Pakistan has posted a GDP growth rate of 8.4% in 2004-05. This is an unprecedented and remarkable feat. Only China in the entire South and South East Asian region can boast of anything like this. Even India at its shining best touched 6.9% only. The notable part of this achievement is that the peak is contoured along progressively higher growth rates in the earlier years of the Musharraf regime – 1.8% in 2000-01, 3.1% in 2002-02, 5.1% in 2002-03 and 6.4% in 2003-04. The best part is that the economic turnaround has followed a belt-tightening and economic restructuring programme in which fiscal deficits have been brought down from 5.4% in 1999-00, 4.3% in 2000-01, 4.3% in 2001-02, 3.7% in 2002-03 and 3.3% in 2003-04. Full marks to PM Shaukat Aziz for successfully directing an economic recovery programme despite some distressing consequences for the social sector, employment and income distribution. The next step is to effectively manage and sustain high growth while addressing concerns of income distribution, inflation, investment, poverty alleviation and social sector uplift. How will Mr Aziz fare?
The high growth is a direct result of specific factors. First, there is an unprecedented high growth rate of 7.5% in agriculture largely due to favourable weather and water conditions. The agricultural growth rate was -2.2% (minus) in 2000-01, 0.1% in 2001-02, 4.1% in 2002-03 and 2.6% in 2003-04, which partly explains the low GDP growth rates of those years. This sector contributes about 25% to GDP. Since it grew by a measly 2.6% in 2003-04 and a gigantic 7.5% this year, this year’s high growth has contributed at least 2.5% points directly to the GDP growth rate of 8.4%. This year’s cotton crop of 15 million bales alone accounted for an additional 2.5% points of GDP growth. Also, this was a freak good year – only twice in the last 45 years has the agricultural growth rate exceeded 7.5%, the first time in 1984-85 (10.9%) when GDP growth recorded 8.7% growth and the last time in 1991-92 (9.5%) when GDP growth stood at 7.7%. So, if agricultural growth falls significantly next year, it will bring GDP growth down.
Second, with fixed investment/GDP (capital formation) ratios stagnant – 16% in 1999-00, 15.8% in 2000-01, 15.5% in 2001-02, 14.8% in 2002-03, 16.4% in 2003-04 and only 15.3% this year – it is clear that much of this year’s growth has been pump primed by consciously manipulating monetary and interest rate policy and relying on capacity utilization in the manufacturing sector rather than an overly significant rise in fixed investment to feed demand. The growth rate in the manufacturing sector – which accounts for over 18% of GDP – was 12.5% this year compared to 14.1% in 2003-04, 6.9% in 2002-03 and 4.5% in 2001-02. Within this sector, large-scale manufacturing grew by a whopping 18.2% this year, compared to 10.5% in 2001-02, 10.7% in 2002-03 and 11.8% in 2003-04. Thus this year’s growth was largely attributed to high growth in the textiles, cement, automobile and consumer durables sectors, the first fueled by a good cotton crop, the second by demand from Afghanistan and Iraq and the third and fourth by soft lending-lease bank policies encouraged by the government and State Bank of Pakistan. So, without a substantial increase in the fixed investment/GDP ratio on account of a major increase in manufacturing, further growth in this sector will be fully inflationary and unsustainable .
The government’s budget for 2004-05 shows an understanding of these factors. Allocations for the Public Sector Development Plan are up by 34.7%, aimed at social and economic infrastructure development, including waterways improvement. Import duty reductions are geared to make manufacturing inputs cheaper, encourage output/investment and stimulate demand. Tax/duty incentives are aimed at making textiles more competitive in export markets and spurring investment. A tax collection target of an additional Rs 100 bn, coupled with bank borrowings of only Rs 18 bn more than last year, is expected to lead to a low fiscal deficit of 3.8%. This is aimed at keeping tabs on inflation. The rest of the budget seeks to rationalize the economy by bringing it in line with WTO requirements (import duty reductions) and donor agency conditionalities (low fiscal deficit). Accordingly, the GDP growth target is fixed more modestly at just above 7% and inflation is targeted to fall into a single digit.
The policy shift from pump priming the economy to real, sustainable, high growth with low inflation, that doesn’t rely on extraneous, transient or extraordinary factors, is not going to be easy. The need to give something concrete to the people in terms of employment, security and incomes – that overrides statistical achievements – is going to be even harder. Political instability and institutional incapacity to meet targets, especially on inflation, will be the government’s biggest bugbears. The challenge for Shaukat Aziz, and by association General Musharraf, is to overcome these obstacles swiftly. They could have had a good stab at it by freezing defence expenditures and using the additional billions to alleviate poverty. But defence remains a holy cow beyond anyone’s jurisdiction.