Monday June 27, 2022

PTI’s reliance on consumption fueled flawed growth

May 20, 2022

ISLAMABAD: A low ratio of investment and savings to gross domestic product compelled the former government to over reliance on consumption and external accounts to fuel a ‘higher but unsustainable’ growth rate of 6 percent for the current fiscal year, The News has learnt.

The government also failed to restrict inflation within the desired target as it climbed up to 13.3 percent in the first ten months (July-April) against the desired target of 8 percent on an annual basis for the current fiscal year.

According to the approved working paper of the National Accounts Committee (NAC), Pakistan’s reliance on consumption to fuel GDP growth is the highest in the region. The private sector consumption contributes 84 percent in Pakistan, while it stands at 70 percent in the case of India. The last budget for 2021-22 presented by the Pakistan Tehreek-e-Insaaf (PTI) led regime provided incentives and fueled demand for increased consumption.

The country failed to achieve investment and savings to GDP ratio during the current fiscal year.

The investment to GDP ratio stands at 15 percent for the current fiscal year against an envisaged target of 16 percent. The savings to GDP ratio hovers around 11.3 percent of GDP against the desired target of 15.3 percent. Without jacking up domestic savings to desired level, the government remains dependent upon foreign savings to the tune of 3.9 percent of GDP for this fiscal year.

Pakistan has perpetually failed to achieve the desired level of investment and savings ratio in the percentage of GDP, resulting into boom and bust cycles after a pause of every few years. Whenever the country achieved a higher growth trajectory it created imbalances and twin deficits appeared indicating the desired level of investment and savings could not be generated to fuel the GDP growth.

This fiscal year, the country achieved a GDP growth rate of 6 percent. It clearly demonstrates the higher growth trajectory is driven by higher consumption. The investment both domestic and foreign failed to give impetus to the higher growth momentum.

The investment to GDP ratio stands at 15 percent for the current fiscal year 2021-22 against 14.5 percent of GDP for the last fiscal year 2020-21. It stood at 14.7 percent of GDP in 2019-20 and 13.8 percent for 2018-19.

The country’s fixed investment stood at 13.4 percent of GDP for the current fiscal year.

Public investment stands at 3.4 percent of GDP while private investment is hovering around 10 percent of GDP.

The Annual Plan for the FY2022 had envisaged investment to GDP ratio might increase to 16 percent of GDP in order to achieve sustained and inclusive growth.

The National Savings was targeted at 15.3 percent of GDP for this fiscal year. The National Savings clinched 11.1 percent of GDP, while the foreign savings stood at 3.9 percent of GDP.

The current account deficit is projected at over $16 billion or 3.9 percent of GDP for this fiscal.

The current account deficit sharply rose and touched over the $13.3 billion mark in the first nine months of the current fiscal year.

The higher current account deficit was a result of increased imports, which stood at over $65 billion in the first ten months of FY2022.

Successive governments’ inability to generate adequate investments and savings ultimately shoved the country deep into a twin deficit crisis soon after achieving growth of slightly over 5.5 to 6 percent on medium term at any point of time. India’s GDP growth hovered in the range of 6.5 percent compared to 4.4 percent for Pakistan in the last decade. Vietnam’s growth remained over 6.7 percent and even Bangladesh’s averaged 5.4 percent, outperforming Pakistan.

Pakistan requires investment for sustained growth.

In the decade of 90s, Pakistan’s Gross Capital Formation was at par (or better) than its peers.

Since 1995, Pakistan’s GCF has gone down, while that of peers has increased substantially.

Private sector has remained shy due to the high cost of doing business and energy and security constraints.

Pakistan’s Public Sector Development Programme (PSDP) spending has declined sharply from an average of 10 percent of GDP in 1980s to just 4.7 percent in FY18 and now it is going to fall further in the next fiscal year.

Pakistan’s Incremental Capital Output ratio (ICOR) over the last decade is around 3.5 -it actually may be 4.

Bottom line, Pakistan needs 20 percent growth in investment to get a GDP growth rate of 5 percent. Secondly, Pakistan lags behind its peers mainly because of its failure to jack up savings as the savings ratio in Pakistan was pathetically low around 16 percent, while in China it is 46 percent, India 31 percent, Bangladesh 33 percent, Sri Lanka 25 percent, and in Vietnam it hovers around 24 percent.

The investment to GDP ratio was estimated at 16.7 percent when the PML (N) was ruling over the country in 2017-18.

Afterwards, the investment to GDP ratio could not be boosted up to the desired level and remained around 14 to 15 percent.