How Pakistan can reignite its crumbling economy

Published on Aug 30, 2022 08:01 PM IST

Neither Pakistan’s army nor the political class has shown any inclination to address the underlying socioeconomic causes of the deepening crisis. This needs urgent change

Pakistan needs assistance to combat floods. But its long-term structural problems have to be addressed internally. (Reuters) PREMIUM
Pakistan needs assistance to combat floods. But its long-term structural problems have to be addressed internally. (Reuters)

In a recent essay in The Economist, Pakistan’s Prime Minister (PM) Shahbaz Sharif stated that his country’s latest economic crisis is borne out of a challenging global policy environment, but also acknowledged that this may stem from home-grown weaknesses left unattended for the better part of five decades. External conditions have indeed made recovery difficult, but they cannot be the primary cause of the crisis in an economy where exports are only 10% of the output and foreign direct investment (FDI) accounts for less than 1% of gross domestic product (GDP). In the middle of this conundrum, the country is locked in an escalating confrontation between the government and the Opposition, led by former PM Imran Khan.

Pakistan has benefited from an extremely benign foreign dispensation, with 23 International Monetary Fund (IMF) bailout packages over the years; the country has also successfully exploited its geopolitical situation to get large amounts of assistance from donors such as the United States, Iran, Saudi Arabia, and China. Yet, this is no longer helping.

According to consultations with the IMF in February, Pakistan had a budget deficit of 6.9% of GDP and a current account deficit of 4% of GDP in FY 2021-22. Pakistan’s government debt is 86.7% of GDP. It has a balance of trade deficit of $25.25 billion. A positive feature was workers’ remittances, which stood at $26.179 billion last year. In July, though, worker’s remittances dropped by 8%. If this trend persists, this may further widen the current account deficit.

The government’s budget proposal targets a tax collection of $31.5 billion, with a 5% economic growth. It is unrealistic to expect that in a more adverse environment, the growth rate will surpass the 4% clocked last year. In response to additional fiscal disciplinary demands by the IMF, the government announced the end of subsidies on petrol and a super tax on the corporate sector. The belt-tightening may have cost Pakistan Muslim League (Nawaz) the loss of 15 out of 20 seats in the Punjab assembly by-elections held immediately after. This is a major loss for the ruling party, which counted Punjab as its base and doesn’t control any province now.

Sharif’s government desperately needs IMF support to enable the release of $1.7 billion as the next tranche of assistance under IMF’s Extended Fund Facility (EFF programme). Most of the bilateral assistance is also tied to this. Despite announcements by Qatar, United Arab Emirates and Saudi Arabia, uncertainty about the timeframe of these investments persists. This makes Pakistan’s situation precarious as its foreign exchange reserves have dropped below $8 billion, or just 1.5 months’ import bill.

Pakistan’s economy suffers from major structural problems. First, poor resource mobilisation. Pakistan’s tax-to-GDP ratio for FY 2022-23 was projected at 9%. Large swathes of the economy are outside the tax net. Agriculture (22.7%) and retail (18%) together account for 40% of GDP. Yet their contribution to tax collection is negligible.

Second, an extremely low savings rate. According to World Bank figures, Gross Domestic Savings (% of GDP) for Pakistan in 2021 was 4.5%. Even war-torn Afghanistan had a higher savings rate of 10.8%. This figure for Bhutan was 17.1%, Sri Lanka 20.1%, Bangladesh 25.3%, India 29.3%, and China 44.7%.

Third, Pakistan’s external debt, which was at $122.83 billion, accounting for 40% of GDP in FY 2021. According to the chairman of the State Bank of Pakistan, it needs external financing to the tune of $33 billion this year. Interest payment, together with defence expenditure accounted for 51.10% of total revenue receipt in the last fiscal. Defence expenditure is stated to be 2.8% of GDP, though this appears to be an understatement.

Sharif recently described Pakistan as being “economically enslaved” by the IMF, though his country is utterly dependent on that institution to avoid a sovereign default. He proposed a charter of the economy to be adopted by political parties to ensure the long-term stability of economic policies. This requires a political consensus, which is not possible in an environment of confrontation.

Neither Pakistan’s army nor the political class has shown any inclination to address the underlying socioeconomic causes of the deepening crisis. Pakistan needs assistance to combat floods. But its long-term structural problems have to be addressed internally.

DP Srivastava is a former ambassador

The views expressed are personal

Enjoy unlimited digital access with HT Premium

Subscribe Now to continue reading
freemium
SHARE THIS ARTICLE ON
SHARE
Story Saved
×
Saved Articles
Following
My Reads
My Offers
Sign out
New Delhi 0C
Wednesday, September 28, 2022
Start 15 Days Free Trial Subscribe Now
Register Free and get Exciting Deals