GDP growth remains strong at 6.6 percent
KARACHI (December 03 2006): The SBP annual report for 2005-06 says that despite the unexpectedly weak harvests of some key crops (cotton, sugarcane and wheat), the impact of the October 2005 earthquake, a tight monetary policy and the continual rise in oil prices, real GDP growth remained strong at 6.6 percent during FY06.
The report, issued on Saturday at a press briefing addressed by SBP Governor Dr Shamshad Akhtar has taken detailed overview of the national economy. The report is divided into two parts. Part I deals with review of national economy, and Part II comprises performance review. According to the report, Pakistan's economy overcame adverse pressures to achieve strong growth for the third successive year in FY06.
It says that while the GDP growth was lower than the target of 7.0 percent for the year, and 8.6 percent seen in the preceding year, the growth was nonetheless commendable, given the negative pressures.
Indeed, if not for the significantly adverse impact of poor weather towards the end of Rabi FY06, it was quite possible that the annual target might have been met. Moreover, it should be kept in mind that the FY06 growth rate was still above the long-term growth trajectory of 6.0 percent, required to assist a sustained reduction in poverty.
However, there was a visible deterioration in the quality of economic performance, in the sense that the FY06 growth was more narrowly based, as compared to preceding years. In contrast to a broad-based growth in FY05, the impetus to the high growth in FY06 was principally from the above-target performance of the services sector, as both key commodity-producing sectors--agriculture and industry--saw growth fall well below the respective annual targets.
In particular, growth in the value-addition by agriculture decelerated, as below target harvests for a number of key crops (especially cotton, sugarcane and wheat) led to a fall in value-addition by the crops sub-sector.
The report says that even the modest 2.5 percent growth in agriculture was made possible only by an exceptional showing by the livestock sub-sector, which offset the negative value-addition by crops.
Provisional data shows that growth in the sector jumped to 8.0 percent in FY06, appreciably higher than the 4.0 percent annual target and in sharp contrast to annual average growth of just 3.0 percent for the preceding 5 years.
The only silver lining to this weak performance was that much of the poor performance by the crops sub-sector in FY06 was due to factors that may not repeat in FY07.
Specifically, it is likely that the wheat, cotton, and sugarcane targets would be achieved in FY07 in the light of the improved prospects for water availability and the continued supportive government policies and access to credit. Moreover, high FY06 prices and better water availability are likely to contribute to a bumper sugarcane harvest FY07.
To the reviewer of the economy, encouraging element of FY06 agri sector developments was the visible increase in fertiliser off-take, above target credit disbursement, increased supply of certified seeds and improved availability of irrigation water.
Given favourable weather conditions and supportive pricing policies, there is a strong likelihood that agricultural performance would improve in FY07.
THE REPORT ADDS:As with agriculture, it was the deceleration in growth of a large-scale manufacturing (LSM) key sub-sector that pulled down the aggregate industrial growth during FY06.
Growth in LSM production dropped from 15.6 percent in FY05 to 9.0 percent in FY06 and, as a result, industrial growth dropped to 5.9 percent during FY06, substantially lower than both the 9.5 percent target for the year and the 11.4 percent growth achieved in the preceding year.
The deceleration in LSM growth was attributable to a number of factors, including the impact of the relatively poor cotton harvest, capacity constraints being faced by some major industries, as well as a small slowdown in demand amidst rising interest rates.
Most of the remaining industrial sub-sectors also witnessed below-target performance. Growth in small scale manufacturing stood at 9.3 percent, against 7.5 percent, which indicated revision of data for the sector to include the contribution of cotton products, which constitutes 14 percent of small-scale production.
Mining & quarrying sub-sector also witnessed deceleration, registering 3.8 percent growth, which was lower than the targeted 5.2 percent as well as impressive growth of 9.6 percent seen in FY05. This could be attributed to fall in the production of crude oil during FY06.
Construction sector also witnessed deceleration, registering 9.2 percent growth which was significantly lower than the previous year's 18.6 percent, although it was still very high keeping in view the base impact, and as compared to the targeted 7.5 percent.
In fact, construction sector was the only sub-sector in industry that exhibited an above-target performance. This impressive growth could be attributed to the boom in the real estate market, significant increase in public sector development program (PSDP), reconstruction activities in Northern Areas and higher FDI in the sector.
Electricity & gas distribution sector witnessed a negative growth for FY06, which points towards a very serious issue of huge operating expenses in the sector in the form of increased input costs of gas and oil, and large line losses incurred due to the security situation in Balochistan.
In contrast with the commodity-producing sector, the services sector maintained its growth momentum during the year, registering an impressive 8.8 percent growth, which was not only much higher than the 6.8 percent annual target, but was also higher than the high growth of 8 percent seen in FY05.
As a result, the share of the services sector jumped back to the 52.3 percent seen in FY03, after declining during two successive years. All services sub-sectors contributed to this remarkable performance. Although growth in the wholesale & retail trade and finance & insurance sub-sectors weakened a little from the previous year, this seemed to be a high-base effect and performance of both sectors was quite strong.
In particular, the wholesale & retail trade sub-sector witnessed a rise in activity mainly on the back of higher trade volume in the form of higher imports and exports from the economy, a surge in domestic demand boosted by high consumption, and high domestic as well as foreign investment in the sector, all of which compensated for the drag due to relatively weak performance of the commodity-producing sectors.
Finance & insurance also witnessed a significant growth for yet another year, mainly on the back of improved profitability of financial and insurance business during the year.
The profitability of the banking sector, in particular, gained due to the rising spreads as a result of increasing lending rates and lagged adjustment of deposits rates, as well as strong credit demand. Another very strong contribution to the performance of this sector was from the rising profits of SBP.
Transport, storage & communication sub-sector witnessed a huge climb in growth rate from 3.6 to 7.2 percent, mainly reflecting the strong growth in the telecommunication sub-sector in the country.
AGGREGATE DEMAND: Despite a deceleration due to a tight monetary policy, aggregate demand remained strong in FY06, on the back of higher consumption as well as investment demand. The strong aggregate demand, together with relatively poor performance of key crops and capacity constraints of domestic industry, and rising oil prices contributed directly to a widening of the country's current account deficit.
Specifically in terms of demand, the private consumption expenditure yet again proved to be the main source of growth in GDP, with its share in GDP rising to 76.9 percent from 75.6 percent for FY05. Although its growth rate was in single digit for the first time in three years, the strong demand by household was probably supported by a number of factors.
These included:
(1) higher income level achieved as a result of sustained growth in the economy for past couple of years;
(2) wealth effect of gains in real estate market and capital gains in stock exchange;
(3) availability of cheaper imports as a consequence of globalisation;
(4) higher credit flow to private sector in the form of consumer financing despite rising interest rate; and
(5) higher remittances being transmitted to economy.
Acceleration in public consumption expenditure was also visible in the rising budget deficit, reflecting the re-construction needs of the economy in the wake of the October 2005 earthquake.
Not surprisingly, given the strength of domestic demand and rising capacity utilisation in LSM, and government focus on improving infrastructure, investment spending also accelerated, growing by 10.3 percent in FY06 compared with a rise of 9.3 percent for FY05. As a result, investment expenditure as GDP percentage also went up to 14.3 percent from 13.8 percent.
Both the public and the private sectors contributed to this higher investment spending. Public sector investment was mainly on account of higher PSDP spending and resulted in externalities for private investment, which grew by 11 percent during FY06, against 9.6 percent for FY05.
