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Thursday June 30, 2022

An economic crisis

June 23, 2022

Pakistan is undoubtedly facing an economic crisis of gigantic proportions caused by the gross mishandling of the economy by successive elected and military governments over the past several decades.

These governments chose the easy way while handling the economic crisis, which merely aggravated over time. The necessary corrective but difficult decisions were avoided or postponed at an enormous cost to the nation as a whole. This politically facile approach made the task of each succeeding government more difficult than would have been the case otherwise as the magnitude and the gravity of the economic problems of the country steadily grew. Consequently, the country is now virtually on the verge of an economic disaster if decisive measures are not taken to stem the rot.

The most serious problem confronting our economic policymakers is the tendency of Pakistan’s economy to record unsustainably high current account deficits whenever the government tries to accelerate the GDP growth rate. For instance, in 2017-18 while the GDP growth was estimated to be 6.1 per cent, the current account deficit rose to the high level of $19.1billion. In subsequent years, the PTI government slowed down the GDP growth rate, resulting in lower current account deficits. However, as it tried to accelerate the GDP growth rate, the high current account deficit reappeared. FY2021-22 with GDP growth rate of 6 per cent is expected to end with the current account deficit amounting to $17 billion.

The immediate cause of the increase in the current account deficit during FY2022 is the sharp increase in imports as against relatively slow growth in exports. The import bill surged to $72.18 billion during July 2021-May 2022. At this rate the total import bill for 2021-22 would be about $78 billion as against $54.27 billion a year earlier. On the other hand, exports, which were estimated to be $28.84 billion during the period from July 2021 to May 2022, will rise to $31 billion by the end of June, 2022. The situation calls for drastic fiscal, monetary and administrative measures to bring about a sharp reduction in imports while encouraging exports and import substitution so as to be able to balance our external account.

In the ultimate analysis, however, the current account deficit reflects the excess of national investment over national savings. That is why whenever the government tries to accelerate the GDP growth rate by increasing the national investment rate without raising the national saving rate, it inevitably leads to high current account deficits. This happened in 2017-18 and is happening again in 2021-22. The moral is that if we wish to achieve high GDP growth rates in the coming years without running into unsustainably high current account deficits, we must raise our national saving rate to at least 20 per cent of GDP or even higher from the current low level of 11.1 per cent of GDP. Austerity combined with effective policies aimed at promoting exports and import substitution thus is an indispensable condition for accelerating Pakistan’s GDP growth rate on a sustainable basis.

High fiscal deficits constitute another source of weakness and vulnerability of our economy. The proposed federal budget for 2022-23 sets the total expenditure at Rs9.50 trillion as against the net federal revenues estimated to be Rs4.9 trillion. The fiscal deficit is thus expected to be about Rs4.6 trillion. The harsh reality is that debt servicing (Rs3.95 trillion) and defence (Rs1.52 trillion) alone will exceed the net federal revenues by Rs570 billion.

Fiscal deficit as a percentage of GDP is expected to decline from 6.3 per cent in 2021-22 to 4.9 per cent in 2022-23. Still its high level in absolute terms will keep the federal government’s fiscal position tight besides generating inflationary pressures. Keeping in view the high level of fiscal deficit, the rising prices of petrol, diesel and other petroleum products, and the inflationary trends internationally, it is doubtful that the government would be able to contain inflation within the limit of 11.5 per cent set for 2022-23.

The federal government’s tight fiscal position calls for a reform of the taxation system to raise the tax-to-GDP ratio from 9.2 per cent, as envisaged in the proposed federal budget for 2022-23, to over 20 per cent. Until the federal government is able to bring about these reforms and severely control its current expenditure, its fiscal deficits and the public debt will continue to grow rapidly. Already the total public debt, which was estimated to be Rs24,953 billion at the end of June 2018, has increased to Rs44,366 billion at the end of March 2022 – hardly a story of fiscal prudence.

Budget 2022-23 sets the target of 5 per cent GDP growth rate. It envisages a federal developmental outlay of Rs727 billion as against actual developmental expenditure amounting to Rs550 billion in the year 2021-22. In addition, provinces will undertake developmental expenditure amounting to Rs1.4 trillion increasing total developmental expenditure to Rs2.1 trillion in 2022-23.

On the whole, the proposed budget aims at stabilizing the economy by maintaining a reasonably high GDP growth rate, dampening inflationary pressures, and reducing current account and fiscal deficits. However, Budget 2022-23 does not go far enough towards raising the tax-to-GDP ratio and the national saving rate to the high levels required for putting the country on a sustainable high growth rate trajectory. It also remains to be seen whether and to what extent the government takes steps to reduce imports and promote exports and import substitution with the goal of reducing the current account deficit.

Historically, education, which is an indispensable condition for economic development, has been accorded low priority by governments in Pakistan in terms of allocation of resources. Our national expenditure on education has generally remained below 2 per cent of GDP as against the Unesco-recommended norm of 4 per cent of GDP. Ideally, our national expenditure on education should be higher than even 4 per cent of GDP on the pattern of the rapidly developing economies, if we want to transform Pakistan into a dynamic and progressive country with a dignified place in the comity of nations. Unfortunately, the budget for 2022-23 does not reflect the high priority that this critically important sector deserves.

The writer is a retired ambassador. He can be reached at: javid.husain@gmail.com

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