Economy in 2022 and beyond
The think-tank noted that the pressure of continued borrowing for consumption and debt servicing increased the fragility of the external account. PHOTO: FILE
Pakistan’s current economic challenges are enormous but they are not insurmountable.
The first challenge facing Pakistan’s economy is its current account deficit, second is fiscal imbalance, third is low agricultural productivity, fourth is lower industrial output and fifth is flawed structure of the political economy.
The current account deficit has already reached 5.3% of GDP, according to the State Bank of Pakistan (SBP). Fiscal imbalance is expected to rise to 8.2% of GDP, according to some estimates being presented by leading independent economists.
This twin deficit has become all the more troubling because unlike the past there is no room for massive external borrowing as the country’s total external debt and liabilities have already reached 93.7% of GDP, shows the SBP statistics for the first quarter of current fiscal year.
A straight $3 billion Saudi Arabian loan obtained during the second quarter may further increase this mind-boggling debt-to-GDP ratio.
Now, if the government doesn’t go for any substantial external borrowing, how on earth will it be able to meet its foreign exchange obligations?
Naturally, both the current account deficit and overall balance of payments deficit will soar. In that case, the rupee will come under further pressure.
This means a resurgence in imported inflation that the government and the central bank have recently tried to contain – the former through the imposition of higher duties on roughly 200 tariff lines and the latter through a 250-basis-point monetary policy tightening in less than a month. The situation is grim.
A fiscal deficit of 8.2% in the current fiscal year, up from 7.1% in the previous year, would further constrain development spending, thereby impeding the growth potential of the economy in the medium to long term.
In the short term, it would compel the government to borrow more from commercial banks at the prevailing double-digit interest rates. This would further increase its domestic debt requirements, leading to further expansion in its fiscal balance in the next fiscal year.
The only way out of this quagmire is a meteoric rise in revenues. Tax revenues have shown a handsome growth of 36.5% in the first five months of current fiscal year and that is a very welcome development.
But this pace of growth would surely decelerate in the coming months due to the economic stabilisation measures taken recently by the government and the central bank.
Much would depend on how fast the non-tax revenue of the government increases. There, too, not much reason could be found to become optimistic because most of the state-owned enterprises either continue to report losses or are just in the process of minimising losses.
Profit made by the central bank through its operations in the inter-bank money market and inter-bank forex market constitutes non-tax revenue of the government and that is where the only silver lining exists.
But one must remember that profit-making is not at all the primary objective of the central bank and as such banking on the profit earned by the SBP is not a wise thing to do.
Overcoming challenges
Pakistan’s economic challenges are enormous. Aren’t they?
Prime Minister Imran Khan’s government has adopted a “hybrid” approach – a combination of both traditional and non-traditional methods for overcoming economic challenges.
But the problem is that most of the measures the government and the central bank have taken in the recent past or are taking now will take time to yield the desired results. And, by that time (only one and a half year from now) a new government will be formed.
What happens post-2023 elections cannot be predicted now. But going by Pakistan’s experience, fears about discontinuation of some of these policies seem genuine.
If such fears turn out to be true, then the ongoing documentation and digitalisation drive may be the first casualty. But if it is allowed to continue, one can expect Pakistan’s economy to become stronger.
On the other hand, PM Khan’s traditional approaches to fix economic issues, like pampering builders and developers, over-reliance on remittances and doling out audit-free incentives to some business classes including exporters, will continue to create negative ripple effects in the economy.
Even during the remaining half of current fiscal year and the entire new fiscal year, the economy is bound to suffer from short-termism and policy U-turns of the PTI government. Theoretically speaking, there are five key macroeconomic objectives a government seeks to achieve during its tenure – economic growth, job creation, redistribution of income, price stability and stability in balance of payments.
Even a cursory look at the official datasets reveals that the current rulers are yet to achieve any of these objectives to their satisfaction – let alone to the satisfaction of 220 million Pakistanis.
As we enter 2022, let’s hope the government at least gets some partial success in its remaining 18 months in power in creating jobs, pushing economic growth above 5%, bringing down inflation to 7-9% range, minimising the current account and overall balance of payments deficit.
As for the targeted income redistribution in favour of the poor, building any hope during any government proves futile. The best we can have is the trickle-down effect of high growth, affording a better lifestyle to part of the middle class for a brief period.
The writer is an electronics engineer and pursuing master’s degree
Published in The Express Tribune, January 03, 2022.
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