Money Matters

The mystery of economic growth

By Ihtasham Ul Haque
Mon, 07, 17

Pakistan’s decade long subdued GDP growth rate would significantly improve to over eight percent following the commissioning of multi-billion dollar China-Pakistan Economic Corridor (CPEC) by 2030. But before that, five percent plus growth rate is getting unattainable due to factors including economic slowdown and poor governance across the country.

So far the government’s claims of achieving 5.3 percent GDP growth rate in 2016-17 is being consistently challenged by independent economists, former finance ministers and central bank governors, as well as the ex- deputy chairmen of the Planning Commission of Pakistan.

They all accuse the finance minister and his economic team of large-scale statistical manipulation in the area of economic growth, revenues, expenditures and budget deficit. Interestingly, after a long time the World Bank, IMF and the Asian Development Bank (ADB) are also disagreeing with the government about its GDP growth rate in the last financial year.

With 16.4 percent decline in electricity production and seven percent fall in industrial consumption of electricity, how can there be 5.3 percent growth. How can there be plausible GDP growth with a small tax base, declining labour force, rising unemployment and income inequality, poverty, falling exports and increasing imports, and diminishing home remittances and forex reserves?

The general belief is that the projected growth rate was to show good performance and meet IMF targets in the $6.2 billion extended fund facility. However, now the International Financial Institutions (IFIs) are on the same page as independent economists who said last year GDP growth rate was 4.3 percent and not 5.3 percent.

“Pakistan Bureau of Statistics (PBS) has overstated the GDP growth rate in an attempt to show faster economic progress under the PML-N government,” said former finance minister Dr Hafiz A Pasha. He said calculations made by a group of MPhil/PhD students of economics revealed growth rate was between 4.0 percent to 4.4 percent and not 5.3 percent as reported by PBS and followed by other government agencies. This group, he added, tends to agree with independent economists that higher growth rate was not possible when major economic indicators did not perform during the last financial year.

He called the rate unlikely and unrealistic when agriculture growth was at 2.5 percent, industry at four percent, and services sector at 5.2 percent, while the commodity producing sectors showed limited buoyancy.

The objective of the PBS and other agencies, Dr Pasha said was to show that for the first time in a decade, the economy crossed the five percent threshold and was now on a higher trajectory.

“I do not have to hide the fact that Pakistan is the worst performer in terms of investment, savings and exports as a percentage of the GDP when compared to India, Bangladesh and Sri Lanka. Also, the average growth rate from 2012 to 2015 was Pakistan’s lowest and, therefore the claim of 5.3 percent achieved last year does not make sense,” he added.

Economist Sakib Sherani also reiterated Dr Pasha’s stance about lower growth. “But for me growth rate of 2015-16 was understated by 1.5 to 2 percent, which was revised downward from 4.7 percent to 4.3 percent.”

He explained the term “hidden box” by saying that when things were not revealed and kept secret and could not be checked and verified, it became difficult to gauge the prevalent GDP growth rate. Small scale manufacturing was posting eight percent growth for the last 15 years or so, but it was not supported by verifiable statistics. Most of the growth, he pointed out, had been coming from the informal sector or through the profit of State Bank of Pakistan (SBP) and increase in the salaries of the government employees. There is no credible growth coming from the real sector and this casts doubts over the PML-N’s claim of achieving higher GDP growth rate, Sherani said

“Claims of higher growth rate could well be accepted when IFIs and private economic think tanks and independent economists think alike,” the former economic advisor to the ministry of finance said, and advised the official agencies to come clean by working out credible macroeconomic  data.

Investment, especially Foreign Direct Investment (FDI) is a very important component that is considered vital in terms of working out a credible GDP growth rate. In Pakistan’s case, private investment kept falling, despite that the government claimed improvement in the investment climate, which it said was possible due to improved security environment, fall in the interest rates and greater access to credit by the private sector.

If that is true, why does private investment, both domestic and foreign, continue to fall? It peaked at 13.5 percent of GDP in 2006-07 and later fell to 10.2 percent of GDP by 2015-16. It declined further to 9.9 percent of GDP in 2106-17. The fall of investment was particularly witnessed in the manufacturing sector which went down by 40 percent from the peak level.

As far as FDI is concerned, it peaked in 2007-08 at $5.5 billion; since then, it has been declining and is averaging less than $1 billion a year. Despite that the $54 billion CPEC project brought $2.5 billion investment last year to help undertake infrastructure and energy related projects, FDI flows remained small and further declined by about 10 percent in 2016-17 - 23 percent below the target.

China has emerged as a major foreign investor having a 41 percent share, but overall FDI in the power sector fell by 40 percent in the first ten months of the last financial year.

Since the domestic investor is shy of investing in the country, foreign investor is equally reluctant to do so. A number of multinational companies have already left Pakistan due to one reason or the other.

Portfolio investment by foreign investors also declined over the years, though they were earning a good profit. There had been a flight of capital by the local investors because of growing political uncertainties in Pakistan. This flight of capital at times averaged $20 to $25 million a month. Many local investors and businessmen shifted their industries to other counties including Malaysia, Sri Lanka and UAE.

Part of the problem is the setting of unrealistic targets by every successive government in Pakistan to achieve higher GDP growth rate. The issue gets compounded when rulers opt for IMF emergency lending programme. This forces the governments to accept checks and balances with IMF officials sometimes getting involved in nitty gritty of things.

Now, it all depends on the ‘political will’ of the rulers to decide whether they want their own wellbeing or the welfare of the state. They have to decide about fundamental structural reforms in key sectors of the economy to ensure new economic, political and social contract to attain higher GDP growth rate.

The writer is a senior journalist based in Islamabad