The business cycle of Pakistan’s economy has shown anomalous behaviour over the last many years. The growth rate peaked at nine per cent in 2005 before hitting the bottom in 2009. It improved a bit to 4.2 per cent last year, but not enough to impact unemployment and poverty. Indeed, the last couple of years have been poignant and marred periods for the economy.
According to the economic survey 2010-11, the revised estimate of GDP growth for fiscal year 2010-11 will settle at around 2.4 per cent. There are a number of factors which have slowed the growth process considerably. The 2010floods top the list, having washed away two percentage points from growth. As a consequence, total economic losses are estimated to be around Rs850 billion. Oil prices have increased by 78 per cent since last year. Inflation, too, remains in double digits.
The final figure for the fiscal deficit, similarlyl, is expected to overshoot five per cent of GDP. The tax-to-GDP ratio has been languishing below 10 per cent. Thus government borrowing for budgetary support increased from Rs397.6b in 2009/10 to Rs614.2b this year, which has crowded out private sector investment significantly.
Credit to private sector has marginally increased from FY 2009/10. Upsurge in terror related incidents have added fuel to the fire. Until 2011, the war on terror has cost the country a whopping $67 billion. As a consequence, Pakistan’s investment-to-GDP ratio declined from 22.5 per cent in 2006/07 to 13.4 per cent in 2010/11.
The IMF forecast for GDP growth rates and inflation expects Pakistan to continue with double-digit inflation well into 2012. Both growth and inflation are disappointing when compared with other South Asian countries and it also confirms that the economy is more vulnerable to both exogenous and endogenous shocks than any other regional country.
Ironically speaking, spending on PSDP as a percent of GDP has been languishing around two per cent of GDP for some years now. It is a very disappointing number when compared with the current state of socio-economic indicators, population growth rate and existing (if threadbare) infrastructure. Indeed, growth is under stress and waiting for stimuli packages from the government, much the same way as governments of India, China, Japan, and the US have done in the recent past.
As per planning commission estimates, the population of Pakistan is growing at a rate of 2.05 per cent per year and will reach to 210.13 million by 2020. The commission’s findings suggest that availability of agricultural land per person is as low as about 0.2 hectare and even that is under stress due to erosion, water logging and salinity. With current levels of spending, one can foresee deterioration in all socio-economic indicators. In the backdrop of a high population growth rate, there is already shortage of power and gas; homes; schools; colleges and universities; hospitals; dams; roads; bridges; and so on.
Economists are usually accused of three sins: an inability to agree among themselves, stating obvious facts, and giving bad advice. Going forward, in order to push the economy out of the woods, the government has to act now and take tough economic measures. Our history suggests that most economic problems are home-grown, which means it is within our power to remedy them.
Security situation in the country, flight of capital, falling investments, energy crisis, floods, increasing food inflation and dwindling tax-to-GDP continue to erode growth amidst persistent lack of adequate government patronage. Poor governance has left deep cuts in the economy, which are unlikely be healed in the short run. It is trapped in stagflation — a state of low growth-rate coupled with increasing unemployment and inflation.
The current fiscal policy stance is weak and is unable to address the issue. Therefore, in order to accelerate the growth process and tackle challenges of poverty and unemployment, fresh injection of money is needed now. A larger portion of current government’s borrowings must be spent to create jobs and improve infrastructure.
This can be done through increasing allocation of money for public sector development projects (PSDP). Spending on projects like dams, roads, parks, bridges, health, education, etc, has a strong bearing on employment, increasing income levels and improving socio-economic indicators of the country. We must understand the gravity of the situation. Failure to take decisive measures now will keep the economy derailed for a long time
The writer is News Editor, Profit
