‘Doubts about economic targets set for 2015-16’

LAHORE
Amid the perception of economic stabilisation and recovery, the National Economic Council (NEC), chaired by the prime minister, has set a number of ambitious targets for the financial year 2015-16.
Realisation of these targets will unambiguously confirm that the economy has finally broken out of the low growth trap. According to a fact sheet issued by the Institute for Policy Reforms (IPR) issued on Wednesday, the GDP growth rate for 2015-16 has been set at 5 per cent. The last time a growth rate of above 5 per cent was achieved was as far back as 2006-07. As per estimates, the industry is expected to lead the growth process, with a growth rate approaching 6.5 per cent. Inflation is likely to average 6 per cent over the year.
The level of investment is also projected to revive sharply from about 15 per cent to almost 18 per cent of the GDP. Exports will also pick up after four years of stagnation with a growth rate of over 5 per cent. Remittances are expected to continue growing, while foreign direct investment (FDI) is likely to show a quantum jump of doubling over the level in 2014-15. The focus of public finances continues to be on further stabilisation with a reduction in the fiscal deficit to 4.3 per cent of the GDP. This is to be achieved by a 20 per cent growth in FBR revenues and little or no growth in current expenditure at the federal level. In addition, the provinces are expected to generate a large combined cash surplus of Rs300 billion.
Recent developments, however, are beginning to cast some doubts about the ability of the economy to perform as per expectations. The ongoing floods could end up damaging crops in an area of almost one million acres. In the presence of low commodity prices and outstanding stocks of 0.5 million tonnes of basmati rice and over two million tonnes of wheat, the procurement/ support prices offered last year do not appear to be sustainable. Thus, any reduction in prices could affect the supply response of farmers. Given the sharp drop in prices of potatoes and other vegetables, a shift from these crops is likely. Overall, it is beginning to look unlikely that the agricultural sector can achieve a relatively high growth rate of 4 per cent.
The biggest threat to growth of the manufacturing sector is the precipitous drop in exports. In July - the first month 2015-16 - exports have plummeted by almost 17 per cent when compared with the corresponding month of 2014-15. The textile industry is up in revolt after the imposition of taxes and surcharges on electricity and gas. The rupee remains significantly overvalued and this has impaired the competitiveness of our exports. Similarly, after a long time, remittances are beginning to flatten out with less than one per cent growth in July. The year 2014-15 witnessed a major recovery in the iron and steel products industry, primarily because of resumption of production by the Pakistan Steel Mill. Almost one third of the overall growth of the large-scale manufacturing sector was due to the iron and steel industry. But the news has come that it has been shut down once again. In addition, industries like fertilizer are likely to be hit by the imposition of the GIDC. Falling exports, rising costs and factory closures render the prospect of achieving 6 per cent growth in manufacturing difficult.
Turning to inflation, the good news is that the year-to-year inflation in the consumer price index is down to only 1.8 per cent in July. In fact, the wholesale price index has been declining every month since December 2014. The economy shows signs of having entered a period of low inflation or even deflation. However, as the ‘low base effect’ begins to take over, the rate of inflation could start rising once again and reach up to five per cent in the next five to six months. Also, low commodity prices, especially of oil, are likely to persist. The assumption of an average rate of inflation of 6 per cent in 2015-16 is likely to be on the high side. This is, of course, good news for consumers but it will be very difficult to achieve a 20 per cent growth in FBR revenues. Already, in the first month, July, these revenues have shown growth of only 11 per cent. The IPR expected to see a spate of mini-budgets, like last year. The revival of investment will also hinge on a number of factors. First, will the noticeable fall in interest rates spurring private investment. But in the first month, July, bank credit to the private sector has actually declined by Rs 68 billion. Perhaps this is seasonal in nature and subsequent months will reveal what is happening. Second, releases to the Planning Commission in the first five weeks of 2015-16 have been a paltry Rs 45 billion, equivalent to only 6 per cent of the annual PSDP of Rs 700 billion.
There are also some movements in money supply in July, which are potentially a cause for concern if they persist. Currency in circulation has increased by almost Rs 112 billion while deposits have shown a larger decline of Rs 38 billion. Is this the consequence of the 0.6 per cent tax on banking transactions and/ or falling interest rates?
Overall, the outcomes in the first month of 2015 have not been very promising. Hopefully, part of this is either random or seasonal in nature. But there are some early warning signs and corrective policy actions may need to be considered sooner than later. This is third year of the present government and it needs to demonstrate that there has been a sustained recovery in the economy, especially with increased support from international agencies and media.