KARACHI (December 07 2008): A four-year economic growth got disturbed, as the country has missed all major economic targets, including GDP, budgetary deficit, investment, agriculture, manufacturing, inflation, broad money growth, tax revenue, etc, during FY08 with domestic and external shocks being the main reasons.
While the central bank has predicted that during the current fiscal year, the country also has to miss it GDP growth target by 1-2 percent to 3.5-4.5 percent, which would be lowest since FY03.
According to the Central Bank's Annual Report on Economy for the fiscal year 2007-08, the country has missed its GDP growth with some 1.2 percent to 5.8 percent in FY08 well below the target of 7.2 percent due to a combination of domestic shocks such as energy shortages, some disappointing crop harvests, rising political uncertainty and external factors, which comprise a rise in international commodity prices and lower capital inflows.
Energy shortages, capacity and input constraints and political disruption have also impacted industrial sector performance. Similarly, critical water shortages at sowing time, incidence of viral attacks, and a disproportionate rise in fertiliser prices, etc, weakened the performance of major crops. As a result, the contribution of commodity producing sector to overall GDP growth in FY08 was the lowest in the last six years.
An important contributor to the slowdown in GDP growth was the weak investment demand in the country; reflecting investors' cautious response to political uncertainty, law and order situation and inflation expectations.
Agriculture sector growth fell to record low of 1.5 percent during FY08, which is significantly lower than the 4.8 percent target for the year, as well as, the lowest growth since FY03.
Shortfalls in wheat and cotton output overshadowed the record sugarcane harvest and relatively improved performance of minor crops, livestock and fishing sub-sectors during FY08. Major crops sub-sector performance was disappointing because of issues surrounding resource management and pricing policy for crops.
Growth in agriculture credit disbursements rose to Rs 211.6 billion in FY08, up by 25.4 percent. The domestic private banks fared well in both, disbursements and recoveries, while specialised banks could not maintain their market share.
Manufacturing sector growth continued to decline for the third consecutive year and posted the lowest growth in six years during FY08. Most of the slowdown was seen in large scale manufacturing (LSM), as growth in small scale manufacturing decelerated only slightly.
The industrial sector suffered a mix of economic, political and structural setbacks throughout FY08. Rising fuel and raw material prices and intensifying energy shortages in the country obstructed industrial activities in FY08. While, the heightened political uncertainty and law & order issues during the year also took their toll. The provisional estimates place the FY08 industrial growth at 4.6 percent compared with 8.0 percent in FY07.
The services sector showed above-target growth for the sixth time during the last seven years. The sector grew by 8.2 percent in FY08, significantly higher than the 7.2 percent annual target for the year, as well as the 7.6 percent growth seen in FY07. The resilience exhibited by the services sector helped keep GDP growth to a respectable level by contributing about three-fourth of the total value addition during FY08.
Inflationary pressures in the economy remained strong throughout FY08. All price indicators, including CPI, WPI, SPI and the GDP deflator, showed strengthening of inflation during the period mainly driven by domestic food inflation backed by strong aggregate demand pressures, high global commodity prices and domestic market imperfections.
A sharp depreciation of the rupee during this period also fuelled inflationary expectations in the economy, pushing inflation to levels not seen in the last three decades.
Consumer price index stood at 12 percent during FY08 as compared to the target of some 6 percent, some 100 percent over the target. In addition, broad money (M2) growth stood at 15.4 percent against the target of 13.5 percent, while reserve money growth reached at 21.6 percent.
During FY08, government borrowed Rs 688.7 billion from the SBP for budgetary support, instead of the net retirement recommended in the SBP's Monetary Policy Statement. The widening fiscal deficit coupled with the rising international commodity prices contributed to dramatic worsening of the external account position of the country. Resultantly, the current account deficit for FY08 jumped abruptly to 8.4 percent of the GDP in FY08 from 4.8 percent deficit in FY07.
Despite continued monetary tightening, growth in private sector credit gathered momentum after January 2008 and remained at 16.5 percent for FY08 - slightly lower than 17.3 percent rise witnessed in the previous year.
Fiscal deficit in FY08 reached 7.4 percent of GDP, a level not observed since FY99, against the budget target of 4.0 percent of GDP for the year and compared to 4.3 percent of GDP witnessed in the preceding year.
After consistent improvement from FY01 to FY07, Pakistan's debt position deteriorated sharply in FY08. The stock of Pakistan's total debt and liabilities (TDL) increased by 26.9 percent YoY to Rs 6,417.4 billion. In particular, the ratio of TDL to GDP, a broad measure of the country's capacity to sustain debt, saw an end to a seven-year declining trend, rising in FY08 to 60.1 percent.
During the last fiscal year, the only factor that provided some respite was the continued rise in workers' remittances, which increased by 17.4 percent during FY08.
On the financing side, as the global financial crisis unfolded in FY08, and the country risk perception was heightened by domestic political developments; the country's ability to tap international capital markets was severely impaired, the report said.
Planned privatisation transactions had to be deferred, sovereign debt issues postponed, and portfolio investment plunged. The fall in capital inflows also resulted in drawdown of foreign exchange reserves and mounting pressure on exchange rate during the period.
Trade deficit widened for the sixth consecutive year reaching unprecedented level of 20.7 billion dollars during FY08. The exceptional surge in the deficit is attributed to a sharp rise in imports, which overshadowed a yet sound growth in exports during this period. Overall exports posted a strong recovery, reaching all time high of 19.2 billion dollars, slightly above the annual export target set for FY08.
Pakistan being the sixth most populous country of the world has been trying to check its population growth rate, which has declined to 1.8 percent in 2008 from 2.1 percent in 2000. During the last fiscal year investment target was some 23.8 percent of GDP, however, it was not achieved and investment stood at 21.6 percent of GDP.
The national savings stood at 13.9 percent of GDP against target of 18.8 percent. The country has also missed its tax revenue target by some 0.2 percent and tax revenue stood at 110 percent of GDP as compared to target of 10.2 percent. Budgetary deficit target was fixed at 4.2 percent, while it reached 7.4 percent by the end of FY08 and budgetary expenditures mounted to 21.7 percent of GDP over the target of 17.5 percent.
