State of Pakistan’s economy
ASMA HYDER
OVER the years, Pakistan has struggled to achieve
macroeconomic stability and sustained economic growth. Its highly volatile
growth experience1 resulted in increased uncertainty and lack of
confidence both at the ends of the investor and consumer. Low investment,2 as a percentage of gross domestic product
(GDP) growth in total factor productivity, stagnant exports and soaring
external debt are all long-standing and persistent issues underlying the
Pakistani economy.
Recently, there has been a rebasing exercise to
measure the GDP of the country.3 This exercise provides a true assessment of the economy
because over time, many new sectors have emerged and a few sectors were
redefined. The present exercise reveals that the share of agriculture changed
from 23% to 24%, the share of industry from 20.9% to 19.5% and the change in
the share of the service sector in Pakistan’s overall GDP from 56% to 56.6%.
These trivial changes in the percentage of GDP show that the economy’s
structural formation has remained unchanged during the last 10 to 15 years.
Recently, with the shift of political regime change
from Pakistan Muslim League Nawaz to Pakistan Tehreek-e-Insaf and now a newly
formed government, Pakistan has had to face the challenges of the pandemic with
quite limited fiscal space. This global health emergency further reflected the
government’s weak capability to handle such an enormous health crisis accompanied
by an economic crisis. This essay further sheds light and suggests a way
forward for selected pressing issues, including available fiscal and monetary
policy, and the external sector and provides a few comments on social sector
initiatives of the present government.
Stagnant and recently shrinking fiscal space is one of
the country’s biggest concerns. Low fiscal space affects all the sectors and
restrains the government’s initiatives and expenditures. During the last three
years, revenues have remained almost unchanged. However, the overall budget
deficit has increased by almost 22% in 2020-21 as compared to 2016-17. A more
upsetting indicator is proportional trends in current and development
expenditures. In the same year, that is, 2020-21, the current expenditure
increased by almost 17% as compared to expenditure levels in 2016-17, but
development expenditure was cut by 50% as compared to the expenditure in
2016-17.4 The decrease in development expenditure and
increase in current expenditure will have a rather compounding negative effect
on the economy as well as on the budget in the coming years.
On the other hand, the long-lasting issue of circular
debt in the energy sector grew chronic this time. The trade
deficit increased by almost 106% during the current year, mainly due to
considerable increases in imports against stagnant exports. According to
the Pakistan Bureau of Statistics, the consumer price index rose by 12.3% at
the end of 2021 as compared to the previous year. The continuous increase in
pricing, especially food inflation, has eroded the purchasing power of middle-
and lower-income groups. An increase in poverty and vulnerability is an
apparent outcome of this bleak economic situation, along with the challenges of
the Covid-19 pandemic.5 The
growth of the private sector, despite a lower interest rate, shows a lack of entrepreneurial
interest and a stagnant economy. Finally, Pakistan’s performance in the
external sector in the region is very low, compared to other peer countries
like India, Bangladesh and Vietnam.
The
solutions for economic revival are deep-rooted and probably not limited to the
political regime under the Pakistan Tehreek-e-Insaaf or the present coalition government. The nature of
the political system and continuous long-term disruptions after independence
did not allow Pakistan to build a robust structure with strong thought
leadership, which requires continuity in the democratic system. The temporary
authoritarian regimes led to high rent-seeking, discouraged positive changes or
reforms and instead provided an incentive to maintain the status quo. One of
the most pressing issues for the present government is the continuously
shrinking fiscal space. Thus, to reduce the current expenditure, many
departments and ministries like the board of investment, the ministry of
technical training and professional education, the health services and
coordination ministry and the planning commission are almost irrelevant in the
post-devolution scenario. These government offices should be abolished and have
their responsibilities transferred to provincial governments. The growing size
of the governmental bodies increases current expenditure and compounds
procedural inefficiencies. Besides these structural changes in the
administrative system, there are many other simultaneous measures, like making
thoughtful decisions on the allocation of resources for subsidies, ambitious
tax reforms and improvement in the structure of the financial sector for better
transactions – especially for remittances and foreign investments for improving
the fiscal space available to the government.
