FeaturedNationalVOLUME 15 ISSUE # 07

Missed targets

The State Bank of Pakistan has painted a gloomy picture of the economy despite Pakistan’s remarkable improvement in the Ease of Doing Business ranking. The economy is expected to slow down to three to four per cent while annual average consumer inflation will remain 11-12pc in the current fiscal year, which mean the common people would continue to face the hardest times of their lives.
In its annual report, the SBP said the share of the services sector was increasing at the cost of the industry and agriculture. The last fiscal year was the toughest for the people of Pakistan and challenges for the next year persist, according to the central bank. Coming almost four months after the fiscal year concluded, the report highlights missed goals after ambitious targets set by and the outgoing government of the Pakistan Muslim League-Nawaz (PML-N) and the government of Prime Minister Imran Khan. It provides an insight into the cause of dismal performance by the investment sector and last year’s record high fiscal deficit of 8.9pc of GDP. The high fiscal deficit fuelled inflation and warranted rapid interest-rate tightening. High inflation, higher interest rates and overdue correction in the exchange rate amidst a massive fiscal imbalance upset various other projections, like public sector development, private sector bank borrowings and growth in agriculture, industry and services sectors. All that eventually slowed economic growth to 3.3pc against the initial target of 6.2pc. A poor revenue mobilisation effort and weak expenditure control contributed to the challenges.
The country largely produces non-tradable services which are consumed domestically. At the same time, industrial output, exports and foreign direct investment (FDI) have faltered. “This pattern needs to be corrected in order to make trade deficit sustainable in the years to come. Putting in place a coherent industrial policy should be among the immediate priorities, while a gradual shift away from non-tradable services in favour of exportable services should also be pursued in the medium term,” the report recommended. The services sector grew by 4.7pc during FY19, missing the annual target by 1.8 percentage points (6.2pc in FY18). This was the most noticeable deviation between the actual and targeted growth rate of services in the past few years. The state must take a leading role to invest in important segments of the economy in order to provide the private sector with a dependable and conducive ecosystem in which to carry out R&D (Research and Development) and capital formation activities, it added.
The report says macroeconomic stabilisation will continue to be the cornerstone of economic policy during FY20 and real GDP growth is likely to remain subdued, though the early signs of recovery are already visible. Development spending may play a pivotal role, since there has been an observed tendency that Pakistan’s GDP growth and (Public Sector Development Programme (PSDP) spending move in the same direction, and similar has been the case in FY19. The current account deficit, after shrinking on a yearly basis during FY19, is anticipated to subside further in FY20, while exports are projected to pick up during the year. The FTA-II (Free Trade Agreement) with China and preferential trade agreement with Indonesia may also boost exports.
According to the SBP, achieving the ambitious tax collection target in the middle of a broader economic slowdown is a real challenge. Even if things pan out more or less according to the plan, the fiscal deficit may be in the neighbourhood of 7pc. The growth in industrial sector slowed down from 4.9pc in FY18 to 1.4pc in FY19. Major drag came from the manufacturing subsector, which carries the highest weight in the industrial sector. The report said that besides the tangible factors behind the economic moderation, a sense of unease remained a persistent theme for most of the year (FY19), stirred up by a number of underlying factors. These included: speculations on the signing of the International Monetary Fund programme; anxiety over possible implications of Financial Action Task Force reviews; uncertainty regarding currency depreciation; and cross-border tensions with India. These developments deflated the confidence of businesses and consumers, unsettled the currency and equity markets, and in some cases inadvertently caused a flight towards greater informality.
In the big picture, though real GDP growth picked up during FY17 and FY18, the sharp downturn in FY19 highlighted the fact that the economic expansion in these years had not been based on a sustainable strategy and was susceptible to various stabilisation measures, such as the cut in development expenditure. It has exposed the structural deficiencies faced by the economy yet again, requiring immediate policy attention. The agriculture sector registered a marginal growth of 0.8pc during FY19, in sharp contrast to 3.9pc a year earlier. This was primarily due to a contraction in the production of the crop sector.
Investment in the country has dropped 3.3 percentage points in the last two decades to 15.4 percent, which means Pakistan is the only Asian country with a falling growth potential. The SBP has quoted the World Bank to argue that Pakistan will not be able to reach a middle-income status in the next three decades unless the rate of investment improves drastically to 25 percent.
The SBP report is an honest assessment of Pakistan’s sate of economy last year. It is an assessment of the past, which cannot be fixed now. It has blamed the last government for missed targets but has not absolved the Pakistan Tahreek-i-Insaf (PTI) government of its share in the mess. The government will have to provide complete autonomy to the State Bank of Pakistan, so that it could fairly assess the economy of the country and challenges facing it. The government cannot undo past mistakes but it should use the report as a guideline to perform better in the next year.