ARTICLE (June 05 2010): First the headlines; the economic survey is out, and looks unimaginably transparent, analytical, frank and forthright - something that reminds one of the survey documents prepared by Dr Arshad Zaman, way back in the 80s. And now the real news; Pakistan's economic growth is still 'fragile' demanding a 'cautiously optimistic' stance from policy makers and a series of tough reforms across the board.
The country's GDP growth for the year ended June 2010 stood at 4.1 percent, a number which could have been around 6 percent, according to finmin officials, if energy shortages hadn't stalled business activities all around the year. While that may sound like an exaggerated blame on energy woes, there is no doubt that power shortages will continue to weigh on the economy next year. And that - will be the real test for the economy.
So far this year, a rebound due to the low base affect helped bring about industrial growth. But with spare capacities gradually being utilised at different paces in different sectors, the question is whether the next year will witness the same level of growth. Aside from energy shortages, another key impediment is low capital formation.
The Economic Survey shows that total Gross Fixed Capital Formation (GFCF) fell by 0.6 percent, as the private sector witnessed a drop 3.5 percent. Included in this decline, is the 4.9 percent slide in manufacturing sector (down 12.4 percent in LSM) and 18.8 percent in the electricity and gas sector.
This is validated by the fact that the marginal propensity to consume in the private sector remained high at 80.5 percent of the GDP this year, while government expenditure increased from 8.1 percent to 8.9 percent. So, with not much change in net exports gross capital formation declined from 17.4 to 15 percent of GDP in the outgoing year.
And just as the LSM sector, small and medium businesses are likely to be strained. "The small and micro-enterprise sectors, which employ the bulk of the non-agricultural labour force, and are less well captured in the national accounts data, are much less insulated, and therefore significantly more vulnerable to shocks such as wide spread disruptions to energy supply," the survey aptly points out.
But what stands out as an even bigger concern is slowing farming growth, which eased to 2 percent in FY10 from 4 percent in the year before, and its falling contribution in economic growth. In 2009-10, the share of services in headline growth was roughly in line with its average, at 59 percent, but agri growth was much lower than its five year average.
"Despite its critical importance to growth, exports, incomes, and food security, the agriculture sector has been suffering from secular decline....with growth in the sector, particularly in the crop sub-sector persistently falling for the past three decades," the survey said.
And knowing that Pakistan is one of the world's most arid countries, farming growth looks structurally challenged in the next few years, unless the proposed plans to construct small and medium dams are actually implemented. "According to the benchmark water scarcity indicator, Pakistan's estimated current per capita water availability of around 1,066 M3, placing it in the "high water stress" category," the survey warns.
DOCUMENTATION & ENERGY Aiming to deal with potential hiccups in growth, the ministry needs a number of reforms. And central to these, amongst others, are documentation and formalisation of economy.
Be it a matter of agricultural reform, tax reform or a question of providing targeted subsidies to the needy, documentation holds the key. The good thing is that the ministry has recognised this in its survey by highlighting the policy disincentives towards formalisation of the economy.
The ministry also adds that pervasive mis-declaration and under-invoicing of imports, costs the economy anywhere between Rs 100 billion to Rs 300 billion in lost revenue yearly, according to certain estimates. The second significant issue is energy. The Economic Survey has rightly acknowledged that circular debt has caused a lot of problems, but now with tariff subsidies removed, there should be no more excuses in the future, blaming circular debt for underachievement.
The report also indicates that power line losses remain at previous year's level, which is an alarming sign as it would keep the pressure of circular debt on the fiscally constrained government. But then again, boosting energy infrastructure requires plenty of foreign investment, which might not be in the offing in the next few years, given the war against terrorism.
Pakistan's economy took a hit of $11 billion, on account of war on terror, this fiscal year - a number which is seen only growing in the years ahead. All in all, this survey seems like a decent, whole-hearted and unbiased effort to paint the economic condition of the country. One hopes that the underlined warnings and cautious approach advised by the makers of this report is heard in the relevant ministries before the fears cited by Sakib Sherani materialise.
Source: FBS
Source: http://www.brecorder.com/index.php?id=1064890&currPageNo=1&query=&search=&term=&supDate=
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