Money Matters

Boom, bust, bailout, repeat

Money Matters
By Mehtab Haider.
Mon, 06, 20

Pakistan’s economic growth has plunged to its lowest among regional peers and its entire trajectory can easily be described as a rollercoaster ride powered by boom-bust cycles that are punctuated by occasional or rather frequent bailouts.

Pakistan’s economic growth has plunged to its lowest among regional peers and its entire trajectory can easily be described as a rollercoaster ride powered by boom-bust cycles that are punctuated by occasional or rather frequent bailouts.

The low growth phenomenon re-emerges after every few years mainly because of the country’s inability to generate investment and savings in the percentage of the GDP (gross domestic product) to fuel desired GDP growth at a sustained level.

The incapability of generating desired level of investment and savings forced the regimes to increase reliance on financing from external avenues, which ultimately shoved the country deep into twin deficit crisis soon after achieving growth of slightly over 5 to 5.5 percent for two to three years’ period.

India’s GDP growth has averaged 6.5 percent over past two decades, compared to 4.4 percent for Pakistan. Vietnam’s growth has averaged over 6.7 percent and even Bangladesh’s has averaged 5.4 percent, outperforming Pakistan.

Pakistan requires investment for sustained growth. In the decade of 90s, Pakistan’s Gross Capital Formation was at par (or better) than its peers. Since 1995, Pakistan’s GCF has gone down, while that of peers has increased substantially. Private sector has remained shy due to high cost of doing business and energy & security constraints. Pakistan’s Public Sector Development Program (PSDP) spending has declined sharply from average of 10 percent of GDP in 1980s to just 4.7 percent in FY18 and now it was going to fall further in the next fiscal year. Pakistan’s Incremental Capital Output ratio (ICOR) over last decade is around 3.5 -it actually may be 4.

Bottom line, Pakistan needs 20 percent growth in investment to get a GDP growth rate of 5 percent.

Secondly, Pakistan lags behind its peers mainly because of its failure to jack up savings as savings ratio in Pakistan was pathetically low around 16 percent, while in China it is 46 percent, India 31 percent, Bangladesh 33 percent, Sri Lanka 25 percent, and in Vietnam it hovered around 24 percent.

Pakistan’s exports as percentage of GDP have slumped in the last two decades as export to GDP ratio was 13.4 percent in year 2000 but declined to 8.69 percent in 2018. Bangladesh’s export to GDP ratio increased from 12.34 percent in 2000 to 16.65 percent in 2018, while in case of India it went up from 13.13 percent in 2000 to 19.18 percent in year 2018.

With these boom-bust cycles, no country could make progress on sustained basis. Given the situation, there is a dire need for a paradigm shift to lure investment and improve savings ratio in percentage of GDP for fueling the growth momentum.

Pakistan also fell behind on account of curtailing its fiscal deficit because the fiscal imbalances sowed the seeds of unsustainable macroeconomic instability, as a result the country came back into square one position after pause of every few years. The structure of Pakistan’s economy could not afford fast growth path, so it started heating up when the momentum started picking up and remained at over 5.5 percent for two to three years. It resulted into higher twin deficits including the current account and fiscal. In order to stabilise the economy, the county is forced to pick up the begging bowl and knock at the door of the lender of last resort known as the International Monetary Fund (IMF).

The IMF’s prescription is same as always. It talks about adopting tight monetary and fiscal policies to suppress demand for stabilising the economy. The exchange rate anchor is also used to inhibit the demand. All this is done under the tight scrutiny of the IMF, but all the discipline disappeared soon after the end of the fund program that ranges between two to three years’ period. The fiscal indiscipline added salt to the injury as it was directly linked with the period of political expediency, so all gains achieved under the IMF program evaporated within one or two years. All this is happening rather recurring over and over again and both the IMF and Pakistani side failed to come up with permanent prescription to overcome this persistent economic ill.

At this juncture of our economic history, Pakistan’s economic difficulties stand terribly multiplied because of the structural rigidities that do not allow the country to boost investments and savings as well as kick-start economic activities amid the deadly COVID-19 pandemic.

The first and foremost responsibility of the government is to ensure kick-starting of economic activities as the government must achieve this basic goal without considering anything related to budget deficit and increasing debt to GDP ratio. If the economic activities are not restored the economic difficulties were bound to multiply in months and years ahead. With the resumption of economic activities, the GDP growth momentum would pick up, resulting into creation of jobs and helping the authorities to collect the due taxes.

The government in its summary tabled before the Annual Plan Coordination Committee (APCC) admitted that prospects for economic growth even before emergence of COVID-19 phenomenon were eclipsed by higher inflation and interest rates, negative large-scale manufacturing (LSM) growth, weaker exports, sluggish resource mobilisation, uncertainty surrounding hot money inflows and above all tough IMF program related conditionalities.

The painful and prolonged adjustment program brought stabilisation but at the cost of economic growth. High policy rate, exchange rate and taxation reforms have increased cost of doing business and have hampered industrial growth.

IMF expects flat growth for Asia for the first time in the last 60 years and around 80 percent of the world economies are likely to post negative growth. Emergence of pandemics inflicted worst-ever economic sufferings across the globe and Pakistan is no exception.

The economic effects of COVID-19 coming from lockdown and reduced spending will be larger than those coming from disruptions to supply chains and illness-related workforce reductions. The country needs to equip itself to ameliorate the potential economic damage from the virus.

It is thus not surprising that economic growth in Pakistan contracted to -0.4 percent in 2019-20 against initially envisaged target of 4 percent for outgoing fiscal year 2019-20, when its economic growth was just 1.9 percent in the previous year 2018-19.

Performance under the IMF program during the first three quarters was strong and on track. The six-year low current account deficit was supported by demand management measures, transition to a market-based exchange rate system, regulatory efforts to curb non-essential imports and increase the inflow of workers’ remittances through formal channels. Fiscal consolidation was helped by non-tax revenue mobilisation efforts and restraint in expenditures from all tiers of the government; however, tax revenue mobilisation was below par.

The decline in current account deficit is primarily contributed by contraction in imports rather than surge in exports, which remained depressed amidst depressed commodity prices in the global markets. Pakistan has made great progress in improving its ‘doing business’ ranking during the last two years; however, this has not translated into a substantial pickup in foreign direct investment inflows.

The investment to GDP ratio has declined, during the last three years, from 17.3 percent in 2017-18 to 15.4 percent in 2019-20. Both domestic and foreign direct investment contributed to this downslide. The downward sliding investment has detrimental effects on future productive capacity of the economy and growth prospects. Public sector investment inched up to 3.8 percent of GDP from 3.7 percent last year, while private sector investment declined from 10.3 percent of GDP in 2018-19 to 10 percent in 2019-20.

National Savings improved to 13.9 percent of GDP from 10.8 percent in 2018-19. Pakistan’s reliance on foreign savings has decreased as marginal increase in investment is somehow compensated with increase in national savings.

All this is hard to achieve without evolving political consensus on major national economic agenda among mainstream political parties as well as other key institutions, because lingering confrontation and tension within institutions will lead us nowhere.

—The writer is a staff member