The
current subsidies by the government are disproportionally skewed toward the
Water & Power Development Authority and K-Electric. Its attempts to manage
the circular debt in the form of Independent Power Plants and Power Holding
Private Limited seem to have failed in fixing the problem. No other solution
exists for the energy sector except structural reforms to streamline the
procedures. Several initiatives like the privatisation of distribution
companies, improvements in metering, billing and the collection system,
reduction in line losses and increased capacity through innovation and higher
reliance on renewable energy can help to improve the performance of the energy
sector. According to the National Electric Power Regulatory Authority report in
2020,6 investment is
needed in transmission and distribution networks compared to installed capacity
to generate electricity. The distribution companies should have financial and
operational independence and follow sustainable business models. A significant
reduction in the circular debt is inevitable to expand the fiscal space for the
government.
Managing inflation and the affordability of
commodities of daily use for lower- or even the middle-income group is also a
challenge for almost every government. A few studies analysed that inflation in
Pakistan is explained by supply-side constraints and market friction.7 The demand-side shocks explain less than 30%
variability in inflation. Besides the increase in international oil and
electricity prices in the country, the devaluation of Pakistani currency also
contributed to inflation. Devaluation increased the prices of currency and the
cost of production due to increase in imported inputs.
From the
investors’ point of view, private investment is discouraged due to the
increased cost of production, market uncertainty due to the Covid-19 pandemic
and the high cost of doing business owing to market frictions. In this
scenario, the monetary policy becomes redundant, and lowering the interest rate
is not an effective policy option. However, the low-interest rate proved to be
a cushion for the investors in maintaining their working capital. Thus, the
sustainability of old ventures was somehow successfully maintained. Soon, the
central bank should be ready to confront the after-effects of the pandemic,
uncertain economic prospects, rising inflation and citizens’ expectations from
the exchange rate.
The external side of the economy, coupled with the
above investment climate, is under threat due to a steep rise in the trade
deficit. In recent years, the imports of machinery, vehicles and vaccines kept
the import bill very high. Nevertheless, sales tax and customs duties
contributed positively to the Federal Board of Revenue’s collection with a high
increase in imports.
The
government’s expectations from remittances, Roshan
Digital Accounts and expected growth in exports seem challenging to improve the
external-facing side of the economy. To handle this situation, drastic measures
are required. In fact, the share of exports in the GDP has been consistently
decreasing over the last two decades. Most of the peer countries in the region
report a relatively higher percentage of export share
in the GDP. One reason for the growing trade deficit, among many other factors,
is the lower level of competitiveness. For instance, despite subsidies and
concessions for the textile sector (which is the largest contributor to
Pakistani exports), it still lacks diversification and
sophistication. The number of product varieties has significantly reduced
during the past decade, and Pakistan fell in the world ranking of product
varieties exported from the 38th percentile to the 45th percentile (Pakistan Development
Update 2021). Similarly, regional and international market integration has
proven to be a successful strategy for many Southeast Asian countries like
Vietnam and Singapore.8 Pakistan should consider
importing raw materials and producing finished goods for exports.
Increasing productivity at the firm level is a
significant challenge for local producers. The data shows that Pakistani firms’
productivity does not increase with their age like many other countries.9 Besides these significant challenges, many
other constraints like certification and labelling of products, marketing,
branding, registration, lack of preferential trade agreements and licensing
discourage many exporters. In this aspect, the government can play a role in
helping these small but potential manufacturers. To fix the challenges of the
external sector, reforms of integrated nature are essential. To design such
reforms, there is a need for dialogue among the private firms, government and
relevant departments like training institutions, national tariff commissions, the industry of commerce and the federal board of revenue. All
stakeholders should work together to figure out how to enhance competitiveness,
productivity and the capabilities of local businesses.
