NationalVolume 14 Issue # 18

In search of structural reforms

After the World Bank and Asian Development Bank, another survey has come out which says that Pakistan’s economic growth has lost its momentum and there will be a slowdown in all sectors.

The annual Economic and Social Survey of Asia and the Pacific 2019 titled ‘Ambitions beyond Growth’, released by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) projects that Pakistan’s GDP will remain the lowest in the region at 4.2 per cent in 2019 and 4 per cent in 2020 compared to Bangladesh’s 7.3 per cent, India 7.5 per cent, Maldives and Nepal 6.5 per cent each in 2019. According to the survey, overall economic conditions in the region are stable with the projected 5-5.1 per cent GDP growth in 2019 and 2020 respectively. However, export-oriented sectors face difficulties due to weaker demand in Europe and possibly in the US, and looming uncertainty over ongoing US-China trade war.

The report says that Pakistan’s economy is experiencing severe balance of payment difficulties amid large fiscal and current account deficits and mounting pressures on the currency. In the larger context, the report notes that inflation in the developing Asia-Pacific region is forecast to increase moderately in 2019 to 4.2pc before dropping to 3.8pc in 2020. However, potentially higher tariffs against the backdrop of trade tensions and rising uncertainties, currency depreciation and unfavourable weather could push up consumer and food prices. According to the survey, the region’s medium-to-long term prospects depend on structural transformation and broad-based productivity growth. The report cautions against countries shifting from an agriculture-based economy to one in which services play a dominant role, bypassing the manufacturing sector.

However, it is possible that new frontier technologies may reduce the scope for industrialisation in “late entrant” developing countries, while high-value-added services require skilled workers. This calls for investment in people and enabling infrastructure. Stating that the next phase of structural transformation in the region must be environment-friendly, the survey illustrates that investments to speed up transition to more resource-efficient systems of production and consumption would not only reduce carbon emissions by a tenth, but deliver high economic returns and over time can reduce net financial costs to zero.

The 2019 survey devotes a lot of attention to the issue of sustainable growth. It points out that achieving Sustainable Development Goals by 2030 would require an annual additional investment of $1.5 trillion for Asia-Pacific developing countries — equivalent to 5 per cent of their combined GDP in 2018. The survey specifically mentions that despite rapid economic growth, too many people are left behind, without a fair chance in life, while environmental degradation has reached alarming levels, threatening the sustainability of past development gains. Hence, keeping the old paradigm of prioritising GDP growth at all costs is neither feasible nor desirable.

On the other hand, the IMF in its annual report ‘World Economic Outlook’ (WEO) has also painted a gloomy picture of Pakistan’s economy. It has said Pakistan’s economy will grow at an average rate of just 2.5% during the next five years and its external imbalance will remain elevated. The IMF has also predicted only 2.9% economic growth rate for this fiscal year, ending on June 30. Titled “Growth Slowdown Precarious Recovery”, the IMF report truly mirrors the depressing economic situation in Pakistan. The average 2.5% growth rate for five years is less than half of what the PTI government has targeted for its 5-year term. The report says in the next fiscal year, the economic growth rate in Pakistan will further slow down to only 2.8% and by 2024 the average pace will be just 2.5%. It is the lowest economic growth rate predicted by any multilateral lender.

The report has projected Pakistan’s current account deficit at 5.2% of the GDP for this fiscal year that will require over $14 billion for bridging it. The 5.2% current account deficit is higher than the estimates of the Finance Ministry. The report further says that the unemployment rate in Pakistan will remain unchanged in the current fiscal year but will marginally increase to 6.2% in the next fiscal year. But the independent economists have predicted a nearly 8% jobless rate due to the slowing economic growth rate.

The IMF puts Pakistan in the same league as the Middle East, North Africa and Afghanistan. In its opinion the economic growth in this region would decline to 1.5% in 2019, before recovering to about 3.2% in 2020. Pakistan has made significant monetary adjustments that have started impacting every sphere of life. On the other hand, the exchange rate depreciation has fuelled inflation.

Pakistan’s growth model needs to change. The previous government made a lot of noise about GDP growth which was achieved at the cost of expensive foreign loans. The growth figures looked favourable but the real economy shrank as evidenced by steadily declining exports. Industrial productivity hit a plateau while agriculture stagnated. Unemployment too touched new levels. To put it simply, growth is meaningless if it does not benefit the people at large. This calls for structural reforms with an emphasis on shifting to human and social development. The PTI government has made a beginning towards it with its poverty alleviation and mass housing and health card programmes. But there is a long way to go before the desired goals can be achieved.