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Thursday March 28, 2024

Logical growth

By Editorial Board
April 23, 2018

How serious are Pakistan’s macroeconomic vulnerabilities? Serious enough for the International Monetary Fund to downgrade Pakistan’s GDP growth forecast for next year. The IMF’s latest report titled, ‘Cyclical upswing, structural change,’ has revised Pakistan’s growth rate prediction for next year down from six percent to 4.7 percent for the next financial year. Compared with the government’s insistence that economic growth will exceed 6 percent in 2018-19, the IMF predictions should cause concern.

The major reason for the reduction is the country’s external account vulnerabilities. This in itself is a logic that should be questioned based on there being little direct connection between the current account deficit and a country’s economic growth, unless there is a likely credit crunch that will cause major commodity shortages and stop the import of machinery for industrial growth. Neither the IMF nor the federal government have indicated that such a situation is likely. If a credit crunch does hit, the likely consequence will be further external borrowing, which would not bode well for the country’s fiscal strategy, but in itself it is unlikely to affect economic growth. Within this context, Advisor to the PM on the Economy, Miftah Ismail, seems to make sense when he has questioned the IMF and WB on their economic growth predictions for Pakistan. Briefing the IMF and the World Bank officials in Washington, Ismail has said that Pakistan is set to achieve high GDP growth rate during the current year and is hoping to maintain this momentum in the coming years.

The trouble is that the IMF predictions themselves might be pointing to other problems in the economy, such as the low rate of commercial loans for investment and the reduction in public developmental spending that the government has promised in the next budget. Public-sector spending remains key to GDP growth, since it both constitutes positive economic activity and encourages investment based on how it is prioritised. With much of the energy supply issues for industry sorted due to preferential treatment on the part of the federal government, investment should be ready to shoot up with a CPEC boon predicted. The problem with CPEC is that local industrialists are still trying to understand how the increased Chinese involvement in the economy will impact their business. So do we believe the federal government or the IMF? The government’s tendency to rely on hyperbole is well-known. Responsible economic management requires sticking to what is actually likely to happen without causing people to question the credibility of the source. A number of Pakistani economists have questioned the growth figures presented each year by PML-N government under the last finance minister. It would be prudent to point, instead, to how Pakistan’s own predictions are more sound than the IMF’s.