Pakistan’s weak economic indicators are a consequence of policy making that deal with symptoms and not fundamental issues. This is stated in the six-month economic review issued Tuesday by the Institute for Policy Reforms.
The report says that sudden rise in the current account deficit is serious. ‘At 2.6pc of GDP it has breached already the year’s target of 1.5pc of GDP’. Pakistan’s exports as a ratio of GDP are at a historic low. This ratio was in double digits in 2000-10. It is now about 5pc. Pakistan has had higher current account deficits before. But they were financed by grant aid or FDI. In other cases, we had to go for IMF arrangements’.
Having just ended an IMF programme, it is unclear what choice the country has now. Part of the external debt also finances current expenditure. Government is borrowing to service debt. SBP has imposed a condition of 100pc cash margin on consumer goods import. We could see more restraints. This is happening during low energy prices.
The economy’s vulnerability will continue. At 2.4pc of GDP in December 2016, fiscal deficit will exceed government’s target of 3.8pc of GDP. Also, from now on, SBP and government must keep an eye on increase in inflation, though it is still under control.
The viability of the external sector depends on exports and workers’ remittance. These have been falling. The fall in exports is because of low competitiveness and lack of manufacturing depth. We have yet to see serious analysis or a strategy in response. More significantly, there is no thought given to job growth for the two million young Pakistanis entering the job market each year. Economic development results from political choice and leadership’s commitment to growth.
Investment is essential for economic growth. Recently, our investment has hovered around 1pc of GDP. By comparison, in 2015, China, India, and Vietnam invested 46pc, 32pc, and 28pc of GDP respectively. The growth rate of these economies that year was 6.9pc, 7.6pc, and 6.7pc respectively. The additional amount needed to raise Pakistan’s total investment to the minimum desired level of 20pc of GDP, is Rs 1.7 trillion or about $16 billion annually. This must come from increase in national savings and higher FDI. Incurring further debt, even if available, is un-sustainable. However, FDI in 2016-17 may be short of government’s target by about $2 billion.
The report recognizes encouraging signs in the economy. With low discount rate, private credit has grown. Equally, import of machinery and of POL products are signs of revival. An improving security situation, CPEC investments, and increase in development spending should strengthen investor confidence.
Public investment is important to increase economic productivity and to crowd in private investment. IPR is concerned at some of government’s priorities, which have reduced budget for higher education and health. The water sector is one-third lower than its budget for 2014-15.
Federal government debt has increased. Though increase is lower than the last year, it has enhanced GoP’s burden. Total increase in public and private external debt and liabilities was over $1 billion for the half year.
