Economic prospects

After showing slight improvement for a while, the growth prospects for the economy of Pakistan are once again sliding downwards. The World Bank in its latest forecast has highlighted certain downside risks that the government must take care of. First, Pakistan’s economic growth rate is likely to come down to 3.4 percent during the current fiscal year against 3.9 in the last fiscal year. The WB has suggested that if the government of Pakistan implements key structural reforms the growth rate may slightly improve in the next year. The WB wants Pakistan to unwind some fiscal and monetary measures so that the growth can be stabilised in the remaining three quarters of 2021-22. In this scenario the government needs to tread carefully. Potential delays in the IMF programme may put additional strain on the country’s economy. Then there is the question of high demand-side pressure in which inflation affects taxes and wages, whereas government spending and interest rates also play their roles. Such high demand-side pressures are also likely to be compounded by potential negative spillovers from the situation in Afghanistan. Luckily, Pakistan has so far avoided more severe Covid-19 waves, otherwise the situation could have been even worse.

Still, what is disappointing is that Pakistan finds its place at one of the bottom rungs of the growth ladder in the South Asian region. The WB report projects that South Asia is likely to grow by over seven percent in 2021-22. It is no consolation that South Asia’s average annual growth is forecast to be 3.4 percent over a three-year period from 2020 to 2023. This is directly related to the pandemic as in the four years preceding the pandemic, the growth was three percentage points higher. If you compare Pakistan’s performance with that of India’s, the bank has projected our bigger neighbour’s economy to grow by 8.3 percent in 2021-22. This is more than double of what the WB projects for Pakistan. India has managed to do this by increasing public investment and incentives to boost manufacturing. Even in Bangladesh, continued recovery in exports and consumption is helping growth rates which have picked up to 6.4 percent in the current fiscal.

Unfortunately, Afghanistan and Pakistan are clubbed together for their lower capacity vaccination and widespread vaccine hesitancy. According to the WB, 35 percent Pakistanis and 30 percent Afghans are not willing to be vaccinated. Now the government of Pakistan must come up with concrete solutions. Just fiscal and monetary tightening will not help, and policy rate hikes are also not going to do the trick to stimulate growth. Somehow we refuse to learn lessons from countries such as Bangladesh and even from Bhutan. Bangladesh has achieved a lot in terms of boosting its exports while Bhutan gets tremendous benefit from its tourism. We have had long-standing fiscal challenges since 2018 and we have been unable to sustain macroeconomic stability; our competitiveness is declining and financial viability is constantly under question, especially related to the energy sector which is marred by a spiraling circular debt. The citizens of Pakistan simply cannot afford anymore domestic energy tariff hikes and higher oil and commodity prices. At least two fronts need immediate attention: reduction in the current account deficit; and expansion in exports with a corresponding reduction in imports.