Pakistan Economy in the light of Business Cycles- 2009-14 Muhammad Arif Editor At Large The Financial Daily Former Head of fscd state Bank
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- Bu səhifədəki naviqasiya:
- Summary of Key indicators
- References ^
Fig.1 In agriculture, improved fiscal attention is going to bring adequate results in spite of water shortfall. Looking at most recent initiatives, the agriculture output should increase in the range of 3-4% in FY 09 as compared to 1.5% in FY08. Since 1971, the agricultural growth peaked to 11.7% once with downside of negative 5.3% giving a mean of 3.37 on average. So taking potential in this area and government initiatives in view, coupled with rise in prices of global agricultural products, growth in between 4-6% has remained for 2009-2012. But due to floods it went down to 3% in 2011-12. Since 1971, growth in industrial sector peaked to the point of 12 % reached once with downside of negative 1.5 giving a mean of 5.94%. This supports the view of projecting 5-6 % growth in industrial sector in 2009-2013. However a bottleneck in growth of this sector is its skewness towards cotton Industry enjoying 60% share in the universe. The less than targeted cotton growth and high financial charges had kept the growth under check at least for the CY2009 (LSM growth till Q3FY09 is negative 7.6 % and is projected to go down by negative 9% in FY 09) than it started picking up marginally in 2010-13. The manufacturing sector posted a growth rate of 3.56 percent during the current fiscal year July to March 2011-12 as compared to 2.96 percent during the same period last year, A modest improvement was seen in large-scale manufacturing (LSM) in July to March 2011-12 as the Quantum Index of Manufacturing (QIM) increased by 1.05 percent against the target of 2.0 percent as compared to growth of 0.98 percent during the same period last year. Due to revision of the base year as well as new industries being added, I, is not prudent to compare the performance of the LSM sector on the revised base against the official growth target of 2.0 percent The growth rate in LSM has recovered largely due to good performance among the sub-categories such as food, beverages and tobacco, paper and board, textile, non-metallic mineral products, pharmaceutical and leather products as compared to negative growth seen during the second quarter of the current fiscal year. The yearly positive growth during the start of current fiscal year (July to September 2012) can be partially attributed to export demand, which has increased the production in the short run. Dismal performance was seen in the winter season (October to December), which was due to persistent gas shortages. Moreover, agro-based industries, which were recovering from the impact of the floods of 2010, were again hit by another natural calamity in the form of heavy rains in Sindh during August 2011. The cotton crop is most vulnerable to floods and almost all major sugarcane producing districts were affected but losses to sugarcane were lower as the crop is relatively resilient to flooding. The floods also damaged industrial supply networks and rural demand and this coupled with severe power and natural gas shortages led to a number of key industries (textile, fertilizer, steel, glass, etc) not operating at expected levels. LSM production began to revive in December 2011 as the impact of flood began to subside. A remarkable growth of 6.0 percent was witnessed in February 2012. This could also be attributed to the beneficial effect of specific policies on large-scale industry. Effective fiscal policy helped in revitalizing the growth to some extent due to reduction in duties on beverages, automobiles, cement and air conditioners. This step was necessitated in view of the costly input prices and the need to absorb the volatility in the production of these industries. In addition, the growth in agro-based industries was based on increase in cotton (Punjab) and sugarcane production during the current fiscal year. In March 2012, the yearly performance of the sector turned negative by registering a decline of 3.7 percent owing to prolonged power and gas shortages. Services are the least volatile sector historically, registering a historical average growth of 5.9% since 1971. Though considerable growth has occurred as far as banking and financial institutions are concerned, the glass remains half empty as much as it is half full. The sector remains inaccessible to the majority of populace. Thus the potential for growth in this sector remains plenty and new opportunities for development will continue to present themselves. Taking growth momentum of this sector since 1971, it peaked to 10.5% once with downside of 0.08% giving a mean of 5.75%. So hopefully growth in this sector was estimated to range in between 6.5-8.5% during the period under review. However it remained 4.1% in 2011 as against 2.9% last year. Main contributors remained defense and public Admin i.e. 13.2% According to theory, decline in investment growth has historically been followed by decline in GDP growth and increase in investment growth has been followed by increased GDP growth. The average growth in investment since 1973 has been 18%, however since the start of the current decade, this has been 21%. Investment declined sharply in 2007, a tight monetary policy and high inflation might have contributed to this decline. The decline has pushed it to Interest rates are now going to be softened and foreign investors now at run may return in near future for better returns. Indirect taxes as a percentage of total consumption (tax base) have been declining since 1979 from 11.2% to 7% in 2007.This means that as total consumption