Economic woes

Despite a significant increase in the GDP growth rate – from 3.9 percent to 5.4 percent – for FY2020-21 by the National Accounts Committee (NAC) through a rebasing exercise, Pakistan is undeniably confronted with serious economic problems as evident by various economic indicators. Against the federal government’s GDP growth rate target of 4.8 percent for FY 2021-22, the World Bank, in its Global Economic Prospects report 2022, has forecast that Pakistan’s growth rate would be 3.4 percent.

The generally slow GDP growth rate since 2018 has already raised the unemployment rate to 16 percent according to estimates by the Pakistan Institute of Development Economics (PIDE). This means that about 20 million people are already out of jobs; this number is increasing rapidly. An average Pakistani’s plight has further worsened because of the double-digit inflation rate. High levels of unemployment and inflation combined with the low GDP per capita have pushed about 40 percent of the population below the poverty line – according to the World Bank – with no amelioration in sight. This is a frightening prospect for the country as a whole.

The economic situation on the external front is hardly any better. The trade deficit during the first half of the current financial year rose sharply to $25.5 billion, compared to $12.3 billion for the same period last year. This was caused by a jump in imports to $40.6 billion during July-December, 2021 ($24.5 billion in FY 2021). On the other hand, exports merely increased from $12.1 billion in July-December 2020 to $15.1 billion in the first half of the current financial year. At this rate, the trade deficit may rise to about $50 billion during the current financial year, compared to $30.8 billion a year earlier and $37.7 billion in FY 2017-18.

Some economists predict that the projected high level of the trade deficit in the current financial year will put enormous pressure on the country’s external account and may raise the current account deficit to about $16-18 billion if drastic fiscal, monetary, trade and administrative measures are not taken to check and reverse the rapid growth in imports while encouraging increase in exports. Such a high level of current account deficit against the background of our low foreign exchange reserves is unsustainable as was the case at the end of FY18 when the country was faced with the current account deficit of $19 billion.

However, the high level of the current account deficit in 2017-18 was with an economy growing at the rate of 6.1 percent per annum, according to official figures revised by the NAC whereas the projected current account deficit of $16-18 billion during the current financial year would be with an economy growing at the officially projected rate of 4.8 percent in 2021-22. What it shows is that there has been no improvement in the management of the economy. If one takes into account the decline in GDP to $347 billion in the year 2020-21 – against $357 billion in 2017-18 according to the revised official figures – and the simultaneous high levels of unemployment, inflation and poverty, the country is in a much worse situation than where it was at the end of FY2018.

The situation is equally disturbing if one looks at the country’s external debt profile. According to the State Bank of Pakistan (SBP), Pakistan’s total external debt and liabilities were $127 billion as of September 30, 2021, compared to $95 billion at the end of June 2018. The corresponding figure may have risen to $130 billion at the end of December 2021, according to some reports. If true, it would mean that the present government has added about $35 billion to Pakistan’s external debt and liabilities during the three and a half years of its tenure. At this rate, it would raise the total external debt and liabilities to $145 billion approximately by the end of June 2023, placing an unbearable burden on Pakistan’s external account.

The main reason for the failure of the present PTI government in handling the country’s economic problems is its excessive reliance on the monetary approach, recommended by the IMF, in balancing the current account deficit through a massive devaluation of the Pakistani rupee and bringing the GDP to a virtual standstill over the first three years of its rule. This reduced the current account deficit but at an enormous cost of economic stagnation and high levels of unemployment, inflation and poverty. Further, exports, which had increased by 12.6 percent in 2017-18, instead of increasing further, in response to the massive devaluation of the Pakistani rupee, decreased by 2.1 percent and 7.1 percent in 2018-19 and 2019-20 respectively, according to official figures.

Pakistan would have been much better off if instead of the above approach, a judicious mix of monetary, fiscal, trade and administrative policies had been adopted for tackling the country’s serious economic problems. Also, for achieving a sharp reduction in imports and encouraging exports, a moderate devaluation of the Pakistani rupee should have been combined with a steep rise in tariffs on the import of all items excepting machinery, raw materials and spare parts needed for productive purposes especially for an increase in exports and import substitution, and necessities for the poor and the lower middle classes. Well-thought-out fiscal and monetary policies should have been employed to restrict sharply conspicuous and wasteful consumption by the Pakistani elite and facilitate a rapid increase in exports and import substitution.

Our policymakers seem to be blissfully ignorant of the implications of the economic principle that the current account deficit directly reflects the excess of national investment over national saving. As the government tries to accelerate economic growth by raising the level of national investment without increasing the national saving rate, the excess of national investment over national saving translates into higher current account deficits. Pakistan can achieve a high GDP growth rate, necessary for reducing unemployment and poverty levels, without running into unsustainably high levels of current account deficits only if simultaneously extreme belt-tightening measures are adopted to reduce conspicuous consumption by our elite and upper middle classes and raise our national saving rate to match with the high level of investment required for rapid economic growth.

The writer is a retired ambassador and president of the Lahore Council for World Affairs. Email: javid.husain@gmail.com