Not Too Much to Celebrate
13 June, 2006
By Raja Khalique
The Economic Survey 2005-06 has highlighted a number of weak indicators of the economy that resulted in much lower than targeted growth rate during current fiscal year including lackluster industrial growth and negative agricultural growth two main sectors of the real economy.
The services sector that posted a strong 8.8 per cent growth was primarily because of a wide gap between interest rates and return on deposits offered by the banking sector that grew by 23 per cent, much higher than the targeted six per cent. This was obviously because the banks earned huge interests on loans than advanced to the private sector, but the depositors who provided this extra liquidity did not get any return on their deposits. This is also evident from reduction in saving rates that are not very significant but show a downside trend for the economy if corrective measures are not taken immediately.
The economic survey described record trade deficit, widening of current account deficit, increase in consumption inequality as the weak areas of the economy. National Savings percentage of GDP stood at 16.4 per cent in 2005-06 fractionally lower than last year level of 16.5 per cent. Domestic savings stood at 14.4 per cent of GDP in 2005-06 against 14.5 per cent of last year. Total investment increased from 18.1 per cent of the GDP last year to 20 per cent in 2005-06.
The factors contributing to less than targeted growth are decline in agriculture growth from 6.7 per cent to 2.5 per cent in the survey period, fall in manufacturing from 12.6 per cent last year to 8.6 per cent, yawning oil import bill and the economic impact of October earthquake.
Although machinery import was the second highest after oil in the overall import bill, largescale manufacturing fell drastically to nine per cent as against 15.6 per cent of last year and 14.5 target for this year. Besides measuring from a high base of last year, major crops registered a decline primarily on account of a 13 per cent less production of cotton (12.4 million bales as against 14.3 million bales last year) owing to adverse weather conditions.
Sugarcane is another major crop, which registered a negative growth of 6.2 per cent (from 47.2 million tons to 44.3 million tons). Rice and maize, two other major crops, however performed well with rice production increasing by 10.4 per cent and maize production was up by 27.3 per cent. Despite the impressive performance of these two crops, they failed to compensate the decline in production of cotton and sugarcane. Wheat production remained more or less at last year's level with a marginal increase of 0.4 per cent (21.7 million tons as against 21.6 million tons).
The government claimed over 10 per cent reduction in incidence of poverty from 34 per cent in 2001 to 23.9 per cent in 2005, whereas the Economic Survey for 2005-06 concedes that the gap between the rich and poor has widened more in the urban areas compared to rural areas. The consumption pattern also showed that the share of health and education expenses recorded a marginal decrease during 2001 to 2005.
The expenditures on household services such as email, Internet etc. increased from 3.9 per cent in 2001 to 5.2 per cent in 2005. However, the expenditures on personal care, services, laundry, cleaning and paper articles declined from 22.6 per cent in 2001 to 22.3 per cent in 2005. Release of the poverty data at a later stage would explain the real situation. "The ratio of the highest to the lowest quintile which measures the gap between the rich and the poor also widened to some extent," the survey said.
At regional level, the survey states the gap between the rich and poor in urban areas has widened more -- increase from 10.40 per cent to 12.02 per cent. In contrast, the gap between the rich and poor in rural areas remained almost unchanged that is from 2.22 per cent to 2.19 per cent.
The percentage of people living below poverty line in the rural areas has declined from 39.26 per cent to 28.10 per cent while in urban areas, it has declined from 22.69 per cent to 14.9 per cent, showing wide regional inequality.
The ratio of quasi-non-poor increased from 30.1 per cent in 2001 to 35 per cent in 2005 while the non-poor increased from 13 per cent in 2001 to 20.5 per cent in 2005. Overall, the growth in real mean expenditures of the population increased from Rs1,004 to Rs1,171 which is 16.6 per cent.
The Economic Survey for 2005-06 blames extra market forces' for sharp increase in prices of sugar, pulses, milk, beef, mutton and some vegetables but does not mention the role of cartelization, which remained widespread in banking and petroleum sector besides the above-mentioned essential items.
This, however, comes as a casual reference and the survey does not say who these "extra market forces" are and what their social status, political position and economic clout is. One of the reasons behind this supply shortage was mainly because of negative growth in the agriculture sector that has about 23 per cent share in the overall GDP.
