Thursday June 01, 2023

A year in economy

By Editorial Board
August 19, 2019

One year ago, there was great hope when the PTI took power. Despite some very familiar faces splattered across the party, Pakistan was getting a brand new prime minister and finance minister. Imran Khan and Asad Umar took over the difficult task of steering Pakistan’s economy on August 18, 2018. On April 18, 2019, only seven months in, Asad Umar was gone. For half a decade, the PTI had insisted that it had an economic plan better than anyone else – and that the brains of the operation would be Asad Umar. There is no doubt that the party inherited a difficult situation, but there have been questions on whether things were indeed as dire as the picture the new government painted. The current account deficit had certainly hit record numbers, but Pakistan’s economy was growing at an 11-year high of 5.8 percent. The outgoing PML-N government had predicted it would steer the growth rate closer to 6.5 percent. With the China-Pakistan Economic Corridor just off the ground, there was a case to be made that the economy was ready for kick off.

This is not the direction the PTI government chose to go. The minute it took power, it pressed the crisis button on the economy. Energy rates were hiked, the rupee devalued, interest rates increased, and the IMF began to be named as a necessary evil by the government. One part of the problem is the lack of economic imagination in the current government. The other part, perhaps the more serious problem, is that the commitment to the idea that ‘corruption has ruined Pakistan’s economy’ is dangerous to make economic policies with. The promised windfall of remittances from PM Khan’s droves of expat supporters has simply not arrived in a shrinking economy. Punitive taxation, the inability to predict costs, as well as the dangling fear of Pakistan’s ongoing anti-corruption campaign has sparked fear in investors both domestic and international. The government’s own narrative of the economy painted it as a sinking ship. A year ago, the Pakistani economy was growing at 5.8 percent, inflation was at single-digits and the government needed to borrow around $20 billion to keep the economy afloat. A year later, the Pakistani economy is growing under three percent, inflation is in double-digits and the government needs to borrow another $20 billion.

It is hard not to see why the optimism has fallen. In real terms, the GDP has shrunk. Strict fiscal and monetary policies have contributed to low investment. Taking away tax subsidies to exporters has reduced exports. Increasing the policy rate has increased the debt servicing burden. This has led to a situation in which all economic sectors, manufacturing, agriculture, and services have taken a hit. Large-scale manufacturing fell by double digits. Amongst the sectors that have been affected is the automobile sector, which has reduced production by more than 20 percent. Agriculture grew by only 0.85 percent, without factoring for inflation. Devaluation has not given Pakistan’s export sector the competitive advantage that was promised. The only indicator looking better is that of imports, which have shrunk. But the consumption loss has not been replaced domestically. Instead, it has led to a straight dip. On its part, the government says that all this was part of the plan. Consumption-driven growth was unsustainable in the long term, which meant that right-sizing the economy was essential. This would have been much more comforting if this was what they had been saying from the start. One can hope that the government knows what it is doing, and that it has factored in everything before embarking on this economic path.