Pakistan’s GDP grows at a nine-year high of 5.3%

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  • GDP to clock in at 5.5% in 2017-18 whereas government is targeting 5.7%

KARACHI: Pakistan’s GDP grew by 5.3 per cent in 2016-17, after 9 years, compared to 4.7 per cent in 2015-16 and last 3-year average GDP growth of 4.3 per cent due to strong growth in Agriculture and Services sectors. GDP grew slower than targeted rate of 5.7 per cent set by the government, primarily because of lower than the anticipated growth in the industrial sector. Industrial sector grew by 5 per cent as against the target of 7.7 per cent.

The government reinforced its resolve to continue to focus on growth and infrastructure development in today’s annual announcement of the Pakistan Economic Survey.

Agriculture sector (19.5 per cent weight in GDP) posted growth of 3.5 per cent which is better than the last year’s flat growth and in line with government target. Services sector (59.6 per cent weight in GDP) continued to outperform growing by 6.0 per cent as against a target of 5.7 per cent and higher than last year’s growth rate of 5.2 per cent. Growth in the services sector was mainly driven by improvement in Wholesale & Retail business.

Industrial sector’s (20.9 per cent weight in GDP) output stood at 5 per cent lower than the targeted 7.7 per cent and lower than last year’s growth rate of 6 per cent. Large scale manufacturing (LSM), the biggest component of the Industrial sector, posted growth of 4.9 per cent, which is considerably below government’s target of 8.1 per cent.

In terms of regional comparison (South Asian players), Pakistan fell behind regional players having average growth rates of 6.2 per cent. Pakistan per capita income surged 6 per cent to $1,629 in 2016-17, higher than last year growth of 3 per cent. An analyst at Topline brokerage house said, “We believe higher infrastructure spending, improving energy and law & order situation and increase in aggregate demand will support higher growth momentum going forward. We anticipate GDP to clock in at 5.5 per cent in 2017-18 whereas government is targeting 5.7 per cent.

Fiscal deficit per cent of GDP during nine months 2016-17 increased to 3.9 per cent versus 3.4 per cent in the similar period last year on account of higher expenditures and lower than budgeted tax collection by Rs 100 billion.

Total revenues for government in nine months 2016-17 was up 6 per cent to Rs 3.1 trillion. Tax revenues increased by 9 per cent to Rs 2.7 trillion, however, it remained well below the revenue target. Federal government pocketed Rs 2.5 trillion worth of tax revenue during nine-months 2016-17 as against full year target of Rs 3.5 trillion.

Non-tax revenues of the government have also fallen by 6% to Rs451bn, contributing to the higher fiscal deficit.

Total expenditures of the government rose by 10 per cent to Rs 4.4 trillion mainly driven by development expenditure (up 8 per cent to Rs 769 billion). Current Expenditures of the government rose by 6 per cent to Rs 3.6 trillion. Total subsidies in 2016-17 stood at Rs 108 billion, down 10 per cent. Debt servicing remained flat at Rs 1.1 trillion (4.2 per cent of GDP) and up 3.4 per cent.

The overall fiscal deficit stood at Rs 1.2 trillion (3.9 per cent of GDP) in first three-quarter of FY16-17 vs Rs 1.0 trillion (3.5 per cent of GDP) in the same period last year. This was mainly financed through domestic sources (Rs 1 trillion or 82 per cent).

CPI inflation clocked in at 4.1 per cent in ten months 2016-17 as against 2.8 per cent in the corresponding period last year. Inflation has crept up compared to last year; however, it is likely to remain well within government target of 6pc for FY16-17. The analyst anticipates inflation to clock in at 4.3 per cent in 2016-17. This compares favourably to last 10-year inflation average of 9.9 per cent helped by low fuel and food inflation.

Consequently, the SBP has kept the policy rate unchanged at 5.75 per cent in its last 6 monetary policy announcements.

The National Economic Council (NEC) has also set an inflation target of 6pc for FY17-18, which is likely to be achieved given the current trend in international commodity prices.

Investment to GDP ratio improved to 15.8pc in FY17 vs. 15.6pc in FY16-17, lower than regional peers. Private investment as % of GDP slowed down to 9.9pc vs. 10.2pc during the previous year. Saving to GDP ratio of the country declined to 13.1pc of GDP as compared to 14.6% last year. This is also on the lower side when compared to regional peers. Primary reason for low savings rate is high consumption levels which are prevalent in Pakistan.

Foreign exchange reserves of the country have been under pressure lately declining to US$20.6bn as of May 12, 2017 as against US$21.3bn in May 2016. In the last 7 months, reserves have come down by US$3.4bn (avg of US$0.5bn/month) after touching an all-time high of US$24bn. The decline is due to sharp rise in current account deficit that increased from US$2.4bn in the last FY to US$7.2bn in FY16-17. In terms of GDP, it has risen to 2.7pc of GDP in FY16-17 vs 1pc in the same period last year.

A rise in current account deficit can be largely attributed to 36pc increase in the trade deficit to US$19.9bn, driven by higher imports. Worker’s remittances contracted by 3pc YoY, further expanding the current account deficit. For FY17-18, the government is targeting a current account deficit of US$9bn (3% of GDP) keeping in view the rising imports and slowdown in exports.

Despite a large current account deficit number of US$7.6bn during 10MFY17, the balance of payment stood at a negative US$2bn only, thanks to inflows under the financial account in the form of long-term loans. This resulted in a drag on the FX reserves during FY17.

Foreign direct investment, which is also a component of the financial account was up 17pc YoY to US$1.3bn during Jul-Apr 2017. This is still considerably lower than the levels seen before 2008.

Outlook on the external account will largely depend upon the uptick in foreign direct investment driven by CPEC flows and higher exports.

Even though, the above macroeconomic indicators show positive improvement, Pakistan’s economy remains burdened with challenges. The government is targeting to increase the tax to GDP ratio to 11pc by FY17-18.

This will still be lower when compared to regional peers like India, Sri Lanka, Vietnam and Bangladesh. Law & order in the country has improved considerably, however, there is still room for further improvement to pave way for increased investment in the country. Pakistan’s Investment to GDP ratio remains a meagre 16pc compared to regional peers, which average around 30pc.

Energy crisis and load shedding remain a key concern as the government has not been able to address the issue yet. According to estimate, prevailing power crisis in Pakistan adversely impacts the country’s GDP by around 2pc. Energy crisis not only affects the industries but also impacts the households that often lead to street protests.

Increased political noise and uncertainty also present key risks. Local political scenario became challenging given ongoing investigation on Panama case.

Progress on China-Pakistan Economic Corridor (CPEC) continues with high profile power projects including Sahiwal and Port Qasim Power Plants expected to come on line on schedule.

External account is another major concern for the country; currently, as not only exports are declining but remittances have also been lowered during FY16-17 creating pressure on the balance of payment. Foreign direct investments have improved but it is still well below its true potential. If things do not improve on the external front, foreign exchange reserves can come under further pressure.

The exchange rate has remained relatively stable since 2013, which raises concerns that the currency can see some depreciation. In the current FY, Pak rupee against US dollar depreciated by only 0.4pc whereas during the previous year it depreciated by 3pc. This is well below the average depreciation of 6pc (4pc excluding outlier) during last 10-years.