Economic Survey 2009-2010: an overview

By Mehmood-Ul-Hassan Khan

Economic Survey 2009-2010 was presented on Friday by the Advisor to the Prime Minister, Dr Hafeez Shaikh. It revealed mixed macroeconomic conditions for the current year. The GDP growth was projected at 4.1 per cent, higher than the targeted growth rate of 3.3 per cent.

Positive highlights

The economic survey reaffirmed that a slight revival in large-scale manufacturing sector of 4.4 per cent pushed up industrial growth to 4.9 per cent. Robust growth in services sector of 4.6 per cent also played a contributory factor in the overall GDP growth ratio of the current year. Despite economic recession and ongoing global economic crisis the construction sector registered a high growth rate of 15 per cent. Somehow, agriculture slowed down to only 2.0 per cent in the current year. While the crops sub-sector declined 0.4 per cent over the previous year, livestock posted a healthy rise of 4.1 per cent. Per capita income was estimated at Rs87,810 ($1051).

The survey further projected healthy performance of the external sector. Workers’ remittances and surge in the exports had a healthy impact on the overall GDP ratio and was instrumental

In narrowing down current account deficit i.e. by $3.1 billion or 1.8 per cent of GDP during July-April, 2010 as compared to $9.0 billion 5.5 per cent of GDP for the same period last year.

According to the survey, consumer price index (CPI) decreased to 12 per cent from 20 per cent in the same period last year. It was an impressive achievement but seems not be sustainable. The overall CPI inflation accelerated to 13.3 per cent year-on-year in April, with food inflation at 14.5 percent. Core inflation registered an increase of 10.6 per cent year-on-year. On a period-average basis, overall inflation was recorded at 11.5 per cent for July to April.

Futhermore, foreign exchange reserves reached $15 billion from $6 billion in October 2008.  International credit rating agencies upgraded Pakistan from CCC+ to B- by S&P, while Moody’s revised its outlook to stable [August 2009].

Negative trends

According to the economic survey 2009-2010 further declining levels of domestic rate of savings, continued low ratios of investments (local and foreign)  and a higher than targeted fiscal deficit were the negative trends of the current year. The survey indicated that national savings were expected to decrease to 13.8 per cent of the GDP from the target figure of 14.7 per cent, while total investment was estimated to drop by 16.6 per cent of GDP as compared to the target of 20 per cent. Foreign direct investment (FDI) during July-March, 2010 declined steeply by 58 per cent.

A substantial decline in FDI inflows for the period also contributed to the decline in fixed investment in 2009-10. FDI accounted for a high share of gross fixed investment, with a share of close to 20 per cent.

All these factors have multiplier effects on economic growth. Moreover, fiscal deficit remained at 2.7 per cent of the GDP during the first half of the year as compared to 1.9 per cent in the same period of 2008-09. It is predicted that due to low receipts of expected external aid flows and delays in proceeds from the coalition support fund, the fiscal deficit during 2009-10 is expected to be around 5.1 per cent of GDP as compared to the target of 4.9 per cent.

The commodity producing sectors are estimated to have expanded at a 3.6 per cent pace. The unemployment rate increased to 5.5 per cent from 5.2 per cent, largely due to the increase in urban unemployment to 7.1 per cent from 6.3 per cent. At current market prices, gross fixed capital formation has been estimated to have declined by 0.6 per cent, after recording a 5.5 per cent increase in 2008-09.

Major risks

Economic survey 2009-2010 pinpoints non-implementation of the reform of GST, leading to VAT and other significant tax broadening measures, larger-than-budgeted security related expenditures, inadequate targeting of subsidies, failure to reform public sector enterprises (PSEs), continued overhanging commodity financing debt stock and lastly deterioration of internal security situation as major risks to the macroeconomy. Moreover, it is feared that high ratios of inflation, fiscal deficit and public debt with the worsening energy crisis (water, gas and electricity) could reduce policy space to stimulate the economy. Therefore, economic recovery is still fragile and stabilization measures need to be consolidated to achieve sustainable growth with financial stability

Serious challenges

The extremely low tax-to-GDP ratio and rising circular debt, defence expenditures and credit requirements for commodity operations are some disturbing factors to economic recovery. The cumulative effect of the energy crisis on the overall economic growth is estimated to be at two per cent of the GDP during 2009-10 as 1.7 per cent negative growth has been witnessed in electricity consumption.

Education sector

Education is considered to be the backbone of any country’s socio-economic development. It is treated as a strategic asset for rapid economic growth.

On the contrary, the economic survey disclosed that public spending on the education sector as a percentage of GDP is lowest in the country, as compared to other countries of South Asian region.

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Country          Allocation

of GDP %

Bangladesh          2.6

India   3.3

Indonesia          3.5

Iran    5.2

Malaysia          4.7

Pakistan           2.1

Vietnam          5.3

Source: Pakistan economic survey 200-2010.

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The survey further stated that Pakistan allocated 2.5 per cent of the GDP on education during 2006-07, 2.4 per cent in 2007-08, 2.1 per cent in 2008-09 and 2 per cent in 2009-10, which shows persistent decline.

The above table clearly shows that the government is not taking enough efforts on an important sector like education. Education sector as whole has had been a deprived sector. A large number of schools are missing basic infrastructure facilities i.e. 37.7 per cent schools up to elementary level are without boundary walls, 33.9 per cent without clean drinking water, 37 per cent without toilets and around 60 per cent schools are without electricity.

Concluding remarks

The survey displays a fair assessment of the macroeconomic conditions. It anticipates an economic recovery to take place, however it would be a fragile one. Furthermore, it urges the decision makers to adopt a paradigm shift in developing and implementing essential policies. Until and unless, issues like low tax-to-GDP ratio, severe energy crisis and bad governance are solved, the road to economic recovery would be a difficult one.

http://jang.com.pk/thenews/jun2010-weekly