The government has decided to align the monetary expansion for the next fiscal year in line with its Gross Domestic Product (GDP) growth target of 4.2 percent to encourage private sector investment and to maintain inflation at the target of 13 percent.
The Annual Plan for the next fiscal year was recently presented to the Annual Plan Coordination Committee notes that the economy is still fragile and growth will depend on economic reforms and on revitalizing the industrial sector by curtailing energy shortages and high interest rates that are discouraging the private sector from investing. The plan shows that the government was working on new ideas for the next fiscal instead of implementing the theoretical rules which have hampered revival of economic growth.
The GDP growth target for next fiscal year is projected at 4.2 percent, with a target of 3.4 percent growth from agriculture, 3.7 percent in manufacturing and 5.1 percent in services sector. However, the plan says to keep the broad money growth in the target level and encouraging private sector credit, it is imperative that the government borrowings from the central bank should be limited to safe level of 10 percent of revenue of previous fiscal year.
The main focus of the fiscal policy during next fiscal year will be to bring fiscal deficit within manageable level with the imposition of the Reformed General Sales Tax (RGST), wealth tax, capital gains tax and bringing agriculture income under the tax net. Strengthening tax administration reforms, reducing tax slippages and enforcing tax compliance need to be undertaken in earnest. It also says provincial government must be motivated to increase their own tax collection and demonstrate fiscal responsibility. Changes in development expenditure will rest on resource mobilization and taxation reforms in the form of reformed general sales tax in the coming fiscal year.
The plan says monetary expansion for the FY 2011-12 will be in line with the projected GDP growth of 4.2 percent and CPI inflation at 13 percent. To keep M2 growth rate in the vicinity of the targeted level and to encourage private sector credit, it is imperative that government borrowings be limited to the safe level, equivalent to 10 percent of revenue of the previous year. This will also help in bringing down the CPI inflation and strengthening growth prospects.
The target rate of consumer price index (CPI) based inflation is set at 13 percent as against the expected inflation of above 15 percent in the current fiscal year. It stresses that efforts should be made to control the inflation by following fiscal stringency, tight monetary policy and adequate supply of essential items.
To control the inflation the government plans to lower custom duties on more than 397 products in the budget it would also help lower manufacturing costs. The Private Power and Infrastructure Board (PPIB) energy outlook for next year is showing improvement in electricity supplies that would further help the industrial sector.
To maintain a sustainable balance of payments position to ensure macro economic stability and avoid excessive reliance on external borrowings, it is proposed that the reliance should be on stable sources of external financing like foreign direct investment and remittances. The projected investment to GDP ratio is 13.7 percent with total fixed investment at 12.1 percent, whereas the national savings is projected to be 13 percent of GDP with the national investment and savings gap at 0.7 percent.
The plan notes that the foreign direct investment would be highly dependent on the law and order situation, infrastructure investment, introduction of reforms to create conducive environment and also on increased competition in the domestic market. The government anticipates that FDI would come in the oil and gas exploration, trade, financial business, telecommunication, construction and chemicals. But it would be dependent upon the measures to be incorporated by the government for opening up markets for private investment and minimizing the role of the government for bringing change in the form of increased competition and better services at the micro level of the economy.
The government also aims at deepening and diversifying the capital market. It has proactively pursued a policy of supporting capital market development through a sequenced divestment of shares in state-owned companies through stock exchanges in both domestic and international markets, taking into account stock market conditions and investor demand.
The plan estimated that Pakistan can increase cotton production by 62.5 percent with the introduction of BT cotton seed and modern pest control techniques. It expects that agriculture growth will increase due to surge in international commodity prices. For improving dairy output, dairy cooperatives on Indian model have been proposed.
Enhanced credit facility is expected to increase industrial growth at 3.1 percent next fiscal year, with projected contributions of mining and quarrying sector projected at 1 percent, manufacturing 3.7 percent, construction 2.5 percent and electricity, gas and water supply 1 percent. The government also plans to introduce uninterrupted electricity supply tariff for industrial zones. Recovery in agriculture and industrial sector will impact the services sector to grow by 5.1 percent next fiscal year.
For the capital market development, the government aims to divest its shares in state owned companies through the local and foreign stock exchanges. However the exports for the next fiscal are projected to grow by 5 percent to $ 25.8 billion as compared to estimated earnings of $ 24.6 billion this fiscal year. The projected target is kept low due to global uncertainty, energy shortages and security situation.
While reviewing the annual plan for the current fiscal year, it was observed that the economy remains under stress due to the floods of 2010, delay in implementation of economic reforms and dilapidated security situation have hampered growth in all major sectors. Massive floods took a heavy toll on agriculture and infrastructure while energy crisis coupled with decline in foreign direct investment soaked up business activity during the first ten months of 2010-11.
Pakistan’s economy is expected to grow by 2.4 percent against the target of 4.5 percent during 2010-11. Agriculture sector is expected to grow by 1.2 percent against the target of 3.8 percent. Industrial sector was hampered by electricity and gas shortages resulting in an expected decline in production by 0.1 percent against the targeted growth rate of 4.9 percent. Large Scale Manufacturing is expected a growth at 1 percent against the target of 4.9 percent. Services sector managed to achieve a growth rate of 4.1 percent against the target of 4.7 percent which was mainly due to wholesale and retail trade, transport and communication sub-sectors.
