State Bank has released its yearly report on the economy of Pakistan. The figures confirm a continuing economic downturn. Our GDP growth went from5.5% in 2017/18 (PMLN’s past year) to 1.9% in 2018/19 and -0.4 the % last year 2019/20. This coming year too the government expects GDP growth to be 2 per cent and World Bank forecasts an anaemic 1 per cent. Given our population increase rate of 2.4 per cent, in each one of the three years, PTI will create Pakistanis poor on average by 0.5percent (18/19), 2.8% (19/20) and 1.4% (20/21).
This isn’t a record we can be satisfied with the current situation of Pakistan economy. Inflation increased from 3.9% in 17/18 to 7.1percent in 18/19 and 10.2percent in 19/20 with metropolitan food inflation in 14.6percent and rural food inflation in 16.4 per cent. Given that less well off individuals spend nearly all their earnings on food, that can be actually causing untold misery on inferior and lower-income families. Research indicates that our GDP should increase by 5 to 6% to offer employment to 1.5 million new people entering the labour force each year.
With the Pakistan economy 2019 growing at 2 or 1% or shrinking, we have created unemployment of about 2.5 million people and also have driven roughly 10 million people to abject poverty. What are the key factors which can play a vital role to improve the economy of Pakistan? One reason for the rampant growth in inflation is a fast increase in the money supply. State Bank forswore buying government treasury bills straight (hence creating money) but then bought over Rs 1200 billion worth of bonds out of the commercial bank (consequently earning money). The 17% increase in money supply last year and enormous increases in the purchase price of utilities, also have led to the large inflation. The buying of bonds was perhaps necessary so as to help banks satisfy the voracious appetite of the authorities for debt.
The deficit retained increasing fast, from 6.5percent in 17/18 about 9.1percent in 18/19 and 8.1percent in 19/20 (along with the deficit was 8.1percent instead of even higher because the government let circular debt increase at record levels). The record-high deficits in PTI’s two years led to the largest increase in public debt ever seen. The authorities increased gross debt with 11,444 billion in just two years (compared to Rs10,661 billion in PMLN in 5 years). Our debt to GDP has gone from 72% to 87% in two decades. Similarly, total external debt & liabilities to GDP has also increased from 33.4% in June ’18 to 45.5% on June ’20. Our entire debt and external debt ratios are now increasing at a dangerous clip. The government has also failed to increase tax collection.
Against the previous year’s goal of Rs 5555 billion, it only increased Rs 3950 billion, although covid hindered in the group of Rs 300 to Rs400 billion. This year the goal is 4950 billion but again the trend seems to suggest Rs 4300 billion sprinkled a miniature budget. Given the enormous devaluation, this government’s revenue collection was abysmal. At the first quarter of the past year, our budget deficit was 0.4percent of GDP. This fiscal year (20/21) can it be 1.1% of GDP so I fear we might end up with another year of more than 8 or 9% of GDP budget deficit. This enormous shortage (or dissaving) cannot be helpful for the capital formation or investment. Our exports in 17/18 were $24.75 billion. They fell in PTI’s first season by $500 million despite enormous devaluation and last year decreased (in part because of Covid) by yet an additional $1.8 billion.
In the first quarter of this year, they’re below last year’s level. So PTI has not been in a position to boost export even after the 40% devaluation. Our imports have been curtailed because of devaluation, a historic decrease in world oil prices, slowing down of Pakistan’s economy and gains of custom duties. The precipitous decline in import has changed into our existing account to an excess. Plus happily, during the previous five weeks, our remittances have also considerably increased. This is expected to continue at least till covid-related travel limitations wane.
What are the key factors which can play a vital role to improve the economy of Pakistan?
The national debt of last 70 years, if say USD100 has increased to USD151/160 in the last two years and is rapidly increasing and Hafeez Sheikh says he sees bright economic indicators from four corners he needs to have his eyes checked and all the two main crops wheat and cotton are on a sharp downward spiral. They will bring the Pakistan economy to the grinding halt and then will drumbeat that they have reduced the C/A deficit.
This current account surplus is forecast to become a deficit once the market picks up and imports rise. This will further pressure our foreign exchange reserves. Our reserves right now are around $12 billion, of which $4.9 billion are due to short-term swaps, as well as another $7 billion is currently in dollar deposits from friendly countries. This is quite a precarious position and demands that we restart our IMF programme along with The IMF is rumoured to be requesting two things: reduction in the huge and burgeoning budget deficit and also power-sector curved debt.
To reduce the deficit, authorities should take action to reduce expenditures and raise earnings without presenting new taxes. It also needs to attempt to decrease circular debt by collecting more invoices (now at 87% vs 93% below PMLN) and decreasing T&D losses (now at 19 per cent versus 18 per cent below PMLN). It shouldn’t take the easy way of increasing taxes and power tariffs. This will truly set the market in a tailspin. The people of Pakistan are still paying for its imprudent policies of PTI, such as accelerated devaluation, enormous increases in gas and power tariffs, excess increase in rates of interest, crony capitalism (glucose, wheat, medicine, etc) and general incompetence.