Growth falling victim to economic instability needs foreign buttress

The outgoing Pakistan Muslim League (Nawaz)-led government managed to achieve GDP growth of 5.8 percent in the last fiscal year of 2017/18, one of the highest in the last 13 years, but the question arises how much will the growth remain sustainable in the wake of severe imbalances emerging on the economic horizon of the country: fiscal and current account deficits.

Pakistan’s economy has been going through ‘boom and bust cycles’ as the growth picked up in the last seven decades since independence in 1947, but every time it could not last long and busted into lower side owing to macroeconomic instability. This has repeatedly happened in the past and there are re-emerging fears that it is going to happen again when growth will become a victim to macroeconomic stability.

Symptoms are crystal clear that there will be no change in the course of history as the stage is set where the country is again sliding into danger zone of imbalances on internal and external accounts of the economy, leaving no other choice but to choke the demand and suppress the growth to achieve macroeconomic stability.

The boom and bust cycles cannot be stopped on sustainable basis without resolving basic structural problems confronted by our national economy in shape of lower investment and saving to GDP ratios.

Alone, savings and investments could fuel the sustainable growth. Despite much drumbeating in the aftermath of China-Pakistan Economic Corridor (CPEC) deal, the investment to GDP ratio stood at just 16.4 percent against the target of 17.2 percent for fiscal year of 2017/18. The fixed investment in terms of GDP stood at 14.8 percent in 2017/18 against the target of 15.6 percent and public sector investment, including general government investment, clinched 5 percent of GDP against the envisaged target of 4.5 percent.

The most worrying aspect is falling private sector investment as it fell to 9.8 percent of GDP as against the target of 11.2 percent for outgoing fiscal year. Total investment to GDP ratio has been hovering 15 to 16.4 percent from 2012/13 to 2017/18, indicating the government’s inability to boost investment for kick-starting economic activities on sustainable basis.

Likewise, the savings to GDP ratio fell below the last fiscal year’s levels as it stood at 11.4 percent of GDP in 2017/18 as against 12 percent of GDP in 2016/17. The government failed to achieve the desirable target of 14.6 percent for the current fiscal year of 2017-18. It was the lowest ratio in the last 10 years.

Without boosting investments and savings to GDP ratios, the prospects of medium to long term and sustained growth are quite dismal and such a dream could not be materialised.

Ex-Secretary Finance Waqar Masood Khan, in a pre-budget seminar, told the participants that the increasing current account deficit demonstrated that the economic activities were picking up in the country so it seemed positive sign, but the problem arose in the wake of financing the growing current account deficit by managing dollar inflows. The mother of all economic ills – budget deficit – starts increasing and it certainly impacts the external accounts.

When imbalances touch peaks then the lender of last resort the IMF is approached. The present government is reluctant to approach the IMF for political reasons as they don’t want to end their tenure with the baggage that they had to go back to the Fund at the twilight of its five-year tenure.

There are structural issues being confronted by Pakistan’s economy as whenever the country’s growth went up beyond certain levels its economy started heating up and then twin deficits touched such levels that they could not properly be managed by the ruling elites. There was a standard prescription through which the demand side was managed and that was through suppressing growth, tightening of fiscal and monetary policies. In the end, the growth became the victim for achieving macroeconomic stability. Even when macroeconomic stability was achieved growth picked up again but the economic managers could not finance rising requirements of current account deficit. So, the country has been in this vicious circle for last seven decades while the policymakers remained clueless how to break the shackle once and for all.

At this stage when the government has assessed provisional GDP growth at 5.8 percent on the basis of available data of different sectors of the economy for 6 to 8 months period, the Pakistan Bureau of Statistics (PBS) also jacked up GDP growth rate estimates for 2016-17 from 5.28 percent to 5.37 percent and 2015-16 from 4.51 percent to 4.56 percent.

Though some of growth numbers related to agriculture, large scale manufacturing and others are hard to digest in the wake of stagnant investment and savings to GDP ratios, the officials argued that idle capacity was utilised for increasing growth. They, however, conceded that it was hard to sustain growth without increasing investments and savings in the long run.

The policymakers seem to be living in a denial mode, which reflected in the preparation of macroeconomic framework for the next budget under which the government envisaged GDP growth target at 6.2 percent and inflation target was kept on the higher side close to 6 percent for the fiscal year of 2018/19.

Analysts said inflation is going to witness a sharp decline in the remaining couple of months of the outgoing fiscal year and it might go close to two percent on monthly basis. But, the inflation on average will pick during the next fiscal year and it might touch seven percent on monthly basis. On average the inflation will hover around 5.5 to 6 percent mainly because of lower base if all other factors are kept constant for the next fiscal year.

On current account deficit, the government is repeating the same mistake which they had committed last year as they were going to underestimate the deficit by bringing it down to 3.8 percent for 2018/19 from the projected figure of 4.8 percent of GDP in the outgoing fiscal year.

It simply means that the current account deficit was projected to come down to $12 billion in the next budget from over $14 billion, but nobody bothers to go into details how it will be achieved because everyone knows that it is next to impossible.

The current account deficit will go up to $16 billion in the outgoing fiscal year and it can only be a wish to bring it down to $12 billion mark without elaborating strategy to be applied for reversing the existing trends.

Only two options are left: to get relief package of $8 to $10 billion from friends or go back to the IMF as early as possible.

All those at the helm of affairs are least bothered about the looming crisis which can be foreseen by those who keep close eye on the developments happening on large picture of the national economy.