3. Real Sector

3.1 Agriculture

The agricultural sector is expected to post dismal growth this year on account of the severe water shortage and bumper crops last year.  As shown in Table 1, production of kharif crops particularly rice and sugarcane (which are water intensive) have been adversely impacted by the dry spell and lag behind the production targets by a large margin.  The water shortage extended into the sowing period of rabi crops (approximately October to January), and hit both wheat and gram production.  Given the role of major crops in agricultural growth, and its spillover to manufacturing, the severity of the water shortage will lead to further downward revisions of aggregate growth this year. 

Rainfall

The sharp fall in the availability of irrigation water can be gauged by the withdrawal of canal water during the sowing period of the rabi season (see Table 3.1.1).  The sharp fall in FY01 actually builds upon an already bad FY00; viewing the availability of water over the past two years, usage of canal water this year is only 70 percent of what was utilized during FY99.  Diminishing rainfall in the past several years is the root cause of the present drought-like situation.  The extended dry spell in most parts of the country, is posing a serious challenge to sustainable growth in both the crop and non-crop (livestock, fisheries,etc.) sectors of agriculture. 

Rainfall impacts the crop sector directly and indirectly; the former refers to agruicultural produce that does not have an irrigation system and depends soley on rainfall, while the latter effect arises as rainfall is the source of water for dams and groundwater that feeds tubewells.  The land that is solely dependent on rain (barani areas), which produced around 6.3 percent of the total production of wheat last year and a sizeable share in the production of pluses, have been hit the hardest.  Since Sindh has a higher ratio of barani land relative to Punjab, the shortage of rainfall has worsened the regional disparity of agricultural growth and the resulting income distribution.  Collectively, Pubjab and Sindh account for over 85 to 90 percent of the total production of major crops in the country.

Data compiled by FBS on 21 selected cities to gauge rainfall patterns in the country, show a 14.0 percent decline in rainfall in calender 2000 over the previous year.  As shown in Figure 3.1.1, the three consecutive years of falling rainfall have reduced the availability of canal water.  During 1999 and 1998, rainfall declined by 13.2 percent and 26.2 percent, respectively.  In comparing rainfall and usage of canal water, there is a clear positive correlation with the exception of calendar 1999: following the sharp fall in rainfall during the year, the authorities made special arrangements to release additional water from reservoirs even at the risk of damaging the power generating dams.[1]  In effect, the bumper crops during FY00 were sustained by drawing down water reservoirs.  This deteriorating situation will continue to plague the country unless the authorities are able to plan out the likely developments in the next few years, and take urgent steps to conserve and improve the efficient utilization of this resource. 

Impact on cultivated land

As shown in Table 1, the lack of irrigation water has reduced area under cultivation for all of Pakistan’s major crops; this can be seen in Figure 3.1.2.  Considerable declines of 5.5 percent and 4.9 percent were recorded for rice and sugarcane, respectively, while smaller declines were observed for less water intensive crops like cotton and wheat.  The shortage of water has hit the sugarcane crop in Sindh the hardest, with yield per hectare falling by 16.1 percent compared to the year before.  However, Punjab was more proactive in terms of addressing the persistent water shortage; a concerted campaign was launched by the provincial government to inform and train farmers in the selection of high yielding varieties of sugarcane, and disseminating information on the latest production techniques.  Hence, despite the fall in sugarcane yield in Sindh, Punjab was able to increase its average yields by 7.4 percent in the same period. 

The shortage of water during the sowing period of the rabi season (see Table 3.1.1), has worsened with time.  It is estimated that the availability of irrigated water at the end of the rabi season was 70 percent and 60-65 percent less for Punjab and Sindh respectively.  In Sindh, brackish groundwater limits the use of tubewell irrigation.  In Punjab, about 79 percent of the Indus Basin contains fresh groundwater that is suitable for irrigation, while the usable portion of the Indus Basin in Sindh is only 28 percent.  Hence, despite a sharper fall in the flow of irrigated water in Punjab, the authorities were able to manage the situation better by diverting irrigated water to areas with brackish groundwater, while resorting to tubewells in sweet water zones.  On account of this, cultivated area for cotton, rice and wheat, declined more in Sindh than any other province of Pakistan. 