The
present government upscaled social protection during
the Covid-19 outbreak through the Ehsaas programme
Almost PKR 179.8 billion (S$ 1.34 billion) were distributed as one-time
emergency cash assistance to 14.8 million beneficiaries at the risk of falling
into extreme poverty. According to a World Bank report, Pakistan is ranked
fourth10 in terms of coverage of cash transfers through
its social protection programme. Another flagship initiative is the Sehat Saholat health card, which
increases the purchasing power of the population from the lowest social strata.
However, increasing the purchasing power will only work if there is enough
supply of adequate health services, including access to doctors, nurses and
beds. According to World Bank statistics, there are 1.1 physicians available
for 1,000 people, 0.4 nurses or midwives for 1,000 people,
and one hospital bed for 1,600 people. Without addressing these supply-side
constraints, any such initiatives from the demand-side would barely work. Thus,
like other sectors, there is a need to introduce reforms in the health sector.
Investments should be diverted toward improving public health facilities; there
is a need for analysing doctor/paramedic staffing and regionwise
population to doctor ratio. Finally, a framework for the production,
distribution and pricing mechanisms of pharmaceutical products is required for
better healthcare in the country.
With more than 67% of the population under 30 years of age, and approximately two million people are expected to enter the labour market annually, Pakistan needs serious planning. An ambitious reform agenda is required for long-term persistent economic growth and sustainable development. As discussed above, the previous and current governments repeated ad hoc approaches to address crucial issues of Pakistan’s economy are stacking up into matters of grave concern.
Footnotes :
1. As reported in ‘Statistical Supplement’, Pakistan
Economic Survey 2020-21, Finance Division, Government of Pakistan, it was
6.8% in 1960s, 3.5% in 2000s, 0.4% in 2008-09, 3.7% in 2012-13, 4.6% in
2015-16, 5.5% in 2017-18, 2.1% in 2018-19, -0.5% in 2019-20 and 3.9% in
2020-21.
2. The gross fixed capital formation (as a percentage
of the GDP) in Pakistan in 2020 was 15%; in Bangladesh 30%; in India 27%; and
the average of South Asia was 26%. Similarly, Pakistan’s average investment
share of nominal GDP in the last 60 years was 17.5%.
3. Pakistan Economic Survey 2020-21. Finance
Division, Government of Pakistan.
4. In a recent rebasing exercise, the base year was
changed from 2005-06 to 2015-16 for measuring GDP.
5. The poverty rate declined by 40% over the last two
decades to 24.3% in 2015, but the IMP projects a sharp reversal, with up to 40%
of Pakistan living below the poverty line during the pandemic. UNDP, June 2020.
6. National Electric Power Regulatory Authority, State
of Industry Report, Government of Pakistan, 2020.
7. M. Nasir and W.S. Malik, The Contemporaneous Correlation of Structural Shocks
and Inflation Output Variability in Pakistan’, The Pakistan Development
Review, 2011, pp. 145-162; F.U. Rehman and W.S. Malik, A Structural VAR (SVAR) Approach to the Cost
Channel of Monetary Policy. University Library Munich, Germany and F.U. Rehman and M. Nasir, The Need for Accommodating Monetary Policy. The
State of Pakistan’s Economy: During the Pandemic and Beyond:
2021-22, Edited by L.S. Farooq and M. Asif, IBA Press, Karachi.
8. A. Nakhuda, ‘Need for
Export-Oriented Strategies’, Daily Tribune, January 2022.
9. N.U. Rehman, ‘Network
Alliances and Firms’ Performance: A Panel Data Analysis of Pakistani SMEs’, Eurasian
Bus Rev 6, 2016, pp. 37-52.
10. Social Protection and Job Responses to Covid-19: A
Real-Time Review of the Country Measures, Pakistan Development Update:
Reviving Exports. World Bank Report, May 2021.