is increasing; indirect taxes are proportionately decreasing, implying government failure to extract revenue from tax base. However in monetary terms indirect tax revenue has increased by 14% on average since 1979.Total consumption has been declined in between 2009-10. This will impair the government to raise further indirect taxes.. We expect indirect taxes to increase by 11% in monetary terms over the entire forecast period, albeit with significant volatility from year to year. However this is to assume that indirect taxes as a percentage of total consumption would remain at around 7%. Changes in government policy however can enhance government’s ability to raise revenues. Direct taxes are a function of disposable income; an increase in the disposable income leads to increased tax revenue and vice versa. In this sense, direct taxes should increase when GDP increases and so on. Using historical data there is 95% correlation with nominal GDP and direct Taxes. However average growth in direct taxes has remained constant over almost two decades; 3.1% in the current and 3.0% in the 90s. Since it was expected that real GDP to slow in FY09, the government ability to raise taxes should be reduced; furthermore slower growth between 2009-13 as compared to last 5 years should also reduce total revenue raised through direct taxation. However in projections we have incorporated government efforts to increase share of direct taxes in total tax base onward 2013 that is required to make tax base equitable. Government expenditure almost depends on its policies as well its ability to meet revenue targets. Historically they have grown mostly above 10% on YOY basis, once touching 40% in FY05 and remaining negative twice in FY2000 and 2002 during FY79-2008. The expenditure as % of GDP has revolved around 20%. In the current scenario we see that the ratio has fallen to 17% in FY09 from 19% in FY08. Going forward on return of fiscal deficits to more sustainable levels and growth and social factors taking centre stage, the government is likely to increase expenditure and expenditure to GDP ratio is expected to rise in FY 13-14 Monetary policy has now started softening after reaching its peak i.e. discount rate at 15%. Though core inflation is still high i.e. 18.5% in March 09 as compared to 18.9% in Feb, 09 and 10.0% in Jan 2013 , however it is likely to come down further in the coming months on the back of weak economic environment and decline in oil prices. The process of softening would continue with some caution in regard to inflationary pressures mainly on account of oil prices that can again become volatile on return of economic recovery particularly onward 2013. Export growth in the current decade has averaged 11.2 % slightly higher than the historical growth rate of 10.54%. Economic activity is the main driver of the exports; there is a 97% correlation between exports and real GDP. According to the business cycle, export growth during economic downturns typically averaged between 5-7%. Performance of export in Pakistan mainly depends on outcome of cotton and rice crops. However export growth remained on average 10.56% during FY 2000-2007. It remained 13% in FY08 and has been targeted at 15% for FY 09. It slowed down in 2010 onward. However we foresee a growth rate of 14.7 in exports during FY 2013-14. Import growth has averaged 16% since the start of the current decade which is significantly higher than the historical growth rate of 10.7%. However, imports fall significantly in economic downturns. During the downturn of the 90, import growth averaged only 3.7%. In fact the improvement in current account deficit has mainly come on reduction in imports valued in dollars. Import growth from FY 2000-2007 averaged 10.56%. In FY 08 it was 31.2% and has been targeted to grow close to 0% in FY09. We foresee import growth to average 5% between FY10-14 The USD- rupee exchange rate has averaged 60.8 since FY 2004-08. Stability in the exchange rate has been the result of increased demand for the local currency in terms of foreign investment and increasing exports. In the current downturn however, these economic advantages have reversed putting strong down ward pressures on the dollar rupee parity. Going forward there is a chance of significant depreciation in case two ‘Ds’ i.e. current account and fiscal deficits are not brought under some manageable levels and FX inflows committed bilaterally and multilaterally are not ensured. Another step can be to utilize KERB market to its potential, for instance external payments particularly of services sector can be handed over to this market. External Debt of Pakistan after declining to less than 27 % of GDP at start of CY 08 has again started building up and has now crossed $ 50 billion i.e. more than 31% of GDP. Growth rate of the external debt has averaged 4.26% since the start of this decade, considerably better than the 90,s average of 6.4%. However under huge current account and fiscal deficits witnessed during FY08 and 1H FY09 and onward since 2013, its size has started bulging again. Under current scenario, we foresee increase in its size in coming two years; thereafter it would start reducing on attaining some better economic variables. Summary of Key indicators
Concluding remarks As per hypothesis on Pakistan, business cycle as shown effective for projection of Pakistan economy is jugular or Biasness Cycles because political turnover in Pakistan is of shorter period and investors mostly remain at the shorter end. From preceding data and economic scenario we can draw following projections for the coming years Summary of Key indicators
The reasons for above are as follows
References
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