ISLAMABAD: The government on Monday approved a modest economic growth target of 4% for the new fiscal year, acknowledging its failure to address chronic issues over the past four years that have hindered higher growth. The Annual Plan Coordination Committee (APCC), tasked with recommending the nation's macroeconomic framework, also set an inflation target of 8.2% for fiscal year 2026-27. The approved framework reflects harsh realities, including limited space for growth and no significant increase in exports and remittances.
Growth Target Concerns
Headed by Planning Minister Ahsan Iqbal, the APCC approved the gross domestic product (GDP) growth target of 4%, a rate insufficient to reduce poverty and unemployment. This target is even lower than the current year's 4.2% target, which the government failed to achieve. Iqbal stated that while higher growth is possible, achieving it through increased imports and consumption would be irresponsible. However, his remarks also highlight the government's failure to boost investment, savings, and exports over the past four years to sustain higher growth.
Political Context
Prime Minister Shehbaz Sharif has been in power since April 2022, except for an eight-month caretaker period, and his administration has presented four consecutive budgets. Policymakers, independent economists, and foreign financial institutions agree that Pakistan cannot pursue a higher growth path without generating sufficient domestic and external non-debt creating flows.
Criticism of Borrowing
The finance ministry has celebrated raising $750 billion in private debt through Eurobonds and $250 million via Panda Bonds backed by guarantees from the Asian Development Bank and the Asian Infrastructure Investment Bank. Iqbal criticized this approach, stating, "Borrowing loans by issuing bonds and then celebrating it is shameful." He emphasized that taking loans to meet requirements is not a point of pride for any country. The planning minister urged the government to enhance exports instead of relying on bonds and debt rollovers from friendly nations. He further noted that Pakistan cannot escape the IMF as long as it continues seeking rollovers from friendly countries. Pakistan annually seeks over $12 billion in rollovers from Gulf nations and China. Recently, it repaid $3.5 billion to the United Arab Emirates by taking $3 billion more debt from Saudi Arabia.
Sectoral Targets
The APCC approved a 3.8% growth target for agriculture and 4.5% for large-scale manufacturing (LSM) in the next fiscal year. The industrial sector is targeted to grow by 4%, driven by a revival in LSM, as well as growth in mining, quarrying, construction, and energy. The services sector target is set at 4.2%, supported by improvements in wholesale and retail trade, transport, storage, communications, and financial services. The Planning Commission noted that achieving these targets depends on effective macroeconomic management and stable external conditions.
Savings and Investment
After missing this year's targets, the government approved a savings target of 14.3% of GDP and an investment target of 15% of GDP. The inflation target of 8.2% is higher than this year's estimated average of 7.1%, despite supply shocks from the Middle East war.
Employment Projections
With a low economic growth target of 4%, the government estimates adding two million new jobs in FY2026-27. Of these, 1.1 million jobs are expected in the services sector, 500,000 in industry, and 400,000 in agriculture.
External Sector Pressures
The external sector may face challenges as easing import controls and debt repayments could widen the current account deficit, according to the APCC. However, remittance inflows, export recovery, and anticipated external financing are expected to cushion these pressures. The current account deficit target for the next fiscal year is set at 0.7% of GDP, or $3.6 billion, significantly higher than this year's estimated $1 billion deficit. Containing imports will be an uphill task.
Trade and Remittances
The APCC approved new external targets that are modest compared to this year's outcomes. Exports are targeted at $32.8 billion, an increase of only 8.4% over this year's estimated $30.3 billion. Imports are projected to exceed $70 billion next year, up by 5.6% from this year. Consequently, the trade deficit is targeted at $37 billion, largely covered by remittances. Remittances are projected to rise to $42.3 billion next year, a modest 2.7% increase due to the uncertain situation in the Middle East.
Outgoing Fiscal Year Review
Iqbal stated that this year's 4.2% growth target was missed due to the Middle East war. The economy grew at 3.7%, reflecting broad-based improvements across agriculture, industry, and services. On the external front, weakening exports and recovering import demand widened the trade deficit, estimated at $36 billion for the outgoing fiscal year. The APCC noted that estimated remittance inflows of $41.2 billion and growing services exports helped contain external account pressures. Inflation rose to 11.7% in May, driven by higher petroleum prices, increased taxes, and rising food prices. The government's decision to recover global oil prices and raise fuel taxes to offset revenue shortfalls largely caused the surge.