On the basis of data for the period FY96 to FY00, Sindh’s share in the production of major crops is: 22.6 percent of total production of cotton, 43.0 percent of rice, 30.6 percent of sugarcane and 14.4 percent of wheat.  The area under cultivation in this province declined by 17.6 percent for cotton, 20.9 percent for rice, and 29.5 percent for wheat.  The disproportionate impact on Sindh can be gauged by looking at the national average declines: 1.8 percent (for cotton), 5.5 percent (rice), and 1.7 percent (wheat).  However, area under sugarcane cultivation in Sindh did increase by 3.5 during FY01, but this was primarily because land that could not be cultivated last year on account of the cyclone was brought under cultivation this year. 

The declining cultivation in Sindh corresponds closely with the pattern of water shortage this year.  While the availability of irrigated water was 19.3 percent lower in October to January 2000 (over the same period the year before), the problem deepened further in April to July 2000, when a shortfall of 32.8 percent over the previous kharif season was recorded.  It must be realized that the base-year benchmarks were themselves very low of account of the worsening rainfall patterns in the last three years.  Although the gravity of this water shortage has pushed the Sindh government to implement water management more seriously, a more permanent solution requires the strategic construction of smaller dams and bunds in the province.  This issue has already been discussed at the Federal level, and action is expected in the near future.

Impact on economic growth 

The dominant role of Pakistan’s major crops in aggregate growth of GDP is well known.  Past experience also shows that growth sentiments in the agricultural sector, filters down to other sectors of the economy (see Figure 3.1.3).  Contrary to its impressive contribution to GDP growth last year, the agriculture sector will depress overall growth this year.  The shortfall in targeted production of rice, sugarcane, gram and wheat, will outweigh the growth in minor crops and the non-crop sector of agriculture.  Using latest crop estimates, the expected loss in value added could be as large as 5.4 percent for major crops, against a targeted increase of 3.2 percent during FY01 (this is an abrupt reversal compared to the 9.6 percent growth recorded last year).  This fall in the production of major crops will pull down the agricultural growth rate from 3.9 percent to only 0.2 percent in FY01 (see Table 3.1.2).  If the actual production of wheat last year is revised upwards to 21.1 million tones (as is expected soon), growth of major crops last year will be higher than 9.6 percent, which in turn will further depress the growth that will be realized this year.  Internal calculations suggest that if this revision is factored in, agricultural growth could fall to negative 1.3 percent this fiscal year. 

If the existing drought also impacts minor crops and the non-crop sector (livestock and fisheries), the dismal growth scenario could be much worse.  On the basis of available information, GDP growth is likely to be less than 3.0 this year. 

Availability of credit 

To facilitate and enhance the supply of credit to farmers and other operators in the agricultural sector, SBP has taken several steps in the recently revitalized Agricultural Credit Advisory Committee.  The more prominent steps that have been approved and should have beneficial medium-to-long-term implications are: (1) remove the restriction that banks can only disburse funds within their designated region (or within their Union Councils), (2) increase the limit on loans against personal “sureties” (implicit guarantees) from Rs 50,000 to Rs 100,000 per farmer per year, (3) introduce the concept of revolving credit, (4) allow asset valuation based on the sale price of land, (5) allow banks to count lending to corporate farms as part of their mandatory lending to farmers[2], and (6) let banks count their lending to Agricultural Development Bank of Pakistan (ADBP) and select NGOs towards their mandatory disbursement to the sector.  Furthermore, SBP has eased the eligibility criteria for disbursement of agricultural credit. 

Within the context of the water shortage and given its role in agricultural financing, early this year ADBP allocated Rs 1.4 billion for small irrigation projects including installation of tubewells, construction and lining of watercourses, and other related items,.  Considering the increasing gravity of the water shortage, this amount has been raised to Rs 2.0 billion.  Implementation of this initiative has been impressive: during the first nine months of FY01, Rs 872 million had been disbursed for the installation of 5,248 tubewells compared to Rs 560 million disbursed for 3,476 tubewells during the corresponding period last year.  In view of the growing urgency, ADBP expects to finance a further 4,752 tubewells in the last quarter of FY01.