Pakistan govt eyes 4% growth rate for next fiscal year

Amid tight fiscal and contractionary monetary policies, the government of Pakistan is targeting slight improvements in savings and investments, coupled with better performance by agriculture and industry to achieve an economic growth rate of 4% during the next fiscal year, compared to a dismal growth of 3.3% during the current fiscal year.According to budget documents, the government is setting a target of total investment-to-GDP ratio at 15.8% for the next fiscal year, slightly higher than the current year’s provisional rate of 15.4% that is significantly lower than 17.2% target.Of this, the fixed investment-to-GDP ratio is targeted to increase to 14.2% from the current year’s missed target of 15.6%.The fixed investment during the current fiscal year is provisionally anticipated at 13.8%.Public sector investment is estimated to stay almost unchanged at 4.1% of GDP during the next fiscal year from the current year’s actual rate of 4% – way behind the 4.8% target.Likewise, the target for national savings-to-GDP ratio is set at 13% for the next fiscal year, compared to the current year’s provisional estimate of 11.1% that fell significantly behind the 13.1% target.As such, investments and national savings would be impacted by the government’s tight fiscal and monetary policies in line with its commitments with the IMF as prior actions to qualify for a $6bn 39-month programme.The documents suggest that the fiscal policy 2019-20 will envisage “containing fiscal deficit, controlling current spending, additional resource mobilisation and targeted subsidies while prioritising development spending”.The monetary policy will be “contractionary” aimed at supporting adjustment process to restore macroeconomic stabilisation and managing aggregate demand.The real test will be to “strike a balance between growth and stability in a manner that monetary policy tools may not suffocate growth while containing inflationary pressure”.Therefore, the government is projecting next fiscal year’s inflation at 8.5% on the basis of rising commodity prices and second round effect of depreciation and base money creation during the current year.The size of the national economy is estimated to go up by about 12.9% to Rs43.5tn next year from Rs38.56tn during the current year.Net indirect taxes are projected to increase by 13% to Rs2.95tn next year from Rs2.6tn this year.Foreign inflows are estimated to decline by about 26.5% to Rs1.227tn next year despite the IMF programme, compared to Rs1.66tn external resource inflows during the current year.Total consumption is estimated to cost Rs40.88tn next year, up 11% from Rs36.77tn this year.The government will be ensuring in the budget documents a primary deficit of 0.6% of GDP committed with the IMF as a prior action by setting a revenue target of Rs5.550tn a massive 35% jump from the current year by increasing the general sales tax (GST) rate to 18% across the board from 17%, excluding lower rates on selected items like sugar, steel, fertiliser, etc.An additional Rs1.5tn or so revenue will flow, mostly from additional tax measures, including about Rs600bn on account of inflation and GDP growth rate.About Rs90bn-Rs100bn is anticipated from 1% increase in overall GST rate, about Rs75bn by increasing the GST rate to 18% from 7.5% on sugar, fertiliser, etc, and about Rs90bn by eliminating the zero-rated regime.About Rs100bn will be generated by reversing some income tax exemptions and about Rs100bn by restoring taxes on telecom services.The budget 2019-20 envisages “overall macroeconomic stabilisation in view of fiscal consolidation, external account contraction and revival in agriculture and industrial growth”.The next year’s GDP growth is targeted at 4%, with 3.5% increase in agriculture, 2.4% in industry and 4.8% in services, but these targets are subject to favourable weather conditions and current account, coupled with consistent economic policies.The agriculture sector is targeted to grow by 3.5% on the basis of expected contribution from important crops (3.5%), other crops (3.1%), cotton ginned (2.5%), livestock (3.6%), fishery (4%) and forestry (2%). Better production of both Rabi and Kharif crops is expected during 2019-20.Similarly, the industrial sector is expected to grow by 2.4% on the back of better energy supply, better investment climate and consistent policies.Mining and quarrying are projected to grow by 2.5%, manufacturing by2.8%, large-scale manufacturing by 1.7%, construction, electricity generation and distribution and gas distribution by 1.5% each.The services sector is targeted to grow by 4.8% in 2019-20 supported by 3.8% growth in wholesale and retail, 3.5% in transport, storage and communications, 6.5% in finance and insurance, 4% in housing, 5.7% in general government services and 7.1% in other private services.The expected higher growth in commodity-producing sectors will support the targeted growth in the services sector.Trade deficit is projected at 9.2% of GDP during the next fiscal year as the government expects exports to get momentum owing to expected better investment environment and CPEC and better industrial production.As such, exports are targeted to increase by 6.2% and imports by 2.1%.Current account deficit for the next fiscal year is projected at 2.8% of GDP, compared to 4.4% this year.