THE government expects economic growth to re-enter the positive zone in the next fiscal year with different stakeholders estimating GDP expansion of 1.8-2.3 per cent as opposed to negative 0.4pc in 2019-20.

Prime Minister Imran Khan and his adviser on finance and revenue, Dr Abdul Hafeez Shaikh, have been putting the entire blame for the worst economic performance in 68 years on the coronavirus.

Also read: Pandemic’s economic impact

The Planning Commission has, however, come up with a relatively independent assessment of the fiscal year. It found that the downhill journey had begun before the pandemic arrived. In its Review of Annual Plan 2019-20, it noted that “prospects for economic growth even before the emergence of the Covid-19 phenomenon were eclipsed by higher inflation and interest rates, negative large-scale manufacturing growth, weaker exports, sluggish resource mobilisation, uncertainty surrounding hot money inflows and, above all, tough International Monetary Fund (IMF) programme–related conditions”.

The commission has noted that the painful and prolonged adjustment programme brought stabilisation but it was at the cost of economic growth. High policy and exchange rates and taxation reforms have increased the cost of doing business and hampered industrial growth.

The Planning Commission claims the downhill journey began before the outbreak of the coronavirus

The economic effects of Covid-19 coming from the lockdown and reduced spending will be larger than those coming from disruptions to supply chains and illness-related workforce reductions. It further compounded longstanding challenges of the real sector, especially in the industrial and services sectors.

The Planning Commission is of the view that the annual plan for 2019-20 had envisaged growth of GDP at 4pc based upon contributions from agriculture (3.5pc), industry (2.3pc) and services (4.8pc). However, extreme weather conditions and the sequencing of reforms–related interruptions weakened the chances of achieving the targeted growth rate.

GDP growth was envisaged to come from the agriculture sector and a revival in the industrial sector and the large-scale manufacturing sector besides a pickup in private-sector credit and the spill-over of completed China-Pakistan Economic Corridor (CPEC) projects amidst steady energy supplies and an investment-friendly environment. These factors were undermined by the disruptive impact of Covid-19–related shutdown in the economy.

The performance under the IMF programme during the first three quarters of 2019-20 was strong and on track. The six-year low current account deficit was supported by demand management measures, transition to a market-based exchange rate system, regulatory efforts to curb non-essential imports and an increase the inflow of workers’ remittances through formal channels. Fiscal consolidation was helped by non-tax revenue mobilisation efforts and a restraint in expenditures from all tiers of government. However, tax revenue mobilisation was below par.

The decline in the current account deficit was primarily contributed by a contraction in imports rather than a surge in exports, which remained depressed amidst low commodity prices in global markets. Pakistan made great progress in improving its ease-of-doing-business ranking during the last two years. However, this has not translated into a substantial pickup in foreign direct investment (FDI) inflows.

Agriculture showed mixed patterns in growth of its components as its overall expansion marginally improved to 2.7pc in 2019-20 against a target of 3.5pc. It was still better than 0.6pc growth last year. Within agriculture, the crop sector performance that registered average growth of 0.6pc in 2013-18 showed a marked improvement. It registered positive growth of 3pc this year. Important crops showed 2.9pc growth owing to an increase in the production of wheat, rice and maize.

The cotton crop succumbed to unfavourable weather, low water availability and pest attacks. The decline in cotton production undermined the crop sector performance in 2019-20. Cotton production contracted 6.9pc. The agriculture sector was not much affected by the pandemic. However, livestock and poultry sub-sectors faced adverse consequences.

The manufacturing sector, with a steep decline in large-scale manufacturing, was a drag on overall growth of the industrial sector. Despite improved energy supplies and a better security situation, a constant increase in the cost of energy and the cost of working capital owing to a two-fold increase in the interest rate since May 2018 increased the cost of production.

On the supply side, rupee devaluation, import duties and taxes levied in the 2019-20 budget increased the cost of imported inputs, especially in automobile, electronic and pharmaceutical sectors. The pandemic intensified the economic woes of the industrial sector. “Large-scale manufacturing growth remained predominantly negative and the only positive spike was during December, but it also waned.” Overall, the manufacturing sector posted a 5.6pc decline instead of targeted 2.5pc growth.

The services sector has been worst affected by falling tourism revenues, lower mobility in the transport sector (air, rail, ship and road), lockdown-inflicted complete cessation of trading activities, closure of educational institutes and event management and community services, and a major burden on the financial sector because of falling interest rates and business financing.

There are some services that have grown like health services, civil society organisations’ operations and online digital content and product delivery. This pandemic is unique in its unprecedented impact on the services sector.

The investment-to-GDP ratio declined from 17.3pc in 2017-18 to 15.4pc in 2019-20. Both domestic and foreign direct investment contributed to this downslide. The downward sliding investment has detrimental effects on the future productive capacity of the economy and growth prospects.

National savings have improved to 13.9pc of GDP from 10.8pc in 2018-19. Pakistan’s reliance on foreign savings has decreased as a marginal increase in investment is somehow compensated with the increase in national savings. The central bank’s decisions to ease monetary policy in the third quarter and launch concessional loan schemes are expected to provide some damage control for business climate.

Published in Dawn, The Business and Finance Weekly, June 8th, 2020