Six-month review: Economic picture rosy, but not for long, says think tank

IPR says flawed policies for decades have caused Pakistan to lag behind

LAHORE: Pakistan’s economy is performing well with favourable signs of GDP growth, inflation, consumption, and private sector activities, but weak fundamentals detract from the positive picture, stated the six-month review by the Institute for Policy Reforms (IPR).

Budget deficit for fiscal year 2018-19 will exceed target while the current account deficit will end at an unprecedented high, stated the think tank’s report. It said that Pakistan is effectively in a debt trap where new borrowing is servicing past debt.

“Both domestic and external debt are at an all-time high. Continued weak fundamentals will damage the real sector and reduce growth rate. The longer the country postpones addressing the real causes of economic difficulties the worse would be its effect,” the report added.

While tabling this fiscal year’s budget, the government announced a combination of stabilising and growth measures to achieve its target GDP growth rate of 6% in FY18. These measures included higher revenues and lower current expenditure, as well as increase in investment, especially through foreign direct investment (FDI) from China and a large Public Sector Development Programme (PSDP).

“Continuous growth in government revenue for the past three years has helped limit the fiscal deficit. During July-December 2017-18, the revenue of Federal Board of Revenue (FBR) grew by a further 18%. On the other hand, investment has not kept pace with plans.

“Actuals for the half year show GDP growth rate will be close to target and above last fiscal year. Large-scale Manufacturing (LSM) has grown by 5.55%, 0.8% off target. With a favourable monetary policy, demand has fuelled production of consumer durables. Estimates for growth of major crops are favourable and half-year power supply grew by 11.8% over the last year.”

However, the think tank added that the positive picture may not continue for the long term. “Import of growth-inducing machinery declined by 3%, import of power generation machinery fell by 26% and construction machinery by 24%. The government has so far attributed the economy’s runaway current account deficit to such imports.

“Government policy has been adrift and two months before elections the economy is sliding into a morass of its own making. The immediate cause of this lies in what was until recently, adamant defence of a high rupee value.”

The IPR said that Pakistan’s perennially poor macro indicators are symptoms of a deeper malaise. “Elitist economic policies have caused chronic social and infrastructure deficit. This is also why we do not have a competitive economy or long-term economic growth. Exports are dependent on fiscal incentives. It has made Pakistan permanently dependent on foreign aid.

“Governance has not improved with no action to reduce the cost of doing business. We face today the outcome of deeply flawed policies of decades. Decision makers are focused on macro numbers without concern for what drives those indicators.

“Sustained economic growth needs higher savings and investment, including public investment. Inevitably, this will need higher imports, and more external capital. Breaking out of this circular logic that constrains the economy is government’s challenge. It can be solved only by committing to well thought out policy over the long-term.”

Published in The Express Tribune, April 10^th, 2018.

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