GDP GROWTH RATE
SHABBIR H. KAZMI
Jan 9 - 15, 2012
While India is striving to achieve 10 per cent GDP growth rate, Pakistan has not achieved even three per cent last year. This failure can be attributed to some structural weaknesses but the root causes include lack of supporting policies, high interest rate, energy crisis and flood as well as drought like situation.
Over the last two years, Pakistan has been the victim of worst deluge, because the country does not have adequate water storage facilities and soon after every flood the country faces drought like situation. Lately, depreciation of rupee has emerged as the most contentious issue that is causing cost pushed inflation in the country.
Agriculture contributes nearly 25 per cent to the GDP and major crops are cotton, wheat, rice, sugarcane and edible oilseeds (corn, canola, sunflower).
Despite the best efforts, cotton output remains lower than demand. If in any year bumper cotton crop is achieved, prices plunge but mostly the country suffers because of unchecked export of cotton, yarn, and unprocessed cloth.
During last financial year, Pakistan managed to achieve above $25 billion export, mainly because of record high price of cotton in the international markets. This year cotton prices have declined by more than 30 per cent and there are apprehensions that the country may not succeed in achieving the export target.
Over the last two years, Pakistan has been successful in achieving around 25 million tons wheat. It was because of attractive support price fixed by the government. Despite achieving bumper crop, the government was reluctant to allow wheat exports. Subsequently, substantial quantity became stale due to inadequate storage facilities and smuggling to neighboring countries, particularly Afghanistan.
Some of the experts were of the opinion that Pakistan and Afghanistan should have entered into barter agreement but failure in reaching at some understanding made wheat expensive in Afghanistan and deprived Pakistan from getting certain goods at attractive prices.
This year the country is expected to achieve another bumper sugarcane crop, yielding about 1.2 million tons exportable surplus sugar. Industry demanded immediate permission to export sugar which was denied. And, sugar is sold around Rs50/kilogram in retail market.
While some critics may say that it is a good omen, industry experts say selling sugar below cost does not bode well for millers as well as growers. Mills have not made 100 per cent payment of sugarcane purchased last season and selling below cost will not allow the mills to offer good price of sugarcane as well as make timely payment. Pakistan could have earned $300 million from exporting sugar, which could have helped in lessening pressure on the country's foreign exchange reserves. This year Pakistan has to pay $1.2 billion to the IMF.
Experts have been saying that higher yield can be achieved through better crop management. Since cultivable lands in Pakistan are deficient in nutrient content, farmers are required to apply appropriate dosage of urea and DAP type fertilizers. During 2011 fertilizer prices, particularly urea prices almost doubled. For ensuring appropriate dosage of fertilizers and preparing land farmers requires funds. However, financial institutions have not been able to meet the disbursement target fixed by the central bank. Experts are of the opinion that lending to farmers cannot be increased without introducing comprehensive crop insurance schemes.
Manufacturing sector also contributes around 25 per cent to the GDP. However, over the last two years, performance of the sector has remained disappointingly low due to sector specific issues, primarily energy crisis.
Worst hit has been textiles and clothing units. Lately, manufacturing units in Punjab have faced load shedding of electricity up to 12 hours a day and gas outages up to three and half days in a week.
While load shedding of gas is said to be a result of demand exceeding supply, electricity shortfall is the outcome of running power plants far below capacity to save fuel. This issue is commonly known as circular debt problem.
It many not be wrong to say that shortfall of gas can be attributed to subdued exploration and production activities. While some experts attribute this to poor law and order situation, some experts say paucity of funds does not allow exploration and production companies to continue their activities as per target.
They say that OGDC and PPL are pressurized to distribute huge dividend to compensate for the shortfall in revenue collection. Similarly, oil marketing companies are unable to increase their storage capacities and gas marketing companies cannot undertake revamping/expansion of their transmission and distribution networks. Due to corrosion of pipelines, gas leakage/waste is on the rise.
Fertilizer units are the worst hit. Curtailment in supply and mandatory closure exceeding 60 days affects production and also increases cost of production.
During 2011, fertilizer units produced around five million tons urea and about 1.2 million tons had to be imported to meet the requirement. According to a report of a brokerage house, fertilizer units getting gas from SNGPL faced up to 180 days closure. Pakistan has not been able to take full advantage of Engro's expansion project capable of producing 1.3 million tons urea annually.
Automobile assemblers and tractors manufacturers also faced serious problems. In the absence of auto financing schemes due to reluctance of financial institutions, overall sales of cars remained subdued. However, worst hit were tractor manufacturers, facing up to 50 per cent decline in sales, also leading to intermittent closure of units.
One of the concerns is that if exportable surplus is not available, exports might go down significantly, which may lead to balance of payment crisis. The country is moving fast towards the point it will be forced to enter into another standby agreement. In such a scenario, IMF assistance will come but certainly with more stringent conditions requiring increase in interest rate, withdrawal of various types of subsides. The country may be asked to further increase electricity and gas tariffs to improve cash flow of electricity utilities and gas marketing companies.