Numerical damage

Pakistan remains far behind regional economies in promoting savings and investment, which makes it difficult for planners to achieve high single digit GDP growth rate necessary for sustainable development.

Since domestic investment is not picking up, foreign direct investment (FDI), except for the $46 billion China-Pakistan Economic Corridor (CPEC), has collapsed due to a number of factors, including the country’s overall security environment.

The growing consensus is that decline in domestic and foreign investment is unlikely to help achieve 7 percent GDP growth rate in the next three years as had been planned by the PML-N government.

Investment rate that peaked at 22 percent during Musharraf period, has come down to 15 percent, not enough to manage higher growth rate with a view to alleviate rising poverty and unemployment across the country.

The three components of investment – private investment, public investment, changes and stocks (inventory) – continue to decline with concerned officials conceding that there is no real scope of improving local and foreign investment in the presence of heightening political instability. The break- up of the private, public, and stocks investment is 10 percent, 1.5 percent, and 3.5 of GDP respectively.

The increasing gas and electricity tariff, coupled with insufficient supply to the industries has discouraged the investors from making new investment. The business friendly PML-N government is being criticised for not fulfilling its lofty pre-poll promises of all possible incentives to promote investment.

The FDI has come down from $5.5 billion of 2008 to less than $1 billion during the last many years.

To achieve seven percent plus growth, economists say, investment rate has to be increased from 15 percent to 25 percent. However, the issue has compounded, as saving rate is declining, and is only 3.5 percent of the GDP. Household saving too is marginalising, and though it had slightly improved on account of increased home remittances over the years, it is currently witnessing problems and may not achieve the $20 billion target fixed for 2016-17.

The cut in interest rate has discouraged savings. The cartel of commercial banks is being held responsible for influencing the ministry of finance from increasing the interest rates relating to various saving schemes.

“There are no incentives to short term investment in any domestic schemes which is discouraging people from buying saving instruments,” said an insider who, however, believes that project implementation on CPEC will promote investment rate in the next three years. “But this may not be possible without more Chinese loans and equity support, also, the Chinese authorities need to fully finance the CPEC,” he said.

Pakistan needs to follow regional countries in terms of promoting investment rate, which is stuck at 15 percent for the last many years, compared to 30 percent of India and 25 percent of Bangladesh. GDP growth requires a certain plough back into productive capacity, which is not happening.

On top of that, the less than 11 percent tax-to-GDP ratio is exceedingly below regional economies like India and China that have a 16.7 and 19.4 percent tax-to-GDP ratio respectively. For any better GDP growth, tax-to-GDP has to reach 15 percent in five years, and 20 percent in ten years. If the country succeeds to achieve this, our reliance on domestic and foreign borrowings will fall substantially.

All three major international donors – World Bank, IMF and ADB - have been urging successive governments to increase the poor tax-to-GDP ratio by taxing every potential individual and companies. But they never put conditions to achieve this objective. IMF extended waiver after waiver in their twelve reviews of the Pakistani economy on account of the $6.64 billion Extended Fund Facility (EFF). Over the years these international financial institutions softened their conditions to offer new loans apparently to help bailout governments in Pakistan.

The IMF has extended 16 waivers related to revenues; fiscal deficit and energy sector reforms, whereas previously it discontinued its $12 billion funding programme to PPP government on account of revenue and other slippages.

Now when savings and investments are down and the target to achieve higher GDP growth seems difficult, one is intrigued to see the various IFIs reports especially that of the IMF released at the end of the final review of the Pakistani economy.

The main conclusions of the review have been: economic growth accelerated gradually; international reserve buffers have been rebuilt; budget deficit narrowed significantly, helped by sizeable growth in tax revenue; inflation declined, owing to lower oil prices and improved monetary and fiscal policies; regulatory reforms and improved energy sector performance have slowed the accumulation of arrears and begun to reduce outages; coverage under Benazir Income Support Programme (BISP) has expanded, and stipends have increased by over 60 percent; regulations to fight monetary laundering and  financing of  terrorism have been strengthened. The review goes on to state that while progress has been made on various accounts, it needs to continue to generate sustainable economic growth.

The independent economists continue to doubt the clean bill of health being given to the Pakistani economy by the international financial institutions. They say amid pending structural reforms in tax revenue and power sector along with governance reforms, releasing such attractive reports sidetracked real issues and challenges.

When IMF’s Managing Director Christine Lagarde visited Pakistan after the release of the IMF’s report, she very cautiously appreciated the economy. However, she spent more time to talk about challenges, which if not addressed in their proper prospective, she said things might turn out to be devastating. Her interaction with journalists and businessmen did not reportedly go well with the government officials.

It has been learnt that the IMF’s local office in Islamabad informed their boss before her meeting with media and senior government officials that most of the economic journalists, economists and editorial writers of reputed daily newspapers remained critical of IMF for having been unnecessarily soft on gross slippages that eventually did not help achieve better GDP growth. The people at large never believed in the ‘success story’ as their lives were deteriorating every passing day. Perhaps that was the reason she selectively highlighted a few achievements and admitted that reducing vulnerabilities, bolstering external buffers, reducing fiscal deficit and gradually increasing economic growth were major challenges. But she did congratulate the government for having successfully completed the IMF three-year programme. She also spoke unexpectedly against corruption, accountability and governance reforms.

There has been an overwhelming consensus among the critics that it was not an IMF programme but was an arrangement to bailout Pakistan at the behest of the US State Department.

The important question being asked is whether the incomplete structural reforms will lead to seeking yet another IMF programme. This is being asked in the backdrop of failure to broaden the tax base, reform the tax system, and tax administration; inability to reform the energy sector, strengthen operational independence of the central bank, and strengthen public debt management; and the delay in privatisation of state owned enterprises(SOEs), etc.

The IMF officials do admit that long standing structural impediments remain key obstacles to growth and investment; pervasive tax evasion combined with still prevalent tax exemptions and loss making state entities constrain the fiscal space for public investment and social spending; despite recent improvements, the energy sector still accumulates payment arrears and is unable to meet growing demand.

Government’s opponents and critics say that nothing has changed during the last three years under the IMF programme except disproportional rise in external debt, which now stands at $73 billion and might reach $90 billion in the next two years.

Going forward, plugging the over Rs1 trillion gaps between income and expenditure, and creating conducive environment for local and foreign investment must be the focus of the government for achieving real economic stability, which will ultimately lead to political stability.

The writer is a senior journalist based in Islamabad