Against a backdrop of declining economic growth in the 1990s, the current year’s growth performance offers grounds for optimism. Serious difficulties emanating from the deep-rooted structural weaknesses resulted in deceleration of economic activity. Following October 1999, an attempt was initially made to arrest the declining trend in the economy. Recent information, however, suggest that economic growth has staged a modest recovery during 1999-2000. Real GDP grew by 4.5 percent as against 3.2 percent of last year but fell short of the current year’s target of 5.0 percent. The modest recovery in growth is fully supported by agriculture, which staged a strong "V-shaped" recovery on account of bumper cotton and wheat crops, and a good rice crop. Agriculture grew by 5.5 percent in 1999-2000 as against 1.9 percent of last year and current year’s target of 4.3 percent * . From statistical point of view, the performance of manufacturing sector in general and large-scale manufacturing in particular has been weak. They grew by 1.6 percent and 0.04 percent respectively in 1999-2000. The weak performance is mainly due to a 24 percent decline in sugar production, which has large weight in the quantum index of manufacturing. Excluding sugar, the large-scale manufacturing has registered a sharp increase of 6.4 percent as against 3.5 percent last year. In fact, the performance of large-scale manufacturing excluding sugar has been, by far, the best over the last five years [See Chapter 3 for a detailed discussion]. The recovery in growth was also supported by services sector, which grew by 4.5 percent as against 4.1 percent of last year. With net factor income from abroad declining by 74.6 percent, primarily because of lower inflow of workers’ remittances, the real GNP grew by 3.9 percent in 1999-2000 as against 3.2 percent of last year. With population growth of 2.26 percent, the real per capita GNP at factor cost has increased by 1.6 percent as against 0.9 percent of last year.

* While estimating current year’s agricultural growth the size of the wheat crop was estimated at 19.3 million tonnes. More recent information suggest that wheat crop may exceed 21.0 million tonnes. If this is the case, agricultural growth would then be 7.1 percent and accordingly, the real GDP would grow by 4.9 percent

Notwithstanding a modest recovery in the outgoing fiscal year, the fact remains that Pakistan’s growth performance has deteriorated in the 1990s for a variety of reasons, including serious lapses in implementation of stabilization policies and structural reforms. As against an average growth rate of 6.1 percent in the 1980s, the real GDP growth slowed to an average of 5.1 percent in the first half and 4.1 percent in the second half of the 1990s. The large-scale manufacturing and services sectors contributed largely to the deceleration process in the 1990s. The former grew by an average annual rate of 8.2 percent in the 1980s, slowed to an average of 4.7 percent in the first half and further to 2.3 percent in the second half of the 1990s. In effect, over the last one decade, the growth momentum of large-scale manufacturing reduced to less than one-half of what was achieved in the 1980s. The services sector also slowed from an average growth of 6.6 percent in the 1980s to 5.1 percent in the first half and further to 4.1 percent in the second half of the 1990s—a loss of one-third in the growth momentum
[See Table 1.1].

Source: Federal Bureau of Statistics

Investment is essential for sustaining higher economic growth. It has also registered a decline in the 1990s. Total investment and fixed investment averaged 18.6 percent and 16.8 percent of the GDP in the 1980s respectively, which actually increased in the first half of the 1990s to 22.2 percent and 18.0 percent despite the fact that economic growth slowed to an average of 5.0 percent. This is because of the loss in growth momentum of large-scale manufacturing and services sectors on the one hand and less efficient use of capital on the other. In the second half of the 1990s, the total and fixed investment rates declined sharply to 17.1 percent and 15.3 percent of GDP, culminating in a steep fall in 1999-2000 to about 15 percent and 13.4 percent, respectively [See Table 1.1]. As shown in Figure-1, investment rate never reached the level of the 1980s beginning from 1994-95 and with the passage of time, the gap continued to be widened.

Declining investment rate has contributed to the deceleration of growth in the 1990s. However, further disaggregation of investment rate suggests that private sector investment as percentage of GDP,in fact, has registered an increase in the 1990s as compared with the 1980s. It is the public sector investment, which has declined sharply from 9.1 percent of GDP in the 1980s to 8.6 percent in the first half and further to 6.1 percent in the second half of the 1990s, culminating in a steep fall in 1999-2000 to 5.3 percent. National saving rate also witnessed a sharp decline from 14.7 percent in the 1980s to 14.2 percent and further to 11.1 percent in the first and second half of the 1990s, respectively [See Table-1.1]. Two points clearly emerge from the analysis. Firstly, the decline in overall investment rate in the 1990s owes mainly to the declining public sector investment and secondly, the decline in economic growth in the 1990s is largely attributed to a decline in public sector investment [See Fig-2]. It may be pointed out that in an effort to reduce fiscal deficit in the 1990s the successive governments curtailed development expenditure instead of mobilizing tax revenues. The development expenditure continued to decline from 6.4 percent of GDP in 1990-91 to 3.2 percent in 1999-2000. The declining trend in Public Sector Development Programme (PSDP) is clearly reflected in declining public sector investment, which, in turn, has caused the deceleration in economic growth in the 1990s.

