FeaturedNationalVOLUME 18 ISSUE # 08

Pakistan’s economic mess and the way out

Last week, the Pakistan Tehreek-e-Insaf released a whitepaper which paints a bleak picture of the national economy. Its basic thrust is on the negative impact of the policies of the current PDM government on the country’s economy. According to the document, inflation has increased by 45% in the past eight months, and all economic indicators including exports, foreign direct investment and remittances, have shown a downward trend since April last year.The international agencies’ credit rating has remained negative throughout the last eight months, while the risk of default on loan payments has increased manifold.

Among other things, the document cites the example of the agricultural sector which has suffered a decline due to the incumbent government’s wrong decisions, and notes that Pakistan must pay back $127 billion in external debt, with 37 percent of the country’s GDP to be dedicated to servicing this debt. Poverty, unemployment and inflation have risen beyond acceptable levels. There was zero investment in agriculture and industrial sectors which has made the country food deficient and resulted in increasing imports. On the other hand, the government has created a mess in the energy sector by overbuilding the power sector supply through imported fuel power plants. The whitepaper notes that the annual capacity payments were Rs450 billion in FY2017-18, which rose to Rs1.4 trillion in FY2022-23.

The PTI whitepaper points out that the current account deficit (CAD) it had inherited was $19.2 billion, while the State Bank reserves stood at $9.4 billion. Similarly, the fiscal deficit was 7.6 percent of the total gross domestic product (GDP), and the debt-to-GDP ratio was 64pc. The document, while mentioning the declining exports and increasing imports in the country during the PML-N tenure between 2013 to 2018, observes that the value of the rupee tumbled by 23pc against the US dollar.

While claiming that the country’s economy was on the brink of collapse when the PTI government took over in 2018, soon after coming to power, it needed $32 billion for loan payments. As funds were not available from other sources, the PTI government was forced to approach the IMF which imposed tough conditions. As a result, the government had to increase the discount rate by 325 basis points, and also electricity, power tariffs and fuel prices. But the PTI succeeded in reducing the fiscal deficit to 5.5 per cent of GDP and increased tax revenue from Rs3.7 trillion to Rs5.5 trillion in a single year.

As the last Economic Survey showed, after 17 years many important economic indicators had turned green. However, in the last eight months, the prices of essential commodities – including petroleum products and power – increased by up to 200 percent. According to an estimate, 1.5 million people have lost jobs in the textile sector alone, while the rupee is in a free fall against the dollar.

No doubt, the PTI government achieved a degree of economic stability by raising exports and speeding up the wheels of industry. But there are critics who say that during its rule the PTI failed to introduce basic structural and institutional reforms for sustainable economic growth. For example, no action was taken to dispose of loss-making state-owned enterprises or set up export processing zones.

It has also been pointed out that the whitepaper does not address the issues of long-term market reforms for wholesome economic development. The PTI talks about economic successes of China and the Scandinavian countries, but does not appreciate the fact that these countries have followed a different path. In China, for instance, not all prices were liberalized, and in turn, a ‘dual-track’ pricing policy was followed. In the Scandinavian countries, policies of social democracy – the middle way between capitalistic and socialist systems – were followed.

Another point of criticism is that throughout the PTI’s tenure in government, monetary tightening was seen as an important tool to deal with inflation, even when inflation in Pakistan traditionally is a fiscal/governance/supply-driven phenomenon and a lot more so ever since the assault of a global supply chain crisis. It is also said that the economic successes of the PTI, when in government, lacked the sound, wholesome, and unified sense of direction to warrant the appreciation they could generate for the party.

In the end what matters in ensuring long-term sound economic growth is the quality of economic institutions, the capacity of the public service and the strength of the public sector in dealing with the ills of market mechanisms.

At the moment default risks are high and poverty and inequality are rising. This is all due to the fact that there is political instability in the country. Experts are unanimous in their opinion that there is a need to install a stable government through elections which can take long-term decisions and negotiate firmly with international financial bodies and foreign governments. There is no other way out of the economic mess we are in at present.