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mtgondal · #54 Monday, June 04, 2007

2006-07: another year of robust growth

By Aftab Ahmad

Like the three preceding years, the current fiscal (2006-07) also looks poised to be a year of robust growth. The GDP growth is expected to reach 7 per cent during the year, due to impressive performance of agriculture and services sectors. As a result, size of the GDP is expected to move up to $150 billion while the per capita income may go up to $950.

The agriculture sector is expected to grow by about 4.5 per cent during the year, due a record wheat crop of 23-24 million tons and increase in the production of nearly all the remaining crops except cotton. The Livestock sector is also likely to grow handsomely and according to an estimate its share in the agriculture sector is going to double from 25 per cent to 49 per cent. Besides, there has been a tremendous growth in the telecommunications and construction sectors in recent months, due to which the services sector is also expected to contribute significantly to the GDP growth. However, the growth of the manufacturing sector appears to have remained weak (although positive) during the year, which may be attributable to a host of problems such as shortage and higher prices of electricity, increase in the bank mark-up rates and the cost of doing business in general and stiff competition in the international exports markets etc.

Besides a strong GDP growth, fiscal 2006-07 may turn out to be a record-setting year in many other ways. The direct foreign investment (DFI) is expected to reach a record level of $6.00 to 6.5 billion by the end of the fiscal year. Home remittances may also go up to an all time high level of $5.25 billion by June 30, while the KSE 100 index had already touched the 12,500 mark – a level never reached before.

Revenue collection target of Rs835 billion is also likely to be achieved during the current fiscal year. During the last 7-8 years, tax collection by the CBR had gone up from Rs300 billion to above Rs800 billion, which is commendable. This fiscal it is expected to achieve the target set earlier. But, the World Bank and the Asian Development Bank have expressed the view that the tax collection has not gone up as a percentage of GDP. In Pakistan, the tax collection is presently 10.5 per cent of the GDP only, which is considerably lower than the average of about 14 per cent for all developing countries. However, the CBR is of the view that sectors like agriculture and services have significant contribution to economic growth but their contribution to tax revenue is relatively small. Therefore, in order to increase tax collection as a percentage of GDP, various sectors of the economy will have to share the tax burden in an equitable manner.

In some other areas, performance remained rather weak. For instance, exports lagged far behind the target of $18.6 billion fixed for fiscal 2006-07. On the other hand, imports were rising much faster and were sure to cross the target of $28 billion fixed for 2006-07. During July-April, 2006-07, exports and imports stood at $13.9 billion and $24.99 billion respectively, resulting in a trade deficit of over $11 billion in 10 months. On the basis of the aforesaid 10 months figures, the trade deficit should go up to more than $13 billion by the end of the fiscal year. Consequently, the current account deficit may also go up to $6 to 6.5 billion.

Independent analysts have been of the view that it may not be difficult to reduce the import bill by $2 to 3 billion without touching sensitive items such as oil, machinery and raw material and food products.

At the same time, instead of focusing all its attention on textile exports, the Government should try to resolve the problems facing the small and medium enterprises (SME’S) in order to promote their exports. In addition, now that foreign investment has started picking up, Government may try to attract foreign investment to export-related sectors, in order to provide a boost to exports. Over and above all that, Government may examine if the public sector can also enter the export market in a more meaningful way. The public sector has already been exporting defence material, training aircrafts etc, but its exports have remained limited so far.

Another grey area of the economy during the year was inflation. The target of 6.5 per cent fixed for 2006-07 is not likely to be achieved. There is no doubt that by tightening its monetary policy, the State Bank of Pakistan (SBP) was able to reduce the non-oil/non-food inflation to 5-6 per cent. However, the policy had little impact on food inflation because of the highly inelastic nature of demand for food items. Since food inflation is the main culprit behind the higher overall inflation, prompt and effective action needs to be taken to deal with speculative hoarding and profiteering which have been pushing up the prices of food items. The objective can be achieved inter-alia by substantially increasing the number of utility stores and improving supervision and governance at the federal, provincial and district levels.

The Government had succeeded in bringing down fiscal deficit from 6 per cent to 3.5 per cent a couple of years ago. However, last year, the fiscal deficit once again went up to 4.2 per cent. During the current year, the fiscal deficit is expected to go up to 4.5 per cent. The country’s estimated GDP being $150 billion, the 4.5 per cent fiscal deficit works out to over Rs400 billion. Government borrowing of such a massive amount, besides being inflationary, will reduce the availability of credit for the agriculture, SME and large-scale manufacturing sectors. In addition, higher fiscal deficit also increases the country’s dependence on internal and external debt. The Government should, therefore, make all possible efforts to keep its fiscal deficit at the minimum possible level.

Other problems facing the economy during the year were electricity shortage leading to country-wide load-shedding, widening gap between the rich and the poor, increase in terrorist activities and bomb blasts in the country and an upsurge in political activities due to 2007 being an election year.

However, it must be appreciated that the economy showed remarkable resilience and continued to grow during the year in spite of the aforesaid problems.