ISLAMABAD: Finance Minister Ishaq Dar on Thursday evening unveiled the Pakistan Economic Survey 2014-15, with a focus on success stories over missed targets.
The minister had set an economic growth target of 5.1 per cent in the current year’s budget. At a provisional growth rate of 4.2pc, the target has been missed by a wide margin, but is still better than previous year’s 4.03pc.
Fiscal year 2014-15 was a mixed bag for Pakistan’s economy, with several positives to take hope from but not without a fair share of alarm bells as always.
To get an economic snapshot of Pakistan right before the start of a new fiscal year, we look at some indicators over the past six years, including the latest numbers from the 2014-15 economic survey, and where convenient, compare performance with regional peers and historical numbers for evaluation.
Real GDP Growth
For fiscal year 2014-15 ending in June, Pakistan’s GDP grew 4.2%, which confirms two consecutive years of increased growth after a couple of years of stagnancy. Growth this year was driven primarily by the services, industry and agriculture sectors.
While that is commendable, growth is still far below the 5-7% required to absorb new entrants in the labour force to check rising unemployment.
If we compare these numbers with GDP growth for the entire South Asian region of which Pakistan is the second largest economy we find that Pakistan’s growth of almost 4% in the past five years lags its regional peers in South Asia who averaged almost 7%.
Bangladesh has been growing at over 6% for the past few years, while India, despite two years of modest growth in 2012 and 2013, has been able to maintain average growth of well over 5% in the past five years.
Inflation in Pakistan has fallen dramatically in FY2014-15, with pace of declines being faster than some regional peers. Most of the declines are attributed to cheaper oil prices that fell by almost 50% in the same period.
In addition to lower oil prices, the lagged effect of “monetary tightening” in 2013 (increased interest rates) led to an ease in inflation not only in Pakistan but also in India and Sri Lanka (World Bank GEP 2015).
But since then, the State Bank of Pakistan has been pursuing a loose monetary policy. Just a couple of weeks ago, the central bank slashed interest rate for a fourth consecutive time since November 2014— this time to a 42-year low of seven percent.
Interest rate has fallen 300 basis points between November 2014 and April 2015.
This is a clear sign of positive economic health, especially with regards to prices, such that the government now wants to spur economic activity without worrying about higher prices.
Finance Minister Ishaq Dar had welcomed the latest cut in interest rate: “The lowering of interest rate is a manifestation of improvement in macro-economic conditions as reflected in multi-year low inflation and considerably improved external account,” he said.
Despite the sharp fall, Pakistan’s average inflation in the past five years is slightly higher than the regional (South Asian) average.
Not only Pakistan but other larger countries in South Asia—such as India and Bangladesh— have struggled on account of tax revenue, with tax-to-GDP ratios declining or flat in the last decade.
Structural reforms to increase tax revenue by broadening the tax base and improving tax administration are a priority under the IMF Extended Fund Facility (EFF) programme for Pakistan.
In the March 2015 update on Pakistan’s sixth review under the programme, Pakistan met all quantitative performance criteria for end-December 2014— except federal tax revenue which it missed by Rs 22 billion.
In the same country report, IMF notes that while tax revenue as a percentage of GDP may register a one percentage point increase this year owing to continued reforms, the ratio remains one of the lowest in the world and reforms in this regard need to persist.
According to the Pakistan Economic Survey 2015, the government spent 0.42% of GDP on health in fiscal year 2014-15. While actual expenditure has been rising year-over-year, the health-to-GDP figure has been more or less stagnant at under 0.5% for decades.
Since government calculations of health as a percentage of GDP may vary from country to country depending on how health expenses are defined, using World Health Organisation (WHO) statistics seems a better way for cross-country comparisons of the metric.
As the table depicts, while all three South Asian countries’ expenditure on health as a portion of GDP has remained flat in the past few years, Pakistan’s average of almost 3% is the lowest among the three.
This ignorance has translated into poor life expectancy rates not only for the region but for Pakistan in particular, which has the highest infant mortality rates among the three countries.
About half of under-five deaths worldwide occur in only five countries: India, Nigeria, Pakistan, the Democratic Republic of the Congo, and China (World Development Indicators 2015, World Bank).