Economy of Pakistan and The delusion of growth

Economy of Pakistan and The delusion of growth

The economic journey of Pakistan always has been a rollercoaster ride. The reliance upon foreign aid and remittances, along with lack of real domestic economic base, has been a constant source of uncertainty for the country’s economy. With apparently impressive growth rate, the state of economy is not as hunky-dory as it is portrayed by the authorities. Economy is not all about numbers. There are many problems flying still under the radar in Pakistan’s economy.

The growth rate for 2016-17 has been estimated over 5 percent – first time after 2006-07. But this growth has been mostly consumption-driven. Pakistan is a lucrative consumer market as the country hosts the sixth largest population in the world. But, an economy cannot be run on consumption basis in the long run. Even with a good growth rate, the government has missed a number of important macroeconomic targets including sectoral and overall GDP (gross domestic product) growth, investment and exports. The current trajectory of growth is unlikely to be sustainable unless these challenges are addressed.

The growth is unbalanced; the 5.3 percent growth rate does not appear to be broad-based with 67 percent of the contribution coming from the services sector only while industry and agriculture sectors contributed 20 percent and 13 percent, respectively. The unbalanced growth problem also contributes to lack of exports and unemployment. Services sector does not

contribute to employment as industrial and agricultural sectors do. The situation of agriculture sector is particularly dire which accounts for 42.3 percent of employment but contributes only 19.53 percent to GDP. Textile sector, the largest industrial sector of Pakistan’s economy, is also in shambles; having serious implications for the labour force and employment prospects. Less growth in industrial and agricultural sectors also means less exports. In addition, overvalued currency is also a big cause of decrease in exports. Textile products, like many of Pakistan’s export commodities, are price-sensitive. Overvalued rupee makes exports less competitive. Commerce ministry largely blames decrease in Pakistan’s exports for three years straight on an overvalued currency; therefore, a cheaper currency could help them become competitive again.

Weak exports are not the only predicament; high imports, too, are a part of the problem. As economy is driven by consumption rather than production, market is flooded with imports. Among these imports are the capital goods which are being imported from China as part of China-Pakistan Economic Corridor (CPEC) project. Half of Pakistan’s imports from China are capital goods, and their value rose by 30 percent between 2015 and 2016. Few in Pakistan have a bad word to say about the CPEC, but it certainly seems to be creating some negative impacts on the country’s economy. The IMF is right to be “appalled” at the implications for Pakistan of having to pay back billions of dollars in expensive loans to China with no export recovery in sight. Trade deficit was targeted at PKR 20.4bn for current fiscal year but actual deficit swelled to PKR 24bn. Exports fell by 2.3 percent while imports increased by 19.88 percent.

In the past, Pakistan paid for its import bill from foreign aid and remittance rather than income from exports. However, both these principal sources have plunged in recent months. The fall in aid was due to reduction in the inflow from Coalition Support Fund (CSF). More cuts are expected due to President Trump’s Afghanistan Policy and the differences between Pakistan and the United States. Remittances did not grow sufficiently due to fall in oil prices. Gulf economies are diversifying their economies by moving from energy to other economic sectors. It would damage remittances to Pakistan as Pakistani labour in these countries is mostly employed in the energy sector.

With external inflows of aid, remittances and export income at a low ebb, taxes are the last resort. But there is no improvement in this regard, too. Federal Budget 2017-18 indicates that the revenue target set by FBR for 2016-17 is likely to be missed by Rs100 billion. It further reflects a compromise on equity and progressivity by a heavy reliance on indirect taxes. With low taxes comes the issue of fiscal deficit. Fiscal deficit is predicted to be 4.2 percent in FY17-18. To fill the gap between revenue and expenditure, Pakistan is relying on debt. But debt-servicing is already a significant budgeting problem. Despite various claims on reduction in debts, revised estimates of 2016-17 show that more than 70 percent of net revenue receipts (gross revenues excluding transfers to provinces) are consumed by debt servicing alone. This implies that most of the current and development expenditures of federal government are financed through borrowing. Public debt is now at 59.3 percent of GDP. In the long run, the government is widening the fiscal deficit, with its efforts to shorten it. But economic policy makers in Pakistan lack the foresight to understand it.

The steady depreciation of rupee will also pile up the debt burden. The rupee has been artificially overvalued by foreign exchange reserves, not earned by trade but aid. For months, the rupee had held steady even as Pakistan’s foreign-exchange reserves dwindled; the country’s stock of dollars shrunk by almost 30 percent during the past year. The State Bank of Pakistan, the country’s central bank, appears not to want to play defence any more. Depreciation can make exports of Pakistan more competitive by decreasing their prices but its effects on inflation and public debt would be devastating. If situation remains the same, Pakistan will have to go to IMF for bailout.

Tax reforms are needed to stem reliance on aid, remittances and debt. Political capital should be used to collect more taxes from those who have managed to escape for years the taxman or have grossly underpaid the amounts they owe the government. Bringing the budget under control will also need a sharp reduction in large deficits being incurred by the public sector enterprises (PSEs). Rupee depreciation is inevitable, so partial depreciation can be used to strengthen exports. Growth should be across the board. To encourage growth in industrial and agricultural sectors, government needs to attract investment in these sectors by enacting business-friendly policies in these sectors. Increased agricultural and industrial production and exports would ultimately lead to increase in employment. Pakistan has to focus on labour skill and business competitiveness to engage with vibrant Chinese economy after completion of CPEC. By these measures, CPEC can be a real game-changer as it is touted to be.

What is GDP?

Gross domestic product is the best way to measure a country’s economy. GDP is the total value of everything produced by all the people and companies in the country. It doesn’t matter if they are citizens or foreign-owned companies. If they are located within the country’s boundaries, the government counts their production as GDP. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, the Q3 2017 GDP is up 3%, this is thought to mean that the economy has grown by 3% over the third quarter. While quarterly growth rates are a periodic measure of how the economy is faring, annual GDP figures are often considered the benchmark for the size of the economy.

Did You Know?

Devaluation is a deliberate downward adjustment to the value of a country’s currency relative to another currency, group of currencies or standard. Devaluation is a monetary policy tool used by countries that have a fixed exchange rate or semi-fixed exchange rate. Devaluing a currency is decided by the government issuing the currency, and unlike depreciation, is not the result of non-governmental activities. One reason a country may devaluate its currency is to combat trade imbalances. Devaluation causes a country’s exports to become less expensive, making them more competitive in the global market. This, in turn, means that imports are more expensive, making domestic consumers less likely to purchase them, further strengthening domestic businesses.

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