The government’s economic performance during the first month of the current financial year is not promising and it should consider some immediate corrective policy actions, as otherwise it might not be able to achieve the ambitious budgetary targets, says the Institute of Policy Reforms fact sheet on economy.
The report notes that recent developments are beginning to cast doubts on the ability of the economy to perform well in financial year 2015-16. The on-going floods could end up damaging crops in an area of almost one million acres.
It says the assumption of an average rate of inflation of 6 percent this fiscal year is likely to be on the high side. But it will be very difficult to achieve a 20 percent growth in FBR revenues. Already, in the first month, July, these revenues have shown growth of only 11 percent. Therefore, it is likely to see a spate of mini-budgets, like the last year.
The noticeable fall in interest rates hasn’t spur private investment. In the first month, July, bank credit to the private sector has actually declined by Rs 68 billion. The Planning Commission releases in the first five weeks of FY2015-16 have been a paltry Rs 45 billion, equivalent to only six percent of the annual PSDP of Rs 700 billion.
The year-to-year inflation in the consumer price index is down to only 1.8 percent in July. In fact, the wholesale price index has been declining every month since December 2014. The economy shows signs of having entered a period of low inflation or even deflation. However, as the ‘low base effect’ begins to take over, the rate of inflation could start rising once again and reach up to five percent in the next five to six months.
There are also some movements in money supply in July, which are potentially a cause for concern if they persist. Currency in circulation has increased by almost Rs 112 billion more while deposits have shown a larger decline of Rs 38 billion.
In the presence of low commodity, prices and outstanding stocks of 0.5 million tons of Basmati rice and over two million tons of wheat, the procurement prices offered last year do not appear to be sustainable. Any reduction in prices could affect the supply response of farmers. Overall, it is beginning to look unlikely that the agricultural sector can achieve a relatively high growth rate of 4 percent.
The biggest threat to growth of the manufacturing sector is the precipitous drop in exports. In the first month, July 2015, exports have plummeted by almost 17 percent in relation to the corresponding month of 2014. The textile industry is up in revolt after the imposition of taxes and surcharges on electricity and gas. The rupee remains significantly overvalued and this has impaired the competitiveness of our exports. Similarly, after a long time, remittances are beginning to flatten out, with less than one percent growth in July.
The last financial year, witnessed a major recovery in the iron and steel products industry, primarily because of resumption of production by the Pakistan Steel Mill. Almost one third of the overall growth of the large-scale manufacturing sector was due to the iron and steel industry. But the news has come that PASMIC is shut down once again. In addition, industries like fertilizer are likely to be hit by the imposition of the GIDC. Falling exports, rising costs and factory closures render difficult the prospect of achieving 6 percent growth in manufacturing in 2015-16.
