Pakistan’s economic woes seem unending. With macro variables in a nightmarish slump and the growth rate still not rebounded from last year’s flood, the fresh flood attack in Sindh has given another excuse for our economy to underperform. The country is a classic case of low growth, high interest rates, huge price hikes, rising inflation and continuous devaluation of rupee. This performance in the world context may not be strange as the best of economies like US and most of the European countries are also facing recession of the deepest kind; however in the context of its geographical neighbours it is unique with India, China of course galloping ahead, but also compared to Bangladesh and Sri Lanka who have all done much better than Pakistan.
The American Business Council held a summit last week to suggest remedies for an economy just not gearing up for any prominence in the world. The main suggestion was to focus on increasing the growth rate, as the current growth rate of hardly 3 per cent is not enough to enhance other macro variables to revive the economy. The simple difference between the revenues and expenses of the country has made the economy dependent on massive borrowing from the donor agencies and domestic debt is ballooning as well. The shortage in revenues is due to the deficit in tax collection targets each year. Despite fudging figures the FBR failed to collect tax from the limited taxpayers list that they have. The ABC council has proposed that all services and agriculture should be brought into the tax net but we all know that the vested interest of the feudals dominating our parliament would never let that happen. The government has been trying very hard to force the 1 per cent who pay taxes to pay more tax but the resistance increases each time. This is due to the obvious fact that there is a complete lack of faith on the usage of this money for public welfare.
The other factor that has made the economy imbalanced is the stubborn current account deficit where the imports have always out paced the exports. Normally a devaluation of currency is a stimulant for exports; however in case of Pakistan the devaluation has been a drag on the economy. With constant pressure on payments of all sorts any devaluation of rupee adds billions to our bills. Having a current account deficit is not all bad provided the import bills are for investment purposes. In many countries import bills have been much larger than exports but the composition of the imports has revealed a list of capital, machinery and technology that eventually will pay off in the long run. However looking at Pakistan’s import list we see a lot of spending on edible oil and many other consumption oriented items that will have no impact on the long run economic development of the country. Thus the rupee dollar rate that may hit Rs90 in the near future is also an indicator of the falling purchasing power of rupee and the diminishing value of our currency. This is especially peculiar when you consider how weak the dollar has been compared to other global currencies. Dollar, world over has been going through a downward spiral and losing its value but the rupee is so weak that it is struggling to hold its weight against a battered dollar.
Under such circumstances the government’s decision on discontinuing with the IMF program is enigmatic to say the least. The government is hailing it as a brave move to become independent but with the economy having no other source of additional revenue coming and the expenses soaring higher and higher this declaration seems another short term impulse that in the long run may back fire in a damaging way. The reason quoted by some inside sources for this decision is that with the elections round the corner and government popularity at a record low, the IMF conditions will be impossible to meet as some of them affect the government spending directly and others on the raising of prices that are directly hitting the public cost of living. The government has been under flak to live by the IMF requirements and thus has earned a bad image in the eyes of both IMF and the public by either not adhering or adhering to them. The billion dollar question is how the authorities fulfill the deficit if the IMF money ceases to be available. For now the most plausible way out seems to be more printing of new notes. This is such a fatal and dangerous strategy as it will further diminish the value of rupee making our imports even more expensive and also fuel the inflationary trend. The net effect on the economy is going to be negative. This may seem simple economics to most of us but to a government operating on a daily survival basis, to see through this equation, is a bit too much. We are after all being led by people who know the price of everything but the value of nothing.
The writer is an analyst, consultant and CEO of FranklinCoveyPakistan and can be reached at [email protected]
