The government announced last week it is going to miss the economic growth target for 2016-17 because of an underperformance by the industrial and services sectors. This will be the fourth year in a row that government is failing to meet the annual economic growth rate target. The economy grew at the rate of 5.28 percent against the projected rate of 5.7 percent in 2016-17. It is the fastest pace of growth since 2006-07 when GDP expanded by 6.8 percent. The target was 5.5 percent last year, but the growth rate remained 4.51 percent. Growth targets were also revised downwards to 4.06 percent in 2014-15 and 4.1 percent in 2013-14. This year only 10 out of 20 key growth indicators were on target, National Account documents showed.
The agriculture sector, which contracted in 2015-16, witnessed growth of 3.46 percent, just below its target of 3.5 percent, in the outgoing fiscal year. Major crops recorded growth of 4.12 percent against the target of 2.5 percent. Growth in the production of five important crops, namely wheat, maize, rice, sugarcane and cotton, is estimated to be 0.5 percent, 16.3 percent, 0.7 percent, 12.4 percent and 7.6 percent respectively. There is a fear that the low yield of minor crops can lead to higher food inflation. Other crops are estimated to post growth of 0.21 percent against the target of 3.2 percent.
SECTOR WISE PERFORMANCE
Livestock, the second largest sub-sector of agriculture, posted growth of 3.43 percent against the target of 4 percent.
The fishery sector expanded 1.23 percent against 3 percent last year. Forestry grew 14.49 percent against the target of 3 percent. Growth in fishery and forestry reflected the last year’s trend.
The industrial sector posted growth of 5.02 percent against the target of 7.7percent in 2016-17. Last year, it grew 5.80 percent. The mining and quarrying sector recorded growth of 1.34 percent against the target of 7.4 percent.
Manufacturing recorded growth of 5.27 percent against the target of 6.1 percent. Growth in the manufacturing sector was 3.66 percent last year.
Large-scale manufacturing posted growth of 4.93 percent against the target of 5.4 percent. Small-scale manufacturing expanded 8.18 percent against the target of 8.2 percent while slaughtering grew 3.61 percent against the target of 3.7 percent.
Major contributors to this growth were sugar (29.33 percent), cement (7.19 percent), tractors (72.9 percent), trucks (39.31 percent) and buses (19.71 percent).
Large scale manufacturing (LSM) grew 10.46 percent in March on a year-on-year basis, the highest growth recorded in the last few years.
March was the third month in 2016-17 that witnessed healthy LSM growth. Over 8 percent growth was recorded in February and November each. Experts interpret it as the beginning of a revival in the industrial production.
With higher-than-expected growth in LSM, the government is likely to achieve the revised GDP growth target of 5.2 percent for 2016-17. In July-March, LSM grew 5.06 percent from a year ago, according to data released by the Pakistan Bureau of Statistics (PBS).
The production data of 36 items received from the Ministry of Industries and Production and that of 65 items received from the provincial bureaus of statistics showed their contribution to overall LSM growth was 3.97 percent and 1.07 percent respectively.
However, the production data of 11 items received from the Oil Companies Advisory Committee (OCAC) showed their contribution to LSM growth was only 0.03 percent in March.
Industry-specific data shows the automobile sector recorded the highest growth of 20.97 percent.
Engineering goods showed a decline of 5.13 percent, electronic products 0.29 percent, coke and petroleum products 2.36 percent and leather products 4.25 percent.
The LSM sector also benefitted from the continued improvement in the supply of electricity and gas coupled with the expansion in credit to the private sector.
Growth in the construction sector was 9.05 percent compared to 14.60 percent last year. It missed its growth target (13.2 percent) for the outgoing fiscal year.
Supply of electricity and gas also depicted growth of 3.40 percent against the target of 12.5 percent. The electricity and gas sub-sector showed low growth due to reduced subsidies for K-Electric and Wapda and its companies.
The services sector grew 5.98 percent in 2016-17 against the target of 5.7 percent. Last year, it grew 5.55 percent.
Major contributors were the general government services, which rose 6.91 percent against the target of 7 percent. It was mainly driven by the increase in salaries and inflation.
Finance and insurance grew 10.77 percent against the target of 7.2 percent mainly because of high growth of deposits (15 percent) and loans (11 percent).
The housing services depicted growth of 3.99 percent against the target of 3.99 percent. Transport, storage and communication rose 3.94 percent against the target of 5.1 percent.
Wholesale and retail trade witnessed growth of 6.82 percent against the target of 5.5 percent in the outgoing fiscal year.
It depends on the output of agriculture, manufacturing and imports. Agriculture increased 3.46 percent, manufacturing 5.27 percent and imports 19.32 percent.
The expansion in credit to the private sector remained high due to low interest rates and better market conditions.
Another welcome development was the rise in the net credit disbursement for fixed investment.
In the automobile sector, growth of 48.43 percent was generated by tractors, followed by jeeps and cars 21.32 percent, motorcycles 21.35 percent, trucks 14.26 percent and buses 9.76 percent.
However, the production of light commercial vehicles (LCVs) fell 2.95 percent in March year-on-year.
In the chemical sector, caustic soda was the only segment that posted growth. Its annual increase remained 4.39 percent. The production of sulphuric acid posted growth of 3.12 percent while that of paints and varnishes declined 0.75 percent.
In the pharmaceutical group, capsules, injections, liquids/syrups and tablets recorded growth of 0.02 percent, 22.34 percent, 2.38 percent and 9.49 percent, respectively.
In non-metallic mineral products, cement managed to grow 7.10 percent in March over the preceding year. The steep fall in global coal prices helped cement manufacturers’ record year-on-year growth.
In addition, the cement industry also benefitted from vibrant construction activities and a reduction in the policy rate.
The production of coke and petroleum products went down mainly because of a decline in all products, except motor spirit.
The production of vegetable ghee witnessed growth of 0.14 percent, cooking oil 3.86 percent and tea blended 6.84 percent.
The current account deficit emerged as the biggest threat to the external sector as it jumped over 200 per cent in the first 10 months of 2016-17.
The State Bank of Pakistan (SBP) reported the current account deficit for July-April rose to $7.24 billion. The record increase is indicative of a crisis brewing on the external front. The deficit can widen up to $9 billion by the end of the fiscal year as a growing trade deficit sets a new record every month.
The current account deficit in April was also record high. It rose to $1.13 billion against the deficit of $546 million in March. The trend can wreak havoc on the economy.
Policymakers are borrowing from the international market to maintain foreign exchange reserves in order to ensure exchange rate stability. As the export performance remains poor, policymakers are unable to control the slide in foreign exchange reserves. It looks like their only solution is to borrow more from the international market and global financial institutions like the IMF.
The trade deficit of about $26 billion during the 10 months left the government with no argument except that 40 percent of the imports consisted of machinery that would ultimately boost exports.
The government set aside Rs100 billion funds to boost exports, but exporters could not fully avail the facility. The fiscal gap has also increased due to a shortfall in the revenue collection.
According to the SBP, the import bill for the 10-month period rose to $44.87 billion compared to the exports of $22.62 billion.
The SBP has so far succeeded in maintaining the exchange rate in the interbank market while a better supply in the open market kept the rupee-dollar parity stable.
Declining remittances pose another threat to the external sector. The decline of 2.7 percent in remittances during the 10 months does not appear to be too big. The fall in inflows is an indicator of the beginning of bad days for Pakistan that depends largely on remittances to meet the current account deficit.
The growing current account deficit cannot be met by remittances alone as they amounted to only $15.6 billion in July-April.