GDP growth – real or mirage? – BR Research
The estimated GDP growth of 3.94% for fiscal year 21 surprised many. There is no reason not to believe that real growth in the industrial sector might be a little higher. The country has a record cereal production this year. Rural income levels have generally improved and show the wealth effect. Then, the higher amount of disbursements under the Ehsas program makes demand magic. And the high flows of remittances must have contributed to some demand.
However, there is nothing positive about this growth coming from a weak base. Per capita income of $ 1,543 is yet to peak at $ 1,652 in FY18. GDP in nominal terms at $ 298.6 billion is still below $ 315.2 billion in FY18. But those higher numbers in 2016-18 were also not sustainable, as the currency was kept artificially overvalued to stimulate domestic demand. This must have faded and GDP per capita fell to $ 1,361 in FY20.
The economy catches up with the growth path after reaching stabilization. The next two years are meant to be higher growth. This can bode well for the well-being of the average household. The momentum is building. But there is still inertia in the economy. The output gap is still negative and, in a few sectors, the economy has not yet reached the output levels of 2018. However, structural reforms and the quality of growth are imperative not to return to a new balance of payments crisis over the next 2 years. -3 years.
In FY21, the surprising element is higher growth in wholesale and retail trade (in the service sector) at 8.37%. The weight of the sector is 18.82% in the GDP and it contributes 40% (or 1.58 percentage point) to the growth of the financial year 21. This increase of the sub-sector is linked to a better performance of agricultural production, optimistic growth in LSM and overall growth in trade volumes. The sum of imports and exports of goods increased 17% in USD during 10MFY21. Then the wholesale and retail segment goes from a weak base – minus 3.94% in FY20 and only 1.08% in FY19. However, higher growth is quite plausible in FY21.
Second, the performance of agriculture in cereals – mainly wheat surprised many. Previous projections by SBP and others were based on old data. According to sources, the latest data received by PBS in May of this year shows better results and when these numbers are put into SBP and other models, the growth approaches what is estimated by the PBS. If the new grain numbers are true, then the wheat import requirement should be siphoned off. Wheat and corn prices (as they also show 7 percent growth plus growth) are expected to stabilize as the price spike reflects demand outstripping supply.
More than half of agricultural GDP is made up of livestock. It is estimated to grow to 3.06%. This growth is based on crude estimates because the herd census is in progress. Growth is very much in line with historical growth. There is no sign of an attempt to overestimate GDP using sub-sectors such as livestock, fisheries and forestry. Aggregate growth in agriculture is estimated at 2.77 percent in FY21, up from 3.31 percent last year.
The industrial sector accounting for 19% of the GDP is estimated to have grown by 3.57% in FY21. This sector was affected by the lockdowns in the fourth quarter of last year – it fell 3.77% in fiscal year 20. This decline continued until the decline of 1.56% in FY19 due to economic slowdown and stabilization policies.
In the previous five years (FY13-18), industrial growth averaged 4.9%. But within exports, the share was decreasing. Most of the raw materials are imported and with some added value the goods produced are consumed at home. The growth of the manufacturing industry driven by imports without increasing the share of exports must have slowed down. The good thing is that the export sector is doing well now. It is imperative that this trend continues.
LSM growth is estimated at 9.29 compared to a 10.12% drop last year. LSM growth is 9MFY21 is at 8.99 percent. As of March 21, it increased by 22.4 percent. April-June 2020 was the worst period due to lockdowns; thus, growth will be higher in the last quarter of this fiscal year. Seeing this, the LSM for FY21 is underrated. And on this basis, the growth of the service sector is also underestimated. This would certainly more than offset the impact of the overestimation (if any) of wheat production on the service sector.
The growth of small scale and slaughter is based on crude estimates and these are in no way tempted to overestimate. For example, small-scale manufacturing increased 8.3% in FY21. This matches the growth range of 8.2-8.7% in FY 05-19, regardless of the volatile path of LSM over the same period. Over the past year, it has only increased by 1.5%. It seems that the growth of small-scale manufacturing is underestimated in FY21.
The service sector accounts for 61.7 percent of GDP and is estimated to grow 4.4 percent in FY21, compared to a decline of 0.55 percent last year. The highest growth (as mentioned above) is estimated in wholesale and retail trade. This is the strongest growth since 2005-06. The sector is as big as agriculture. The impact of the growth of main crops, LSM, foreign trade has a strong impact on wholesale and trade.
The other area of higher growth in services is finance and insurance – up 7.8% from 1.1% last year. Its share is 3.72% in the GDP and mainly in the banking sector. The growth in remittances and the stimuli offered by the government and the PBS have boosted the money supply, especially bank deposits. Commercial bank deposits increased 16.4% between April 20 and March 21. This growth is significantly higher than the average deposit growth of 10.5% over the previous three years. The profitability of commercial banks also describes a similar story, with profits increasing 35% in 2QFY21 and 21% in 3QFY21.
Some say that due to COVID-related smart locks there must be a decline in many retail services such as catering, wedding halls, restaurants, fashion, gyms and clubs, lounges beauty, etc. these are not integrated into the GDP. The GDP was last rebased in 2005-06 and at that time many of these services were extremely limited in Pakistan. The rapid growth of the last fifteen years is not really taken into account in the current estimate of GDP.
Pakistan’s overall nominal GDP is up 14.8% to reach 47.8 trillion rupees ($ 298.6 billion). The higher nominal growth would reduce the budget deficit and the public debt in terms of GDP. At the same time, the GDP rebasing exercise is long overdue and ongoing. The buzz is that the new series will be released during this calendar year. There are many sectors – within LSM and many services are underreported in the current base. Added value in textiles, packaging and many other sectors is not taken into account in LSM. As mentioned above, many modern services are not part of the GDP. For more details read “Underestimated GDP”.
Nominal GDP is expected to increase by around 10-15%, bringing the number to between 52 and 54 trillion rupees, which would improve deficits and debt ratios. However, this will make the tax-to-GDP ratio even lower. Higher than expected growth in FY21 calls into question FBR’s performance as tax growth should have been higher!