FeaturedNationalVOLUME 17 ISSUE # 11

Hopes outpace economic growth

The World Bank has projected Pakistan’s economy to grow at 3.4pc in the current fiscal and at 4pc in 2022-23. The projection is less than the finance ministry’s forecast of 5pc. Though the international financial institution has warned of climate risks, yet even if Pakistan manages to grow at 3.4pc, it will be less than regional countries.

India’s economic growth is projected to be 8.3pc in the current fiscal year and 8.7pc in 2022-23. In its latest report, the World Bank noted that India’s growth rate in the current and next fiscal years would be stronger than those of its immediate neighbors. The bank predicts Bangladesh’s growth at 6.4 and 6.9pc in 2021-22 and 2022-23, respectively, while Nepal is to grow at 3.9pc this fiscal and at 4.7pc in the next year. It also warned that per capita incomes might fall further behind advanced economies in 2021-23 in Bhutan, Nepal, Pakistan and Sri Lanka. The projections have come at a time when Pakistan badly needs to improve its growth to meet the needs of the country and a rapidly growing population.

The International Monetary Fund has also warned that emerging economies should gird for possible rough times as the US Federal Reserve prepares to raise interest rates and world economic growth slows because of the Omicron variant of Covid-19. It said that for now global economic recovery from the ravages of the pandemic should continue this year and next. But “risks to growth remain elevated by the stubbornly resurgent pandemic,” IMF economists Stephan Danninger, Kenneth Kang and Helene Poirson wrote in a blog post. “Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence,” the economists said, as these countries are also confronting elevated inflation and substantially higher public debt. Higher interest rates mean financing costs for some emerging economies with dollar-denominated debt will rise. These countries are already lagging behind in the global economic recovery and thus less able to absorb added expenditure. “While dollar borrowing costs remain low for many, concerns about domestic inflation and stable foreign funding led several emerging markets last year, including Brazil, Russia, and South Africa, to start raising interest rates,” the IMF said. Quicker Fed rate hikes could rattle financial markets and cause tighter financial conditions on a global scale, the blog says. The risk is there will be a slowing of demand and trade in the US, as well as capital flight and a depreciation of the dollar in markets of emerging countries. The IMF recommended that emerging economy nations “tailor their response based on their circumstances and vulnerabilities.” And central banks that are raising interest rates to fight inflation should engage in “clear and consistent communication” so people better understand the need for price stability, the international lender said.

Experts say 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. According to a 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. 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. 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. All indications suggest the economy would stay in its present state of low growth, low exports, and close to default, it warned. It anticipated further devaluation of the rupee or a more restrictive monetary policy and even more increase in administered prices. The people of Pakistan are paying a huge cost for years of poor economic management, it noted. 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. “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.

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. It may have paid back the original loan more than once and still owes it to the creditor. Between FY01 and FY20, external debt disbursed to Pakistan totalled $112.6b. During the same period, it paid foreign creditors a sum of $117.9b in principal and interest. Thus, it has paid back $5.2b more than it received. 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.

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.

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.