FeaturedNationalVolume 13 Issue # 20

Annual Plan 2018-19: Uncertainties galore

The Annual Plan 2018-19, which is a part of the new budget, faces uncertainties with regard to its implementation in its original outline. Reportedly, some key features have been changed in relation to the draft of the Plan laid before the NEC. The original Plan projected a current account deficit in 2018-19 of $12.5 billion, equivalent to 3.8 percent of the GDP. But the deficit has now been revised upwards to $13.3 billion or 4 percent of the GDP. The GDP by expenditure estimates for 2018-19 have also been somewhat altered.

Besides, there are differences in the key parameters of the Annual Plan and the corresponding numbers in the Budget documents for 2018-19. These relate to the national public development outlay and the expected external inflow of financing. The total outlay in the PSDP for the federal and four provincial governments combined has been set at Rs 1,650 billion for 2018-19 in the Budget-in-Brief brought out by the MOF. But the Annual Plan presents a significantly larger size of Rs 2,043 billion for the national PSDP. This includes a provision for new projects with an allocation of Rs 100 billion. If the Annual Plan figures are accepted as the final estimates of the projected national PSDP, financed through the budget in 2018-19, then the consolidated budget deficit next year will go up from 4.9 percent to 5.9 percent of the GDP.

As for external financing, the estimate of the Annual Plan is $11.6 billion while the Federal Budget for 2018-19 is framed on the assumption of an inflow of $9.5 billion, at the exchange rate of Rs 117 per dollar. The Annual Plan is too optimistic in its growth projections. It expects the growth rate to exceed 6 percent for the first time after 2004-05 and reach 6.2 percent. The assumption is based on the revival of the agricultural sector; strong performance of industry; pick up in private sector; macroeconomic and political stability; improved security situation and enhanced supply of electricity.

But international financial institutions have their doubts. The IMF says the GDP growth rate of Pakistan will not go beyond 4.7 percent in 2018-19, in the presence especially of a large current account deficit which could approach $15 billion or 4.4 percent of the GDP next year, thereby putting further pressure on the depleting foreign exchange reserves of the country. Similarly, the Asian Development Bank Outlook does not expect the Pakistan economy to grow by more than 5.1 percent next year.

Therefore, the basic question which arises about the 2018-19 Annual Plan is: Are the upbeat expectations about growth justified? Contrary to the concerns of the IMF will the external imbalance decline and the economy stabilize? Regarding the feasible growth rate, it needs to be remembered  that the increase in the GDP in 2017-18 has been overestimated. In the presence of a large water shortage in the Rabi season and reduction in the input of fertilizer of 4 percent it is hardly likely that the growth rate of the agriculture sector will approach 4 percent in 2017-18. Similarly, with a decline in electricity consumption of 2 percent by industry during first nine months of the year, the likelihood of a 6 percent growth in large-scale manufacturing is remote.

Therefore, the high growth rate of 6.2 percent is based on a big jump in relation to that achieved in 2017-18 of below 5 percent. Agriculture is projected to grow by b 3.8 percent in 2018-19. However, water shortages have already emerged in the on-going Kharif season and a bumper crop of over 14 million bales of cotton is beyond the realm of possibility.

On the other hand, the fast growing industries are beginning to suffer a capacity constraint. Investment by the private sector in manufacturing has remained shy. In 2017-18 it is expected to actually fall by 2 percent. As such, continued double-digit growth rates in 2018-19 in industries like sugar, cigarettes, automobiles, cement, iron and steel are unlikely. Electricity supplies may also continue to be adversely affected by the accumulation of large circular debt in the power sector and the constraints in transmission and distribution. Consequently, despite the commissioning of substantial new generation capacity outages may continue.

Given these conditions, a growth rate of 5 percent or somewhat above in 2018-19 will be considered a good performance. There is need to recognize that this is election year and there could be some dislocation of economic activity in the next quarter of 2018-19.

According to the balance of payments projections in the Plan, there will be a surplus from February 2018 onwards up to the end of 2018-19 and foreign exchange reserves will be back on an upward trajectory. This will obviate the need to go to the IMF. The plan expects reserves to be at $12.6 billion by end-June 2018 and at $14 billion by end-June 2019, thereby providing import cover of more than two months throughout.

The conclusion is based on fast growth of exports, only modest growth in imports and recovery in remittances leading to a fall in the current account deficit in the last four months of 2017-18 by 15 percent, compared to the corresponding period of last year. This turnaround is expected in the aftermath of growth in the current account deficit of 50 percent in the first eight months of the current year. Similarly, the deficit is projected to fall by 14 percent in 2018-19 in relation to the likely level this year.

Turning to the trade projections for 2018-19, exports are expected to continue showing buoyancy and maintain a high growth rate of over 12 percent. The likelihood of the projections materializing hinges crucially on containment of imports to an increase of only 5 percent, despite a concomitant rise in import demand for machinery and intermediate goods to achieve the target 6.2 percent growth rate.

Oil prices are also inching up and the import bill may be larger by over $2 billion above the normal increase. Consequently, the projected import bill in 2018-19 by the Annual Plan is on the low side at $56.9 billion. It could actually be above $59 billion. This will imply a current account deficit approaching $ 15 to $ 16 billion in 2018-19 as compared to the Plan estimate of $13.7 billion. The former projection is also close to the estimate by the IMF for 2018-19.

The Plan also makes optimistic projections about inflows into the financial account of the balance of payments in 2018-19. This includes a 28 percent jump in foreign direct investment and portfolio investment of $4.7 billion, including up to $4 billion of Sukuk/Eurobonds. On top of all this, “other” inflows in 2018-19 are likely to be as much as 66 percent over the bloated projection for 2017-18. The balance of payments projections in the Annual Plan are clearly unrealistic.