BY Monem Farooqi
With expectations of holding the momentum
Inflation hit a 13-year low in 2016, supported by falling international oil prices despite the high aggregate demand and low interest rates, which was contained due to a stable currency and, again, falling international oil prices
Pakistan economic growth witnessed an acceleration in fiscal 2016 and started catching up with its neighbors with gross domestic product (GDP) expanding at 4.7 percent — the highest rate in eight years and a significant increase from the previous year’s four percent.
While this improvement is a positive sign, the economy could be growing faster. India’s 7.6 percent growth continued to lead the pack in South Asia, while Bangladesh and Pakistan began to strengthen relative to others.
Data show that Pakistan achieved macroeconomic stability and a surprising fall in poverty over the last 14 years, but could not make equivalent improvement on the ground. Long-term growth depends on investment in people, however, this growth could not make any difference in real life.
Inflation hit a 13-year low in 2016, supported by falling international oil prices despite the high aggregate demand and low interest rates, which was contained due to a stable currency and, again, falling international oil prices. Average inflation reached a low of 2.9 percent. Food price fallen and low domestic petroleum, oil, lubricants prices — driven by international oil prices — kept average inflation low for the year.
Some food items, however, experienced dramatic price increases due to different factors and gram whole, pulse mash and pulse gram prices rose 50 percent, 47 percent and 46 percent respectively year-on-year due to reduced domestic production driven by local weather patterns.
2016 also saw the continuation of a longstanding decline in Pakistan’s share in global trade. This trend was a combined reflection of Pakistan’s weakening export competitiveness and soft global demand in key sectors. Food and textiles, in particular, key contributors to Pakistan’s exports and continue to suffer from a decline in international prices and demand. Though Pakistan exported more rice in fiscal 2016 than in fiscal 2015, lower international prices translated into a lower total value of rice exports. More generally, Pakistan’s decline in competitiveness has been driven by poor trade facilitation, infrastructure gaps, inefficient logistics and a poor investment climate. Pakistan has also lagged behind its competitors in trade openness, reducing its prospects of regaining export momentum. The simple average tariff has fallen only slightly from 14.4 percent in fiscal 2013 to 13.4 percent in 2016.
Amidst an environment of soft global demand, Pakistan’s growth was driven by strong domestic demand. Consumption accounted for an overwhelming 92 percent of GDP and contributed seven percentage points towards GDP growth (moderated by a negative contribution of 2.2 percent from net exports), supported by sustained growth in remittances. Strong aggregate demand and improving business sentiments were evident in private sector credit growth of 12 percent, expanding by Rs461 billion compared with Rs224 billion in fiscal 2015. Low inflation and low interest rates also contributed to higher credit growth.
An increase in foreign investment flows from China (to fund CPEC projects) made a small contribution to growth. The government’s efforts to stabilise the macroeconomic environment provided a better footing for economic activity, while marginal improvements in energy supplies facilitated manufacturing growth in particular. The low and stagnant investment rate, however, continues to pose significant challenges. After strong growth in fiscal 2015 of 13 percent, investment grew by only 5.7 percent in 2016. The ratio of investment to GDP is 15.6 percent — compared with an average rate in South Asia of 34 percent between 2010 and 2015. Pakistan’s much lower rate of investment is driven by its volatile security situation, energy shortages and poor business regulatory environment (now ranked 144 of 190 countries). The World Bank’s 2017 Doing Business report found that Pakistan improved four ranks in 2017 — placing it among the top ten ‘most improved’ countries — although this was preceded by a fall of 72 ranks between 2008 and 2016.
Industry performed above expectation, making up for agriculture’s underperformance. Industry, contributing 21 percent of overall GDP, grew by 6.8 percent compared to 4.8 percent in 2015 — surpassing the growth target of 6.4 percent in the 2016 Annual Plan
The implementation of the federal and provincial governments’ joint action plan to improve the investment climate was an important step towards reversing this long-term trend.
More generally, Pakistan’s decline in competitiveness has been driven by poor trade facilitation, infrastructure gaps, inefficient logistics and a poor investment climate. Pakistan has also lagged behind its competitors in trade openness, reducing its prospects of regaining export momentum. The simple average tariff has fallen only slightly from 14.4 percent in 2013 to 13.4 percent in 2016.
The end of the IMF’s Extended Fund Facility program in September 2016 marked significant progress in achieving macroeconomic stability over the last three years. Fiscal deficits are significantly reduced, foreign reserves have returned to comfortable levels and inflation is in-check.
There remains, however, a significant agenda of economic reform to be implemented. The energy sector has reduced financial losses and load shedding — particularly for industry — but investments in transmission and distribution are desperately needed. The government has also made solid progress on financial sector reforms, but will need to continue to strengthen and diversify the sector and improve its governance and transparency. Continued improvements in tax collection will also be essential for the government’s economic agenda, particularly those that widen the tax net and increase provincial revenue collection.
On the supply side, the agricultural sector, representing 19.8 percent of GDP, contracted by 0.2 percent in FY16, compared to growth of 2.9 percent in 2015. The contraction was largely driven by poor performance of Kharif crops, particularly cotton, whose production fell by almost 30 percent compared with 2015. As a result, overall crop sector performance declined by 6.3 percent. Unusual rainfalls and a virulent pest attack (pink ballworm and whitefly) devastated cotton crops in the southern districts of Punjab. As prices are expected to remain low in 2017, farmers may switch to more profitable and water-intensive crops such as sugarcane and corn. In addition to cotton, rice production also suffered in 2016 due to depressed prices, heavy downpours in July 2015 and abundant rice stocks. Although sugarcane and wheat production increased, this was not sufficient to compensate for the crop sector shortfall.
Industry performed above expectation, making up for agriculture’s underperformance. Industry, contributing 21 percent of overall GDP, grew by 6.8 percent compared to 4.8 percent in 2015 — surpassing the growth target of 6.4 percent in the 2016 Annual Plan. The manufacturing sector grew by five percent, 1.1 percentage points higher than 2015. Within manufacturing, large-scale manufacturing (LSM), which accounts for a little over 50 percent of industry, grew by 4.6 percent in2016. Continued soft prices of raw material, relatively improved energy supply, and high private sector credit flows15 allowed some LSM sub-sectors to grow particularly rapidly, aided in some cases by government subsidies.
These include automobiles (16.1 percent), fertilisers (13.8 percent) and cement (10.1 percent). The automobile sub-sector benefited from strong sale of cars, cheap auto financing, demand under the Apna Rozgar Scheme, and stronger trading activities.
Cement makers enjoyed growth on account of strong public and private construction activities and lower production and distribution costs. Other sub-sectors of industry, such as construction and mining and quarrying, grew by 13.1 and 6.8 percent respectively, both surpassing their respective Annual Plan fiscal 2016 targets. The upward momentum of industry is expected to continue in fiscal 2017 on the back of consistent energy supplies and CPEC-related construction.