The government and other political stakeholders need to come up with a real strategy
ecent events in Pakistan have left the country in a precarious position with regard to its balance of payments. Given the lack of consensus on key issues, the country may face the same issues later this year or early next year. The only reason there is some stability in the exchange rate is the International Monetary Fund (IMF) nod and the $4 billion assistance from four friendly nations, including China and Saudi Arabia.
Let’s take a look at where we are and the best way forward. Trade in goods and services dominates an economy’s current account. Primary and secondary income flows are also included. The term “primary income” refers to payments made internationally to the factors of production, such as income from investments and compensation to employees. “Secondary income” comprises transfer payments between countries, such as personal remittances, pension payments and aid from other countries.
Pakistan has a large current account deficit (CAD). The problem has persisted for several decades now. In 1958, Pakistan was mired in a never-ending cycle of accumulating deficits in the balance of payments. Its foreign trade performance in 1953, 1954, and 1956 was satisfactory. Until the end of the fiscal year (FY) 1956–1957, the country’s annual exports were around $161 million higher than its annual imports, resulting in a trade surplus. In FY 1973, Pakistan had a positive trade balance for the first time after 15 consecutive years of posting a deficit. Since then, Pakistan has always had a current account deficit. The current account deficit reached $4,575 million in 1996. This was equivalent to 4.96 percent of the GDP. The current account surplus reached a high point in FY 2003 with ($3,165 million, equivalent of 4.77 percent of the GDP).
The situation was completely different in the fiscal year 2005: the current account was in a favourable position, even though the trade deficit had reached $6,185 million (8.2 percent of the GDP, the highest ever in Pakistan’s history). It is clear that Pakistan’s increasing trade disparity is the biggest contributor to its current account deficit.
Recently, the State Bank of Pakistan (SBP) published the balance of payment data. It revealed that the country had a $17.41 billion CAD for the fiscal year 2021-22. The imbalance has been attributed to the rising energy imports.
There is a possibility that deindustrialisation over the long run is the cause of a widening trade imbalance. Since 1973, Pakistan has been experiencing a steady decline in the size and scope of its industrial sector.
Given the various causes of persisting CAD, several solutions exist.
There is a possibility that deindustrialisation over the long run is the basic cause of a widening trade imbalance. Since 1973, Pakistan has experienced a steady decline in the size and scope of its industrial sector. It is useful to examine the country’s progress toward modernisation in light of the East Asian economies’ experience. Compared to East Asian economies, Pakistan had a low GDP per capita at $1,317 in 2014. Korea’s GDP per capita was $27,970, followed by Malaysia’s $11,300. China, Thailand, Indonesia and the Philippines had comparable figures: $7,590, $5,977, $3,492 and $2,813. Pakistan’s real GDP per capita rose by 2.4 percent annually from 1960 to 2014, above the Philippines’ 1.6 percent annual rise. Pakistan’s growth lagged behind other East Asian economies. China had the lowest starting base in 1960 but expanded the fastest at 6.6 percent per year. Korea had the second-highest GDP per capita growth rate, 5.9 percent. Thailand and Malaysia followed at 4.3 percent and 3.8 percent annually. It would be beneficial for Pakistan to adopt cutting-edge technologies for the sake of industrialisation.
The lesson from East Asia is not to imitate the models used in South Korea, Indonesia, Malaysia, the Philippines or Thailand. Instead, the goal line for industrialisation should be to play catch-up with technology in advanced industries and develop sectors that complement the existing economic activity, such as information and communication technology, machinery and equipment and biotechnology. The government should work on institutional change to vet, monitor, and evaluate the incentives system developed to boost industrialisation and technological catch-up.
Another cause for concern is the circular debt. For years, Pakistan’s economy has been thrown into disarray because of the power sector. Load shedding occurs every day because of power disruptions. There have been holdups in distributing government subsidies to power distributors, typically state-owned businesses. When these firms do not receive money from the government, they are unable to pay the power-generating companies, maintain and develop transmission lines and systems, or keep up with maintenance and development costs.
The power companies need to be compensated for purchasing fuel and building up their generation capacity. When there are frequent interruptions in power delivery many consumers do not pay their bills. This results in significant financial challenges for power distribution firms, affecting utilities that produce power. The “circular debt” is anticipated to exceed $14 billion this year. How can an industry thrive in the circumstances?
The government is in a muddle as it tries to eliminate the subsidies provided since the 1960s. This risks social and political discontent. The rising cost of energy can make it impossible for low-income segments of society to pay for it. Nadeem Babar, chairman of the Prime Minister’s Task Force on Energy Reforms, says the government has decided to increase the energy tariff rather than remove the subsidies. This decision was made to avoid ‘economic disaster’.
To make an accurate forecast regarding the problems with the country’s balance of payments, the government and other political stakeholders need to come up with a real strategy to get out of the dire situation. Trying to stimulate the economy by artificially lowering the prices without a comprehensive plan will only bring the nation to its knees. It is time for major political parties and other key stakeholders in Pakistan to provide comprehensive plans for meeting the nation’s long-term energy requirements.
The writer is a director of the Business Finance Programme at Birmingham City University, UK. He tweets at firstname.lastname@example.org