Reflections on Pakistan’s Economy
in the middle of the last year, Pakistan entered into a $6bn bailout arrangement with International Monetary Fund (IMF) under a 39-month Extended Fund Facility (EFF). This was the twenty-first loan that Pakistan sought from IMF to shore up its dwindling reserves, and to avoid an economic crunch. The state of Pakistan’s economy has been in shambles as the country was battling to stave off an economic crisis.
Abdul Hafeez Shaikh, Adviser to the Prime Minister on Finance, made the announcement, “So Pakistan will get $6bn from the IMF and in addition we will get $2 to $3 billion from the World Bank and Asian Development Bank in the next three years.” Pakistan has outstanding foreign loan in excess of $90bn and the country’s exports sector has plunged over the past five years. The national economy is still going through structural adjustment phase. By far, things appear grimmer and prospects shadier.
Under its readjustment bid, the government realigned exchange rate, revised interest rates upwards, escalated energy prices and put a cap on public sector development expenditures, resulting in overall stalled economic growth. No doubt, the aim of these adjustments was to control the genie of twin deficits. Government discouraged increased consumption-led growth by containing demand through import compression. This helped in stabilizing current account deficit but its unintended fallout was hyper-inflation, resulting in loss of value of Pakistani rupee. As a result, GDP growth constricted to the lowest in the past nine years.
Due to the impending threat of burgeoning twin deficits by the end of 2018, Pakistan started tightening its monetary policy. In the beginning of FY19, the government rescheduled its priorities to control the twin deficits and precarious level of foreign exchange reserves. One mistake that Pakistan committed was the delayed agreement with IMF—the delay created much ill-founded suspicion and scepticism among investors who were already shying away due to failure of efforts for internal stabilization. Government took several measures to curtail imports but this was not enough as overall reserves remained quite low and financing external obligations became a Herculean task. Sensing its mistake, the government approached IMF for another EFF. This arrangement helped Pakistan to attract foreign investors and international financial institutions (IFIs), as well as in raising funds from international capital markets.
Most significant departure from the previous government’s policies was a substantial cut in PSDP (public sector development programme) spending. No mega infrastructure project was taken up by provinces, and four provinces jointly supplied a whopping cash surplus of Rs. 202 billion to the centre in December 2019. Government’s efforts at tax reforms could not materialize and government had to revisit its revenue target from PKR 5.5 trillion to PKR 5.2 trillion—it still seems a distant dream, though. Weak collection from typical revenue-generators pushed government to overly rely on non-tax revenues.
The story in expenditure sector was not much different; despite much-touted austerity and PSDP cuts, growth in overall expenditures remained high due to a substantial increase in interest payments. This resulted in deterioration of primary deficit while an increase in overall fiscal deficit.
Throughout FY19, the economy witnessed a steady increase in headline inflation which was further compounded by government’s decision to increase energy prices to control fiscal deficit. Prices of food as well as non-food items (NFIs) also rose, constraining the basket of goods of common purchaser.
Real GDP growth picked up during FY17 and FY18; however, the sharp decline in GDP growth in FY19 exposed the un-sustainable economic strategies upon which this artificial DGP growth was based. Low real GDP growth, high level of fiscal deficit and increased inflation reflect fundamental structural deficiencies in Pakistan’s taxation system. Overall exports during FY19 showed a substantial growth but overall value of exports decreased.
Annual report (2018-19) on State of Pakistan’s Economy, released by State Bank of Pakistan, presents a dismal picture. The report highlights that structural imbalances and gaps have been building over time especially increasing share of services in GDP which does not add to export base. The report warrants that for structural adjustments measures like restoration of commodity-producing sectors, increasing competitiveness of Pakistani goods in domestic and international markets, increasing product quality, diversifying market trends, facilitation of incremental shift towards exportable services and increased improvement in human capital and productivity, are needed. It suggests that provision of quality education, health and vocational training should be given priority.
In FY19, growth in real DGP decelerated to 3.3 percent, compared to 5.5 percent in FY18, due to rapid decline in commodity-producing sector. In agriculture, growth stalled due to below-par performance of major crops especially in Sindh, a problem aggravated by low water availability. Growth in industrial sector also slumped due to a slowdown in construction industry.
Inflation during FY19 was fuelled by increased demand, administered prices and depreciation of rupee. Headline Consumer Price Index (CPI) inflation reached 7.3 percent during FY19, compared to 3.9 percent in FY18. The overall budget deficit during FY19 stood at 8.9 percent of GDP against the set target of 6.8 percent in the Budget 2018-19. This deficit was due to sharp decline in revenue collection and a steep rise in current expenditures. Data provided by Pakistan Bureau of Statistics (PBS) shows that overall revenues plunged by 6.3 percent during FY19 due to reduction in non-tax revenues.
Debt sector dynamics depicted poor performance of economy. Pakistan’s total debt and liabilities reached PKR 40.2 trillion by end FY19. The share of long-term debt in total domestic debt rose from 45.8 percent a year earlier to 73.4 percent in FY19. However, good news came from external sector where current account gap narrowed substantially in FY19. Strict regulations, growth in worker remittances, import reduction, completion of CPEC early harvest projects, and lower PSDP spending contributed towards decrease in machinery import which contributed to the decline in import payments. This, in turn, helped stabilize external sector. Worker remittances increased record high with increase coming from US, UK, KSA and Malaysia.
In the second half of 2019, Pakistan pursued its structural adjustment bid under IMF conditionalities associated with bailout package. With new bailout, IMF made sure Pakistan follows macroeconomic stabilization. State Bank of Pakistan continued to keep consistent monetary policy. On the fiscal front, government continued its efforts to increase revenues and decrease expenditures. It implemented system of market-based exchange rate. Government started documentation process of the economy including assessment of assets, financial scrutiny over bank accounts and payments flows, and introduction of structured mechanisms to formalize businesses’ value chains. Though with the revision of taxation targets and due to resistance from traders and merchants, the impact of these efforts is not easy to be gauged at this time.
Current economic crisis has inflicted much pain on ordinary Pakistani. However, this latest spate of economic pain would not last for too long. Given government’s tight fiscal and monetary policies, structural adjustment bids, documentation process and improved revenue collection, it is hoped that dawn of economic prosperity and end of economic peril is not too far away.
“Hope is the beacon which points to prosperity.” —Edward Counsel