FINANCIAL YEAR 2008-09: A WORST IN DECADE

SHAMIM AHMED RIZVI
June 8 - 14, 2009

The outgoing financial year of 2008-09 is likely to end as the worst financial year of this decade in terms of growth rate. The government is claiming that the current financial year will end with a growth rate of 2.5% as Pakistan had pledged with the IMF, while independent economists as well as some of those associated with the government are alleging that the figures have been fudged to show the desired result. Some of them insist that the year may end with a negative growth. Others, however, put the growth rate at about 2%. Even if it is accepted, the 2% GDP growth rate will be second lowest for the country in more than a decade. The economy registered a growth rate lower than this only in 2000-01, which was 1.8%.

According to a news report, "the government has fudged the figures in an attempt to bring the reasonable GDP growth estimates of 2.37 per cent of ongoing fiscal close to the target of 2.5 per cent as agreed with International Monetary Fund (IMF).

If the government had not maneuvered the figures, the GDP growth for current fiscal would have been 0.5 per cent even if the cut in the size of GDP of fiscal 2007-08 by 1.7 per cent from 5.78 per cent to 4.1 per cent was acknowledged. And, if the last year's GDP of 5.78 per cent is kept as base, the GDP growth of the current fiscal must stand at -1 per cent, revealed the report. "The National Account Committee put its credibility on stake as it approved without any objection the working paper on GDP prepared by Federal Bureau of Statistics. For instance, the Federal Bureau of Statistics (FBS) did not include in the national accounts the growth in Large Scale Manufacturing of 7.7 per cent registered during July-March period, instead it included the growth of LSM registered during July-February period that stands at 5.7%, the report claimed with cogent reasons.

FBS included dubious figures of growth of major crops in GDP growth estimates for 2008-09. According to the Planning Commission's Annual Development Plan (ADP) for 2007-08, the major crops growth target was 4.5 per cent. Under the ADP, the target of wheat was earmarked at 24 million tonnes, rice 5.7 million tonnes, sugarcane 56.5 million tones, and cotton 14.1 million bales.

But, in the working paper prepared by FBS which NAC approved, it has been shown that rice produce in the ongoing fiscal has been estimated at 6.96 million tonnes as against target of 5.7 million tones. Wheat produce estimates have been slashed to 23.4 million tonnes against target of 24 million tonnes, cotton 11.8 against 14.1 million bales, and sugarcane 50 million tonnes against 56.5 million tonnes.

However, the working paper of FBS shows that major crops growth has increased to 7.7 percent despite the decline in growth of three major crops as against the target of 4.5 percent. If the real picture of the major crops is accounted for, the agriculture growth stands at 2.7 per cent and if the LSM growth of -7.7 per cent in July-March period and agriculture growth of 2.7 per cent is included in the national accounts the GDP growth of the country for the ongoing fiscal stands at 0.5 per cent.

The deceleration in economic growth is mainly due to dismal performance of the industrial sector, which, according to provisional data, has registered negative growth of 2.6 percent, compared with growth of 4.6 percent in FY08. The major reason for negative growth of the industrial sector is negative growth of the large-scale manufacturing sector, which accounts for 70 percent of the total manufacturing, compared with growth of 4.8 percent in FY08.

According to provisional data, the agricultural sector has grown by 4.7 percent in FY09, compared with 1.5 percent in the preceding fiscal year. The services sector, accounting for more than 50 percent of GDP, has grown by only 3.8 percent in the ongoing fiscal year, compared with 8.2 percent in FY08. One reason for deceleration in the growth of the services sector is the dismal performance of the manufacturing sector.

For a developing country like Pakistan, economic growth is always a major macroeconomic objective. Experience shows that this growth has to be stable otherwise it will be difficult to be sustained. The bursting of the bubble of economic growth just before the present government was installed exposed the essential flaws in economic policies of the previous regime, because growth did not rest on strong fundamentals, as reflected by the low level of savings and investment, high inflation, and large-scale unemployment.

The PPP government was thus required to correct the economic fundamentals. In doing so, the economic managers put stability before growth. The agreement with the IMF also provides for stabilization policies. Such policies, however, are not without cost. The most obvious cost is that the pace of economic growth is slowing, because the government pursues either a restrictive fiscal or monetary policy or both. The government tightened both fiscal and monetary policies. For instance, development budget for the ongoing fiscal year was slashed from Rs371 billion to Rs219 billion, while interest rates remained on the higher side.

What is worse that deceleration in economic growth has been accompanied by persistently high inflation resulting into stagflation. Usually, there is a tradeoff between high GDP growth and low inflation. However, sometimes, the economy reaches a stage where this choice is no longer available. The result is increase in prices accompanied by contraction of output growth, and consequent fall in employment and incomes. In FY08, GDP growth went down from 7.0 to 5.8 percent (4.1 percent according to new figures), while inflation went up from 7.8 to 12.0 percent. In FY09, GDP growth has further slipped to 2.0 percent, while inflation has been around 20.0 percent.

Why is the country facing stagflation? This is because of more than one reason. To begin with, the government pledged to bring down the fiscal deficit to 4.3 percent of GDP in FY09, from 7.7 percent in the preceding fiscal year. This necessitated drastic contraction of the public expenditure, including removal of or reduction in subsidies. While the removal of subsidies has helped in containing the fiscal deficit, it also has had some undesirable effects, the most obvious being strong inflationary pressures in the economy, which have negatively impacted both consumers and businesses.

Productivity of the economy has gone down as resources have been diverted to speculative or non-productive activities. Surge in prices of inputs pushed up the cost of production and thereby increased the final price of exportable goods making exports less competitive in the international market. To make things more difficult for the government, the country's major export markets-the United States and the 27-member European Union-are in recession, which means reduced consumption and investment expenditure, thus driving down the demand for imports, including those from Pakistan.

An economic crisis breeds on itself. Economic uncertainty makes businesses shy of investment. It also results in flight of capital to markets perceived to be more stable or at least exhibiting less uncertainty. Fall in investment reduces output, employment, and incomes, and drives down the aggregate demand. In turn, fall in aggregate demand reduces consumption and investment expenditure.

The only way out of this vicious circle for the government is to increase public spending, because this generates both employment opportunities and additional incomes, which in turn increase demand for goods and services. Businesses also respond by hiring more workers, which results in higher output and employment level. However, in the case of Pakistan, increase in public spending is not likely because drastic reduction of the fiscal deficit seems to be the government's top priority.