FeaturedNationalVOLUME 16 ISSUE # 18

High hopes, low growth

Pakistani lives and the economy are at a great risk after the third wave of the Covid-19. The country hopes to contain losses but it could still face huge economic costs at a time when it badly needs to improve its growth to meet the needs of the country and a rapidly growing population.

The State Bank of Pakistan has projected the country’s economy to grow at 3pc for the current fiscal year while the International Monetary Fund (IMF) forecast a subdued economic growth rate of 1.5pc for Pakistan, coupled with a higher rate of inflation and rising unemployment, during the current fiscal year. Pakistan’s new Finance Minister Shaukat Tarain has set an ambitious target of 6-7pc GDP growth. Pakistan needs to grow at 7-9pc for 30 years to reduce public debt and create jobs by bringing a radical shift in functioning of the state and redefining the government role as a facilitator, says a new reform agenda released by the Pakistan Institute of Development Economics. There should be a maximum of two terms for the prime minister and all the legislators to break the monopoly of political families that will lead to a stable democracy, according to the think tank. The reform agenda emphasizes achieving a 7-9pc economic growth rate annually for next 30 years to create two million jobs per annum and reduce the public debt, which it said had already become “unsustainable”.

Another think tank, headed by Humayun Akhtar Khan of the ruling party, refutes tall claims of the government about an economic revival. Despite the apparent short-term control over the current account deficit, the government policies suggest Pakistan’s economy is to stay in the low growth, low export and close to default position, the Institute of Policy Reforms said. It also advised the government to slow down foreign borrowing. The government has controlled the current account deficit at present but the respite is precarious and likely short-lived. All indications suggest the economy would stay in its present state of low growth, low exports, and close to default, it warned. It anticipates further devaluation of the rupee or a more restrictive monetary policy and even more increase in administered prices. If all of that happens, the cure may turn out to be worse than the disease, the report said, adding the people of Pakistan were paying a huge cost for years of poor economic management.

The most critical problem faced by Pakistan’s economy is repayment and servicing of external debt and years of ill-advised financial management. In the last ten years, external debt servicing (principal and interest) has ranged between one per cent of GDP in FY14 and almost 5pc of GDP in FY20. Remitting such large sums of money overseas without drawing any productive benefit is harming the economy. In FY20, principal and interest paid to foreign creditors was Rs2.3 trillion – almost twice the Rs1.2tr amount spent on all development projects by federal and provincial governments. Just interest paid to foreign creditors stood at Rs406 billion – one-third of total development. New external loans, often at high commercial rates, are taken to service past debt, a solution fraught with risks, but one that has become especially acute in recent years. “In essence, the economy is in a debt trap,” the report noted.

Besides, Pakistan remits over 0.5pc of GDP in foreign direct investment (FDI) profits annually. While this is a necessary part of FDI, these are not export-oriented investments. Remittance of profits adds to foreign exchange squeeze. Also, in FY19 and FY20, outflow of foreign private funds invested in Pakistan government’s debt instruments amounted to $1,002 million and $241 million, respectively. The debt was incurred at a very high cost of up to 13pc. “Pakistan must end its preference for accessing any available foreign fund regardless of its interest cost,” the report said, adding the country must take a deep look at its public fiscal management, i.e., how it raises funds (revenue and debt) and what it spends that money on.

In the last twenty years, Pakistan has paid external creditors more than it has received from them. Yet its external debt has grown by over 200pc from $37.2b in FY01 to $112.9b in FY20. We may have paid back the original loan more than once and still owe it to the creditor. Between FY01 and FY20, external debt disbursed to Pakistan totalled $112.6b. During the same period, it has paid foreign creditors a sum of $117.9b in principal and interest. Thus, it has paid back $5.2b more than it received, a negative resource transfer. Of the $117.9b paid, $90.6b was principal, and $27.2b was interest. Average annual interest paid was US $1.4b. It is the result of borrowing to service past debt and the effect of compounding, which makes even concessional credit expensive. As a result, most solvency and liquidity indicators have worsened in recent years.

Taking another measure, the government of Pakistan spends the bulk of its revenue on paying interest on public debt. In the last ten years, it has spent annually an average of 60pc of federal net revenue receipts on interest payment (on both domestic and external debt). In FY19, interest payment was 103pc of net revenue receipts. It means every government expense other than interest payment was met from loans.

Two approaches define Pakistan’s economic policy making. For years, it has tried to deal with macro issues through macro policy. Economic growth, which would yield tax revenues and export earnings, has not been a priority. Second, it has not made sufficient efforts to control expenditure on subsidies and security, preferring to borrow from both within and outside the country to meet the expenses. The government’s logic of incurring foreign debt is that it helps economic development and macro stability, yet all evidence is to the contrary. Most macroeconomic or GDP growth indicators have worsened during the last twenty years. Seen over 20 years, the fiscal and current account deficits have stayed high, inflation has resisted a tight monetary policy, and the rupee has weakened consistently. Many times, we have put controls on imports and have repeatedly sought IMF help.

On the other hand, the IMF projects Pakistan’s economic growth rate recovering to 4pc of GDP next year (FY2022) and 5pc by 2026. It estimates the current account deficit rising from 1.1pc of GDP in FY2020 to 1.5pc in FY2021 and then going up to 1.8pc of GDP in FY2022 and peaking at 2.9pc of GDP by 2026.

The ground realities show Pakistan faces serious economic challenges and it will have to increase its revenue and decrease expenditure to meet the growing needs of its people.