Although economic growth has staged a modest recovery in 1999-2000 the task now is not only to sustain a higher growth momentum but also restore investors’ confidence. Recent developments in the growth literature have emphasized that economic conditions and implementation of appropriate public policies influence the rate of economic growth. The government can influence growth by creating stable macroeconomic environment, which can be created through macroeconomic policies that are conducive to growth. The key macroeconomic polices are considered to be monetary, fiscal, and exchange rate policies designed to keep inflation low and predictable, a stable and sustainable fiscal balance but not at the cost of development spending, appropriate real interest rates, a competitive and predictable exchange rate, and a viable balance of payments. The signaling effect government management has on the private sector is one of the key mechanisms through which macroeconomic policies influence growth.

Having discussed the overall growth and investment relationship in the 1990’s in general and the current year in particular, it is now appropriate to have detailed discussion on the growth performance of the components of gross national product for the outgoing fiscal year 1999-2000 which are well-documented in Table 1.2.

(Percent)

Source: Federal Bureau of Statistics and Economic Adviser Wing.

Commodity Producing Sector
The commodity-producing sector has considerably improved its performance during the year 1999-2000. The value added in the sector grew by 4.5 percent against a target of 4.9 percent and actual achievement of 2.2 percent in 1998-99. The poor growth profile of the manufacturing sector is mainly responsible for slight slippage from the target while rest of the sub-sectors of the commodity-producing sector has performed well. The impressive performance of agriculture sector has especially contributed this healthy performance. Given below is an overview of performance of components of the commodity- producing sector.

Agriculture sector has improved its share in the GDP from 25.6 percent in 1998-99 to 25.9 percent in 1999-2000. Furthermore, it accounted for 55.6 percent of value added in commodity-producing sector during 1999-2000, which was 54.8 percent in the last year. Agriculture surpassed the growth target of 4.3 percent by a fair margin and grew by 5.5 percent. The impressive recovery is due mainly to the bumper cotton and wheat crops and a substantial increase in rice production. The size of the cotton crop increased from 8.8 million bales in 1998-99 to 11.2 million bales in 1999-2000, surpassing the target of 9.7 million bales by a wide margin. The lower prices and increase in output of cotton would provide a much-needed impetus to jumpstart the textile industry. Wheat production is estimated at 19.3 million tonnes, which is 7.9 percent higher than the last year’s crops of 17.9 million tonnes. [The recent information indicates that the wheat production may exceed 21.0 million tonnes. If this is the case, then agricultural and real GDP growth would increase to 7.1 percent and 4.9 percent, respectively in 1999-2000]. The increase in wheat crop is mainly due to enhancement of the support-price of the crop, timely rain and increase in the area under cultivation. The increased output has enabled a considerable decline in import bills of wheat. Rice production also increased by 10.3 percent, increasing from 4.7 million tonnes in 1998-99 to 5.2 million tonnes. The impressive agricultural recovery was however, restrained by a 16 percent decline in sugarcane production. As against a production of 55 million tonnes last year, sugarcane production declined by 16 percent in 1999-2000. The overall growth of major crops is estimated at 9.6 percent during the year 1999-2000 as against the target of 5.4 percent and actual achievement of a negative growth rate of 0.04 percent.

The minor crops are estimated to grow by 2.7 percent in 1999-2000 against the target of 4.5 percent and actual achievement of 4.3 percent in 1998-99. The slackening of growth is due to fall in production of gram, barley, bajra and jowar, owing to decline in area under cultivation and drought conditions in certain parts of the country.

The Livestock sub-sector has grown by 2.8 percent against the target of 3.0 percent in the year 1999-2000 and achievement of 3.2 percent in 1998-99. The production of milk, egg and mutton are estimated to go up by 2.8, 2.5 and 2.7 percent respectively. Due to substantial increase in the fish catch (marine fishing by 9.5 percent and inland fishing by 7.1 percent), the fisheries sub-sector is estimated to grow by 8.5 percent as against a minor increase of 0.6 percent last year. The value added of the forestry has, however, declined by 38.2 percent mainly because of imposition of ban by Punjab and N.W.F.P on woodcutting to bridle deforestation.

