NationalVOLUME 14 ISSUE # 23

From growth to stabilisation

The State Bank of Pakistan governor recently said that Pakistan has nearly achieved economic stability and the economic future of the country is bright. Obviously, his view is based on some positive developments in the economy.


A major development is the near-elimination of loadshedding. The economic damage caused by long periods of power suspension have decreased substantially over the last few months. From the peak in 2012-13, time losses due to outages have declined by over 70 percent. On the other hand, the security situation has visibly improved. The incidence of acts of terrorism is much less today as compared to a few years ago. Also notable is the fact that democracy is taking root in the country. With the third elected government under the PTI taking office, doubts about political stability have cleared.


But countervailing these positives are factors which are negatively impacting the economy. In this connection, the primary concern is the decline in the GDP growth rate to 3.3 percent from 5.5 percent last year. The Ministry of Finance has projected that the growth rate to fall further to only 2.4 percent in 2019-20. According to experts, the reason for the fall is that the policy has shifted from growth to stabilization in 2018-19, necessitated by the emergence of very large and unsustainable deficits both in the current account of the balance of payments and the budget finances.


It has necessitated the devaluation of the rupee, a raise in the interest rate and a reduction in development spending. As a result, we have seen an improvement in the current account deficit which is likely to fall by 30 percent by the end of the year. Also, according to the ministry’s estimates, the primary deficit in the budget is expected to come down to 2 percent of the GDP as compared to 2.2 percent of the GDP last year. However, it is axiomatic that unless the fiscal deficit is reduced substantially, the external balance of payments will remain under pressure.

Needless to say, for stabilization of the economy in the short and medium-term, we need to better manage the budget deficit. The ministry’s projection is that it will decrease from 7.2 percent of the GDP this year to 7.1 percent next year. It may be noted here that the federal expenditure is expected to grow by over 30 percent next year. The provincial budgets also show growth rates in expenditure of 20 to 25 percent. This means that the fiscal policy is expansionary which is to be counterbalanced by additional taxation. As suggested by the IMF, the trade deficit can be reduced by the depreciation of the currency based on a market-determined rate. Already, over the last few weeks, the rupee has fallen steeply against the US dollar. This, in turn, will increase the rate of inflation which has been projected at 11 to 13 percent in 2019-20.

According to experts, to stabilize the economy, instead of an expansionary fiscal policy combined with currency depreciation, we should go for a more restrictive fiscal policy, especially in terms of containing the growth in expenditure, and a less restrictive monetary policy. This would have less impact on the rate of inflation, leading to a smaller increase in the cost of debt servicing. The federal budget has been passed, but there is a strong likelihood of a shortfall in revenues which will necessitate adjustments to meet the IMF programme criteria. Tax rates may be further increased and the rupee may be further devalued. This, combined with a cut in development expenditure, will result in falling real incomes and rising unemployment. To cope with the situation, the government will have to show economic prudence.


There are a number of measures that the government can take immediately to arrest the declining economic trend. The first one is to stop the further slide of the rupee against the dollar through tactical intervention in the market. This will not only check inflation but also reduce the debt servicing burden. Secondly, all luxury imports should be immediately banned to reduce the trade deficit. On the other hand, a new package of incentives should be offered to encourage exporters to redouble their efforts and earn more foreign exchange. Last but not the least, efforts should be made to increase productivity in the agricultural and industrial sectors which will, in turn, generate new employment opportunities for jobless educated youths.