Pak’s troubled economy is hurting more than Imran Khan wants to believe | Opinion
The Pakistani economy was in shambles much before the lockdown and has been so for decades. There is not much scope for downside, it is already scraping the bottom of the barrel.Updated: Apr 26, 2020, 12:52 IST
Even as the Covid-19 pandemic continues to hog the limelight with nearly three million cases around the globe, almost daily there are a couple of stories on how the outbreak is likely to impact Pakistan’s economy. That the Pakistani economy was in shambles much before the lockdown and has been so for decades, should give people strength. There is not much scope for downside, it is already scraping the bottom of the barrel. As far as the cost of living and quality of life of the masses are concerned, these might get a little worse, but nothing people are not already used to. Pakistan is perhaps one of the poorest countries in the region and had it not been for the bailouts and concessionary loans, it would have fallen to pieces years ago.
Before coronavirus disease struck the world, Pakistan’s GDP growth rate was estimated to be 3.3% for 2020 and 2.4% for 2021, its lowest in a decade. Now, Pakistan’s real growth rate for 2020 has been projected by the World Bank to go into the negative, between -1.3 per cent and -2.2 percent.
Pakistan’s total GDP in 2017 was roughly $305 billion, lower than that of Iran ($454 bn), and expected to grow to $340 billion in 2020. Compared to Iran, a country struggling under economic sanctions, Pakistan’s per capita GDP in 2018 was $1,565, much lower than Iran’s at $5,417. It also scored significantly higher than Iran in its debt to GDP ratio which was 71.69% vs 32.18% of Iran. Its defence expenditure in 2018 was 18.5% of its budget, much higher compared to its rival neighbour India at 8.74%.
Struggling with a double-digit inflation, almost 13%, and a budget deficit of almost 9%, Pakistan would need to grow in double digits to break even. The likelihood that this will happen is next to nothing. In layman terms, the country will continue to get poorer and deeper in debt as it borrows more and more to meet its expenditure. Low sources of revenue combined with high non-development expenditures has been Pakistan’s problem for a long time and with or without Covid-19, it will continue to remain so. Interestingly, Pakistan has one of the lowest tax to GDP ratio (1%) which means that it is basically the poor that bear the tax burden through indirect taxes perpetuating the cycle of poverty.
Amid the corruption, mismanagement and misplaced priorities, the one thing that has kept Pakistan afloat has been borrowings, both domestic and foreign. It has received $ 1.39 billion under a rapid financing instrument of the IMF to combat the pandemic. The Pakistan Institute of Development Economics has advised economic diplomacy initiatives to reschedule its other bilateral debts to the tune of $ 24 billion.
Even though the Chinese have indicated their willingness to consider Islamabad’s request to reschedule debt favourably, the numbers just don’t add up for a pretty picture. Its debt to GDP ratio is 85% and expected to increase to 90% with negative GDP growth and a higher budget deficit than the previous year (8.9 per cent). Pakistan’s total external debt stands at a whopping $111 billion. Unless rescheduled, its debt servicing obligation for 2020 is over $29 billion. The numbers keep increasing as Pakistan borrows more to be able to service its debt obligations and pay for its imports, a classic debt trap. Its foreign exchange reserves at under $11 billion are barely sufficient to cover 3 ½ months of imports.
While Pakistan owes over $11.3 billion to the Paris Club, $27 billion to multilateral donors, $5.765 billion to International Monetary Fund, and $12 billion to international bonds such as Eurobond, and Sukuk, the largest chunk, more than $22 billion, is owed to China, largely as a result of the China Pakistan Economic Corridor (CPEC). When the project was launched in 2014, it was valued at $46 billion. By 2019, this figure had gone up to $62 billion, increasing its indebtedness to China in a very short time. Moreover, this indebtedness has come at a time when the country is already living beyond its means.
The unsustainable situation keeps pushing Pakistan to borrow more, including from the IMF, which despite failing to introduce structural changes a dozen times, had agreed last year to conditionally lend $6 billion to “reset” its economy. One doesn’t need to be a rocket scientist to predict the outcome. Like on earlier occasions, the latest decision is also based more on optimism than reason.
With the CPEC project far from over and cost overruns, it is very likely that Pakistan will have to reschedule its debt several times before it’s over. It is following the same pattern as that of Sri Lanka, which, caught in a similar debt trap, finally had to swap debt with equity and hand over control of a strategic resource to China. The fate of CPEC seems to be headed in the same direction. Frequent warnings from observers have been shunned by the Pakistan establishment with the argument that this is propaganda directed against its all-weather friend and intended to spoil their relationship.
By the time Pakistan wakes up to the realisation that China is not its “milk and honey” bosom buddy and has only encouraged a relationship of dependency, it just may be too late.