The mining and quarrying sector has surpassed the growth target of 4.5 percent and recorded an impressive growth of 7.7 percent in 1999-2000 as against a modest increase of 3.6 percent last year. The production activity in the sector is mainly concentrated in crude oil, natural gas and coal and the value added in these have increased by 1.4 percent, 17.6 percent and 10.0 percent, respectively.

The manufacturing sector was planned to grow by 5.8 percent during the year on the basis of a growth projection of 4.3 percent and 8.4 percent for large-scale and small-scale manufacturing sub-sectors, respectively for the year 1999-2000. From statistical point of view the large-scale manufacturing exhibited a marginal increase of 0.04 percent in the first nine months (July-March 1999-2000) of the outgoing fiscal year. However, the overall growth figure is undermined by the impact of massive fall in the sugar production. Excluding sugar, the large-scale manufacturing grew by 6.4 percent during July-March 1999-2000 and the growth was broad-based as well, albeit, cotton textile leading the proceeding. In fact, the performance of large-scale manufacturing excluding sugar has been, by far, the best during the last five year. The major industries which registered impressive growth include tractors (53.9 percent), buses (51.2 percent), cosmetics (39.5 percent), phosphetic fertilizer (33.4 percent), paints & varnishes (21.5 percent), billets (18.8 percent), cotton cloth (15.1 percent), paper & board (14.1 percent) and beverages (8.3 percent). The declining trend was prominent in two major groups, i.e. food, beverages and tobacco group and automobile groups. The industries which depicted decline in these two groups include sugar (24.0 percent), cigarettes (11.2 percent), light commercial vehicles (43.2 percent), jeeps & cars (23.5 percent), trucks (6.7 percent) and motorcycles (3.8 percent).

The growth rate of small-scale manufacturing has been adjusted downward on the basis of a new Survey conducted by the Federal Bureau of Statistics in 1996-97. Therefore, beginning from 1997-98 onward the growth rate for small-scale manufacturing is taken as 5.3 percent as against the traditional practice of assuming a growth of 8.4 percent.

The construction sector has once again showed tremendous potential and grew by 6.2 percent in 1999-2000 as against a negative growth of 6.2 percent last year. The recovery is mainly attributed to higher investment in land improvement, construction of residential and non-residential building, highways, bridges and commercial ventures.

The electricity and gas distribution sector continued their expansion and grew by 7.8 percent in 1999-2000 as compared to 3.5 percent last year and yearly target of 5.0 percent. The growth is mainly attributed to the government’s efforts towards village electrification and increase in generation capacity.

The Services Sector grew by 4.5 percent in 1999-2000 as against 4.1 percent growth of last year. The sub-sector, wholesale & retail trade, witnessed slower growth and grew by 2.4 percent during the year which is slightly higher than 2.1 percent growth of last year but still far below the target growth of 4.8 percent.

The finance and insurance is the only sub-sector among services which surpassed the growth target of 5.0 percent and grew by 6.9 percent during 1999-2000 as against 15.0 percent growth of last year. The growth is largely attributed to an impressive increase of 31.0 percent in the insurance companies and of 15.5 percent increase in operating surplus of scheduled banking companies. The transport & communication sub-sector is estimated to grow by 3.9 percent during the current fiscal year as compared to 3.1 percent last year and target of 5.3 percent for the year. The public administration and defence has also surpassed the targeted growth of 3.5 percent and witnessed a growth of 5.6 percent as against 2.4 percent growth in last year. Two minor sectors i.e. ownership of dwellings and social services have maintained the estimated growth path of 5.3 percent and 6.5 percent, respectively.

Relative Sectoral Contribution Towards GDP Growth
Which sector has contributed most to the GDP growth in the outgoing fiscal year? The analysis reveals that commodity producing sector has contributed to the extent of 2.27 percentage points while the services sector contributed 2.20 percentage points in the growth of real GDP. More specifically, the contribution of agriculture has been the largest with 1.44 percentage points due to its impressive growth and largest weight. The weak performance of manufacturing sector reduced its contribution to 0.26 percentage points, which is even lower than the contribution of electricity & gas distribution. This sector, inspite of its small weight has contributed 0.34 percentage points.

In services sector, the main contribution came from transport & communication (0.39 percentage points), trade (0.37 percentage points) and public administration & defence (0.35 percentage points). The commodity and services sectors account for 51 and 49 percent, respectively, in the GDP. It is therefore noteworthy that both sectors have evenly contributed to the national output growth.

