FeaturedNationalVOLUME 19 ISSUE # 28

Declining investment and its implications

Despite the concerted efforts of the government, Pakistan’s investment ratio has plunged to its lowest level in fifty years, marking a significant economic concern.

The investment-to-GDP ratio now stands at a mere 13.1%, a stark indicator of the challenges facing the nation. This decline persists amid promises of substantial foreign investments that have yet to materialize, highlighting deep-seated issues within the economic framework.

Pakistan’s investment quotient has plummeted to an unprecedented nadir in five decades, descending to a mere 13.1% of the economic expanse in the concluding fiscal year. This regression persists notwithstanding the endeavors of the Special Investment Facilitation Council (SIFC), as corroborated by data ratified by the National Accounts Committee (NAC).

This half-century trough in the investment-to-Gross Domestic Product (GDP) ratio corroborates trepidations that the SIFC, in isolation, cannot substantially galvanize investment sans enhancements in the core tenets of Pakistan’s economy and the realization of political equanimity.

The official records further divulged an inconsistency in the demographic figure employed by the Pakistan Bureau of Statistics (PBS) in the recently sanctioned National Accounts. This incongruity has precipitated an inflated per capita income estimation of $1,674 for the outgoing fiscal year. According to the 2023 census results, the nation’s populace stood at 241.5 million; however, the PBS utilized an antiquated figure of 236 million. Provisional National Accounts estimates indicated that both investments and savings as a proportion of Pakistan’s economy remained below the stipulated benchmarks for the outgoing fiscal year. Such meager savings and investment ratios are the crux of the external sector’s predicaments.

In juxtaposition to the target of a 15.1% investment-to-GDP ratio, it has deteriorated to 13.1% in the outgoing fiscal year, marking the most dismal ratio in five decades. The last instance of such a low investment-to-GDP ratio was in the fiscal year 1973-74, recorded at 13.2%.

The Pakistan Democratic Movement (PDM) administration instituted the SIFC through legislative action, aiming to invigorate the country’s tepid investment landscape and alleviate impediments to economic progression. The SIFC, a collaborative entity managed by both military and civilian sectors, has embarked on numerous initiatives over the past year. Nonetheless, these efforts have yet to materialize into tangible outcomes. Prime Minister Shehbaz Sharif has asserted securing pledges amounting to $10 billion in investments from the United Arab Emirates’ leadership. This pledge follows a similar commitment from Saudi Arabia to expedite a $5 billion investment.

In recent deliberations, the International Monetary Fund (IMF) interrogated the prospective investments Pakistan anticipates for this fiscal year and the subsequent one. With consumer price index-based inflation forecasted to average 12.7 percent for the upcoming 2024-25 budget, the IMF has urged Pakistan to share the draft of the forthcoming investment policy and ensure transparency in the operations of the Special Investment Facilitation Council (SIFC).

For the closing fiscal year 2023-24, the provisional GDP growth estimate may oscillate between 2 to 2.5 percent, falling short of the official target of 3.5 percent. The IMF has projected debt servicing to reach Rs9.787 trillion for the next fiscal budget of 2024-25. The Ministry of Finance is refining the total debt servicing figures, which will be contingent upon the precise primary surplus generated for the forthcoming fiscal year.

Regarding the SIFC, the Pakistani delegation apprised the IMF assessment team that the new investment policy was in the formulation stages and would be promulgated post deliberations. The IMF emphasized the necessity for transparency in the SIFC’s operations. The IMF team also inquired about potential investments across various projects and specifically underscored the privatization of PIA and other state-owned enterprises.

The SIFC has made strides in addressing coordination challenges between federal and provincial governments and in alleviating procedural obstacles. However, these efforts have yet to catalyze notable surges in either foreign or domestic investments. Currently, the investment-to-GDP ratio stands at 13.1%, markedly lagging behind regional counterparts. Last year, this ratio was at 14.1%.

Additionally, the fixed investment-to-GDP ratio declined to 11.4% from last year’s 12.4%. Private sector investment plummeted to 8.7% of the GDP this fiscal year, representing the lowest level in nearly a quarter-century. Public sector investment also dropped to 2.8% of the GDP, the lowest in four years, primarily due to fiscal constraints that prevented the Ministry of Finance from disbursing the entire Rs950 billion budget allocation.

Investment in the manufacturing sector has waned, largely because of frequent changes in taxation policies and biases favoring other sectors. The country’s productivity is diminishing, with economic growth primarily driven by consumption, which contributed to about 88% of the increase in the economic size.

Failing to meet the critical investment target has hampered the government’s capacity to address deteriorating infrastructure and social sector issues with its resources, resulting in a greater dependence on loans for development projects. This shortfall underscores a significant economic setback and a lack of progress in rectifying structural imbalances.

The savings-to-GDP ratio slightly decreased from 13.1% to 13%, falling short of the official target. The estimated size of the national economy for the current fiscal year is $373.6 billion, up from $338.2 billion the previous year, reflecting a 10.5% increase in dollar terms due to a stable exchange rate. However, it remains below the $375.6 billion figure from two years ago, which declined due to subsequent devaluations.

In rupee terms, the economy reached Rs106 trillion in 2023-24. Per capita income, initially estimated at $1,551 last fiscal year, rose to $1,674 this year—a $123 or 8% increase per person. However, this figure is based on an outdated population estimate of 236 million.

According to the latest census, Pakistan’s population was 241.5 million two years ago. At an average annual growth rate of 2.6%, the current population should be around 248 million. Consequently, the per capita income is overstated by approximately $90 due to the incorrect population figure.

The precipitous drop in Pakistan’s investment ratios underscores profound economic vulnerabilities and a pressing need for structural reforms. While the SIFC has made progress in streamlining processes and enhancing coordination, these measures alone are insufficient to spur the necessary investment growth. Addressing underlying economic imbalances, stabilizing political conditions, and ensuring policy consistency are crucial for reversing this downward trend. Without these fundamental changes, Pakistan’s economic prospects will remain constrained, relying heavily on external aid and loans rather than sustainable, homegrown investment.