Inadequate supplies of essential items provided room to extra market forces to play their role," the survey observes while mentioning the shortfall in supplies and rise in prices of sugar, pulses and other items. Its prescription is "enhancing production and imports".
"The key to addressing this challenge is to give due importance to minor crops and livestock and dairy sector," the survey says.
With a claim of reducing substantially the number of people living below poverty line, the survey obliquely admits the "marginal increase" in the number of consumption inequality during 2001 to 2005.
"More attention will be required in skill development in both urban and rural areas," it suggests.
The survey is a political document and its authors claim that notwithstanding the sharp rise in prices of some food items in the second half of 05-06, "the prices of essential commodities are still relatively cheap in Pakistan". By attributing this price-hike to a regional inflationary phenomenon, the government tried to absolve itself of its basic responsibility of providing essential commodities to the people at affordable rates and not its failure.
For example, it says, prices of wheat, wheat flour, rice basmati broken, masoor pulse, gram pulse, chicken and red chillies in Pakistan are lowest in South Asia. When the references and observations made in the survey are compared with those in annual and quarterly reports of the State Bank of Pakistan, one finds that the SBP reports warned repeatedly of growing cartelization and business syndicates in Pakistan's market over the past few years and pleaded for framing anti-trust laws.
There was not much of infrastructure investments and government or private business stakes in Azad Kashmir and the quake-affected parts of the North-West Frontier Province; hence not much of a loss in economic terms. In fact the relief and rehabilitation work in these areas is helping to give a boost to certain sectors of economy cement, construction etc in Sindh and Punjab and that speaks of the regional inequality in the country.
Speaking of regions, it is often asked why the federal and provincial governments do not issue economic surveys of the provinces and districts. Now that devolution and decentralization have become the guiding principles, there is a need for periodical economic surveys of Punjab, Sindh, the NWFP, Balochistan, Azad Kashmir and the Northern Areas. Agriculture has been hit hard by a fall in cotton and sugarcane productions.
Dr Salman Shah concedes that the services sector's growth was mainly boosted by growth in the banking sector through a large gap between higher interest rates and low return on deposits but said it was necessary for the government's development agenda. The banking and insurance sector grew by a mammoth 23 per cent against a target of 6.7 per cent.
The performance of agricultural sector remained weak this year as major crops registered a negative growth of 3.6 per cent," said the economic survey.
"This decline was on the back of poor showing of major crops and forestry, and weaker performance of minor crops and fishery." The sector, with about 23 per cent share in the GDP, grew by a nominal 2.5 per cent against a target of 4.8 per cent for the current year and against 6.7 per cent farm growth achieved last year.
The gross fixed capital formation or domestic fixed investment grew by 30.7 per cent against a rise of 28.6 per cent last year. Private sector investment grew by 31.6 per cent against 29.1 per cent last year. National savings as percentage of GDP stood at 16.4 per cent this year, slightly lower than last year's 16.5 per cent growth. Domestic savings stood at 14.4 per cent of GDP this year, nominally lower than 14.5 percent.
The overall fiscal deficit that had reduced to 2.3 per cent in 2003-04 has increased to 4.2 per cent during the outgoing financial year as against the target of 3.8 per cent of the GDP. Exports in nine months of the year rose by 18.6 per cent to $12 billion while imports grew by 43.2 per cent to $20.7 billion, leaving a trade deficit of $8.6 billion.
The current account deficit, excluding official transfers, stood at $4.7 billion in the first nine months of the year against just $1.18 billion last year, showing an increase of 300 per cent.
Large-scale manufacturing, accounting for 69.9 per cent of overall manufacturing, registered weaker than expected growth at 9.0 per cent as against the target of 14.5 per cent and last year's achievement of 15.6 per cent. Sugar production with large weight also registered a decline of 2.4 per cent. Basic metal industries registered a sharp contraction of almost 59 per cent because two coke oven batteries of the Pakistan Steel Mill went out of order in July 2005 and the mill was operating at around one-third of its capacity. Consequently, the production of basic metal industries badly suffered. The performance of petroleum group also remained lackluster with 2.3 per cent growth this year as against 9.4 per cent last year.