Economic fundamentals have changed a lot since these targets were fixed

Sep 20 - 26, 2004

The government has set a number of targets for the current financial year. Even at that time of announcement these targets were termed 'over ambitious'. There is a growing feeling that some of these have to be revised in the light of changing economic fundamentals. The targets needing re-evaluation are: GDP growth rate, inflation rate, fiscal deficit and trade deficit. One may say that the very idea or revising targets sounds completely outrageous because the first quarter is still not over.

Against a GDP growth target of 6.6% and an inflation rate of 5% for the current financial year, Pakistan is expected to achieve growth of 6.4-6.5% on the back of a 5.5-6% inflation rate. It is the result of underperformance by the agricultural sector and rising core inflation. The fiscal deficit may touch 4.5% against a target of 4%. Due to increase in administration expenses one is likely see an offset of the expected increase in the CBR collections. At the same time, Pakistan's trade deficit is likely to exceed the target by US$ one billion due to faster than projected growth in imports. This will put further pressure on rupee experiencing erosion in value against dollar.


After reporting real economic growth of 6.4% in FY04, the government, in line with its medium-term target of 8% growth by 2007, set a 6.6% GDP growth target for the current financial year. While the services and industrial sector are expected to attain and possibly even beat the growth targets during the year, the agricultural sector is likely to fall short of the 4% growth target that was set for it as a result of the lower than expected availability of water. At this stage analysts expect GDP growth not to meet the target.


The government set a 5% target for 2004-05 and onwards. Last year the factors responsible for inflation were rising petroleum and food prices and house rent. This year the government has taken steps to control these drivers. These steps include (I) the hit the government has chosen to take on its revenues in order to avoid passing on the impact of high international oil prices to local consumers and (II) the import of wheat to meet any potential shortfall. However, inflation still seems to be accelerating. The problem this year is that even though fuel and wheat prices have been controlled to some extent, prices of other items have increased, thus causing inflation to shoot up over 9% YoY and core inflation to shoot up by over 6% YoY.


At the beginning of new financial year, the government set a target of Rs 580 billion for tax revenues, which represents a rise of 14% over last year's target of Rs 510 billion. The raise came as a result of expectations of greater than 6.4% real growth in the Pakistani economy coupled with 5% inflation and a broadening of the tax base. However, the higher than targeted collections in July on the back of increased indirect tax collections, and the increased likelihood of greater than 5% inflation led the IMF's visiting mission to encourage the CBR to raise its collections target for the current financial year. The CBR has suggested a revised collection target of Rs 590 billion. Some analysts believe that CBR is likely to achieve the revised target and possibly surpass it.

However, they also fear that Pakistan's fiscal deficit is likely to touch 4.5%, above the targeted 4%. The reasons for higher fiscal deficit are said to be reduced collection of Petroleum Development Surcharge and higher administration cost. The government decided not to pass on the impact of high international oil prices to local consumers. Higher administration cost is likely to be there because of a huge new Federal Cabinet. It is feared that the government will indulge in higher bank borrowing, beyond the Rs 45 billion that was targeted for the year. This will also lead to crowding out private sector borrowing.


As per Pakistan's Trade Policy, exports are expected to grow at 11% and imports are projected to grow at 8% during financial year 2004-05 resulting in a trade deficit of US$ 3 billion. Given current export and import growth pattern it is expect that while exports will meet their 11% growth target, imports are likely to grow by a much more rapid 15% rate during the current financial year. This is because of the continued rise in import of machinery and raw materials. This trend is likely to boost the trade deficit close to US$4 billion. This will further worsen the exchange parity.

It may be true that Pakistan has succeeded in achieving even the most difficult targets in the past. However, it is also necessary to fix realistic targets and then make concerted efforts to achieve them. While the present government has the potential to overcome the internal factors, some of the external factors, affecting the economy, are certainly beyond control.