This report by the Institute for Policy Reforms (IPR) undertakes a review of the performance of the economy in 2013-14 and presents the likely economic outlook for 2014-15.

The year 2013-14ended with a mixed performance. On the positive side stability has been achieved in the foreign exchange market, with a major appreciation in the value of the rupee after March 2014.Foreign exchange reserves have increased by over 50 percent due largely to one-off inflows. Remittances have shown buoyancy but exports have stagnated despite the granting of GSP plus (General Sales Preference) status by the European Union (EU).

On the negative side, there is controversy about the government’s claims of a GDP growth rate of over 4 percent in 2013-14. IPR estimates that at the maximum it is 3.5 percent, while the IMF believes that it is 3.3 percent. The latter estimates imply that the growth rate of the economy has been the lowest in the last four years.

Other targets that have been missed include a higher rate of inflation than anticipated; lower investment and savings rates; rising unemployment rate which has crossed 7 percent in 2013-14.

The government’s claim that the fiscal deficit target of 5.8 percent of GDP has been met is based on substantial overstatement of the combined cash surplus of the provincial governments by almost Rs150 billion. As such, the actual fiscal deficit is closer to 6.4 percent of GDP.

Turning to the economic outlook for 2014-15, it needs to be recognized that this year is characterized by greater uncertainty than is normally the case. At the global level, the world economy is floundering once again and growth forecasts have been revised downwards. There are many more flashpoints of conflict in the Middle East and elsewhere. Oil price is showing greater volatility.

On the domestic front, the army is engaged in military operations (Zarb-e-Azb) and there is the possibility of a blowback. The political situation has become more tense and unpredictable, with parties both inside and outside parliament staging sit-ins in Islamabad and huge rallies in many large cities.

In this environment of uncertainty, most government targets appear very ambitious for 2014-15.The growth projection of over 5 percent is based on a bigger cotton crop and a surge in the large-scale manufacturing sector by 7 percent. The outcome will depend on the extent of improvement in electricity and natural gas load shedding and the performance of exports. IPR expects that the GDP growth rate will remain range bound at 3.5 to 4 percent, like in the last six years.

The prospects for investment will be negatively impacted by perceptions of risk. Also, the extent to which the development plans of the federal and provincial governments for 2014-15 are implemented will determine the rise in the investment rate.

The projected inflation rate could range from 7 to 10 percent depending on, first, whether oil prices rise, second, on the extent to which the government raises power and gas tariffs and, third, on the degree of depreciation (if any) in the value of the rupee. The IMF projects this at over 8 percent in 2014-15.

A big reduction is proposed in the budget deficit to 4.9 percent of the GDP in 2014-15. This is based, first, on over 24 percent growth in tax revenues, second, on a massive provincial cash surplus of Rs.289 billion (almost 1 percent of GDP).These optimistic projections are unlikely to materialize and either the PSDP (Public Sector Development Programme) will be cut once again or the consolidated deficit will approach 7 percent of GDP.

On the balance of payments side, it is expected that foreign exchange reserves will rise from $9 billion to $13.5 billion by the end of 2014-15. This premise is based on, first, export and remittances growth of 4 and 9 percent respectively; second, doubling of foreign direct investment (excluding privatization receipts); third, a second round of flotation internationally of bonds of $1 billion and, fourth, privatization proceeds of $2 billion. No provision has been made for higher oil prices. IPR projections of the balance of payments are more conservative, with reserves staying at just below $10 billion.