ISLAMABAD: Pakistan’s total investment in the percentage of Gross Domestic Product (GDP) has declined significantly in the outgoing financial year, mainly because of uncertainties on the political front and inability to revive the IMF programme.
The stalled IMF programme dried up foreign inflows, so the country managed its external position by imposing restrictions on imports. The import restrictions resulted in a massive decline in the current account deficit, resulting in a massive contraction in the GDP growth rate of 0.29 percent in the outgoing fiscal year against 6.1 percent in the last financial year.
The foreign savings declined to 1.1 percent of GDP in the outgoing fiscal against 4.6 percent of GDP in the last financial year. The country was unable to generate dollar inflows repeating the boom and bust cycles again in the outgoing financial year whereby the GDP growth dropped to 0.29 percent for the current financial year.
The overall total low investment and the dismal situation on foreign savings restricted the country’s ability to grow more, so the growth momentum was disrupted and dropped from 6.1 percent GDP in the last financial year to 0.29 percent of GDP for the current fiscal year.
According to provisional figures approved by the National Accounts Committee (NAC) two days back, the total investment-to-GDP ratio declined to 13.5 percent of GDP for the outgoing financial year against 15.6 percent in the last financial year 2021-22.
The data shows that Pakistan’s growth rate of 0.29 percent was largely reliant on consumption-led growth whereby the investment and net exports contributed marginally. The contribution of consumption-led growth increased from 90 percent to almost 97 percent while the contribution of investment and net exports remained in the range of just 3 percent. Traditionally, consumption-led growth always contributed substantially but in the outgoing fiscal year, its contribution had further gone up.
Total investment in percentage of GDP stood at 17 percent in the financial year 2017-18 but it continued to decline in subsequent years and reached 13.5 percent for the outgoing financial year.
The investment to GDP ratio remained at 15.4 percent in 2018-19, 14.7 percent in 2019-20, 14.4 percent in 2021-22, 15.6 percent in 2021-22 and 13.5 percent in the outgoing financial year 2022-23.
Alarmingly, public investment declined from 3.5 percent of GDP in the last fiscal year to 3.1 percent of GDP in the outgoing fiscal year. While the private sector investment stood at 8.8 percent of GDP in the outgoing fiscal year against 10.5 percent of GDP in the last financial year.
In the annual plan for the ongoing financial year 2022-23, the government had sought investment-to-GDP ratio target of 14.7 percent for the current fiscal year while savings to GDP ratio was targeted at 12.5 percent.
The national savings to GDP ratio stood at 12.4 percent of GDP for the outgoing fiscal year against 11 percent in the last financial year. The foreign savings stood at 1.1 percent of GDP for the outgoing fiscal year against 4.6 percent of GDP.
The domestic savings stood at 6.1 percent of GDP in the outgoing fiscal against 4.2 percent for the last financial year.
Pakistan has perpetually failed to muster up the desired level of investment and savings ratio in the percentage of GDP, resulting in boom and bust cycles after every few years. Whenever the country achieved a higher growth trajectory, it created imbalances and twin deficits appeared, indicating that the desired level of investment and savings could not be generated to fuel the GDP growth.
The country’s inability to generate the desired level of investments and savings left it with no other options but to increase reliance on financing from international donors and bilateral friends, which ultimately shoved the country deep into a twin deficit crisis soon after achieving the growth of slightly over 6 percent on the medium term at any point of time.
India’s GDP growth hovered in the range of 6.5 percent compared to 4.4 percent for Pakistan in the last decade. Vietnam’s growth remained over 6.7 percent and even Bangladesh’s growth averaged 5.4 percent, outperforming Pakistan. Pakistan requires investment for sustained growth. In the 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. The private sector shied away due to the high cost of doing business and energy and security constraints. Pakistan’s Public Sector Development Programme (PSDP) spending has declined sharply from an average of 10 percent of GDP in the 1980s to just 4.7 percent in FY18 and now it is going to fall further in the next fiscal year. Pakistan’s Incremental Capital Output Ratio over the last decade is around 3.5, it actually maybe 4.
The 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 the ratio in Pakistan is pathetically low at 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.
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