Sectoral Shares in GDP
The shares of the various components of the Gross Domestic Product have changed little over last one decade. The shares of agriculture, manufacturing and services have remained, more or less, unchanged. However, when viewed from the loner-run perspective major structural transformation in the components of GDP can be observed. As shown in table-1.3, the share of commodity producing sectors declined from 61.1 percent in 1969-70 to 51.0 percent in 1999-2000 and at the same time the share of services sector increased from 38.4 percent to 49.0 percent during the same period. Within the commodity-producing sector, the share of agriculture has declined from almost 39 percent to 26 percent—a decline of 13 percentage points in three decades. However, what is interesting to note is that the share of manufacturing has remained stagnant over the last three decades. The decline in the share of agriculture has been compensated by the almost equal increase in the share of services sector.

The structural transformation has various stages. In the first stage of transformation, the decline in the share of agriculture is compensated by an almost equal increase in the share of manufacturing sector, with the share of services remaining more or less stagnant. In the second stage of development, substitution of share takes place between manufacturing and services with agriculture remaining stagnant. In the case of Pakistan the data reveals only one stage of transformation, i.e. from agriculture to services with manufacturing remaining the same. The details of sectoral share are given in Table 1.3:

(Percent)

(P) Stands for provisional.
Source: Economic Adviser Wing Finance Division

Per Capita Income
The per capita income has bounced back after remaining subdued for the past three years. In real terms, the per capita income has increased by 1.6 percent in 1999-2000 as against 0.9 percent increase of last year. In terms of US dollar, the per capita income rose by 2.1 percent. One positive development about recent rise in per capita income is that it was consistently declining in dollar terms for the four years but bounced back in 1999-2000, mainly because of the stable exchange rate. The developments in per capita income are summarized in Table 1.4.

Note: FC means factor cost and MP represents market prices.
Source: 1) Federal Bureau of Statistics

2) Economic Adviser Wing

Resources and Their Distribution
The total resource availability for the year 1999-2000 is estimated at Rs.3206.7 billion including GDP at market price of Rs.3173.7 billion and net external resource inflow of Rs.88.1 billion. These resources are added with outflow of net factor income from abroad of Rs.55.1 billion and the remaining resources are utilized for the purpose of total consumption, fixed investment and changes in stocks.

The total consumption and fixed investment are likely to increase by 6.9 percent and 9.3 percent in 1999-2000 whereas, changes in stocks are likely to improve marginally. The increase in volume of fixed investment is equally shared by public and private sector. The fixed investment by public and private sector increased by 9.3 and 9.4 percent respectively.

Saving and Investment
The outlay for Gross National Investment (GNI) was projected to grow by 36 percent for the year 1999-2000 but it managed to grow by 9.3 percent. Gross Fixed Investment (GFI) recorded 9.5 percent growth over fixed investment of Rs.387.9 billion in 1998-99. The total and fixed investment remained more or less unchanged in 1999-2000 as compared with previous year. The private sector investment also remained unchanged at 8.1 percent of GDP in 1999-2000.

The public sector investment grew by 9.6 percent while private sector investment increased by 9.4 percent in 1999-2000. The increase in public sector investment is attributed to 35.9 percent increase in capital formation in agriculture sector and 16.5 percent increase in transport and communication sector. The encouraging development regarding private sector investment is an increase of 23.9 percent in manufacturing, 15.6 percent in agriculture and 17.6 percent in construction sector during 1999-2000. However, tremendous decline is witnessed in private sector activity in the sectors like mining & quarrying (34.1 percent) and electricity & gas distribution sector (49.8 percent) in 1999-2000, which were main recipients of private investment in the past.

The national savings as percent of GDP has increased from 11.1 percent in 1998-99 to 12.2 percent in 1999-2000. Pakistan’s saving and investment records are not very encouraging. The gross domestic investment (GDI) were only 13.4 percent of GDP in 1999-2000 as compared with the weighted average investment rate of 25 percent of GDP for South-Asia of which Pakistan is a member of the community. Even some of the less developed countries (LDC’s) have higher investment rate than Pakistan.

Gross National Savings (GNS) during the year 1999-2000 were only 12.2 percent of GDP as against the target of 18 percent of GDP. It means national saving could only manage to finance 81.5 percent of total investment outlay while the remaining 18 percent is expected to be financed from foreign savings. An increase in domestic savings and decline in dependence on external resources is noteworthy in recent years. The domestic saving as percent of GDP has improved from 12.3 percent last year to 14.0 in 1999-2000 while foreign savings declined from 3.8 percent of GDP in 1998-99 to 2.8 percent in 1999-2000. Tables-1.5 A and 1.5 B reflect changing patterns of saving and investment over the years.

(Rs.Billion)

Source:
1) Federal Bureau of Statistics
2) Economic Adviser Wing

Note: (P) stands for provisional
Source: Economic Adviser Wing

Almost the entire amount of savings has been contributed by the private sector, in particular, the households, while the corporate and public savings contributed marginally.