Background
Pakistan has a robust and progressive economy, incorporating essential features of a typical modern formal economy; at the same time it has deep rooted fault lines as well. In line with public sentiment it has also incorporated numerous instruments of Islamic economy. In addition, there are informal and philanthropic components of the economy. Volume of Gross Domestic Product at the time of independence was Rs. 57973 million that has grown to Rs. 5932.5 billion, likewise per capita income has grown from US$ 164 to US$ 1641. Pakistan has often faced tumultuous conditions, yet it maintained an average growth rate of 6 percent. Though the start was predominantly agrarian, Pakistan’s economy now comprises of Industrial Sector (20.91 percent of GDP), Agriculture Sector (18.86 percent of GDP) and a sparkling Services Sector (60.23 percent of GDP. The silver lining is that the projected poverty rate continues to decline. Poverty at the $1.90 international poverty line is estimated at 4.9 percent in FY18, down from 6.1 in FY13, the year when latest actual figures were made public. Over the same period, a 12 percent reduction in poverty is also projected for the $3.2 poverty line, while a lower improvement (4 percent) is projected at the $5.5 poverty line.
Pakistan did not inherit any major industrial or communication infrastructure at time of independence and most of the resources that formed Pakistan’s share were held back by India on one pretext or the other. Mahatma Ghandi had to threaten to go into a ‘fasting till death’ to have only a part of it released by Indian government. So, Pakistan’s journey towards economic and infrastructure development has been akin to a proverbial “starting from a scratch”.
The journey of Pakistan’s economic growth is quite interesting, besides the usual country level successes (and failures), it is also a tell-tale of enduring strategic partnership with the Kingdom of Saudi Arabia (KSA). Saudi Arabia has always been a fall back of last resort during Pakistan’s economic difficulties.
Challenges
Pakistan’s economy faces arduous challenges which are almost perpetual, such as: sustained high population growth rate (over 2 percent); mainly thermal fuel based high cost electricity; shortage of water and electricity; narrow tax base leading to low tax to GDP ratio (12.4 percent); inefficient revenue collection system; inadequacy of infrastructure; high inflation and interest rates, etc. Tax regimes do not provide even playing field for all sectors. Agriculture Sector’s tax contribution is little over one percent of gross tax, the Industrial Sector accounts for around 17 percent of tax. Services are inordinately overtaxed. Recently the Supreme Court had to intervene to reduce taxation on mobile telephone users and gasoline to provide much needed relief to consumers. Regional and global market dynamic and interplay of American sanctions here and there often make unpredictable negative impact on the country’s economy. Single commodity export (textiles) exposes it to vulnerability of price variations of cotton in the international market, likewise fluctuation in oil prices is another factor making unpredictable impact on import bill without any prior warning. Managers of Pakistan’s economy virtually remain on their toes and function like a typical emergency ward of a hospital. Over the decades they have performed fairly well, as there is not even a single case of economic default.
Economic Development: Concept, Strategy and Performance
Pakistan’s economic development concept is embedded in oft quoted foreign policy goals: “Building Peaceful and Prosperous Neighbourhood” and “Trade not Aid”. Pakistan is a member of World Trade Organization (WTO) and subscribes to all instruments of international trade, Pakistan’s trade is wide ranging and diversified, the US is the largest destination of Pakistani goods while Kingdom of Saudi Arabia is the largest destination for Pakistan’s white and blue collar work-force. Overseas remittances account for 4 percent GDP of Pakistan (US$ 19.6b during FY18), a quarter comes from Saudi Arabia. Pakistan has been granted Generalised Scheme of Preferences (GSP) status by the European Union. Cheaper consumer focused imports from China have brought household electronics, mobile phones and Laptop computers within the reach of lower strata of society, hence giving a semblance of prosperity; though it has resulted in closure of some domestic industrial units which could not compete. Pakistan rolled out 4G in 2014, aiming to capitalize on over 140 million mobile phones in the country. Several mass transit systems have been developed throughout Pakistan.
Pakistan’s society is inclined towards consumerism, savings are marginal, as a result imports always exceed exports by huge margin (gap is US$37.7b in FY18; with imports standing at a record high at $60.9 billion) causing unsustainable Current Account Deficit (over 16 billion in eleven months of FY17-18). Over borrowing is a national habit and now external and domestic borrowing stands at over 72 percent of GDP. Public debt of Rs. 24.5 trillion includes domestic debt of Rs16.5 trillion and external debt of Rs8 trillion. The financing of the current account deficit by taking more loans is one of the reasons for high debt accumulation. Average maturity time of public debt had come down from 4.5 years in 2013 to 3.7 years in 2017. The indicator of debt maturing in one year also deteriorated in recent years and now 44.4 percent of the total debt is maturing within one year. Debt increased mainly due to the fiscal deficit, IMF loans, balance of payments requirement and rupee depreciation. After achieving a 13-year high growth of 5.8% last fiscal year the government has set a growth target of 6.2% for 2019. However, growing external vulnerability and high fiscal deficit will continue to pose major down side risks to the achievement of this target.
Security Compulsions. The security environment in Pakistan’s neighbourhood is quite volatile. Afghanistan is in turmoil for the last four decades, India has not yet reconciled to the creation of Pakistan and it spares no chance to impede its progress, be it any field. This necessitates maintenance of a military worthy of thwarting these challenges, to do so about 4 percent of GDP is tied down to defence sector which is at the cost of social security elements like education, health and Human Resource Development. The country’s counter terrorism effort, especially since 9/11, has cost over 120 billion US dollars alongside unquantifiable loss of investor trust. The ensuing instability has hampered private investment and foreign aid. Pakistan’s banking sector has undertaken massive reforms to block terror financing through banking channels.
China Pakistan Economic Corridor (CPEC). Despite the plethora of challenges Pakistan’s economy has been able to sustain itself and there has been no instance of default. Pakistan tops the list of countries attracting Foreign Direct Investment (FDI) with China in the lead followed by the US, KSA and the EU. Soft opening of China Pakistan Economic Corridor (CPEC) was performed on November 13, 2016, as first trade convoy comprising 60 containers from Kashgar, China reached Gwadar port on November 13 2016, and left for onward destinations in Middle East and Africa affirming notional function-ability of the CPEC land route and Gwadar port. Early harvest projects of CPEC are fast becoming operational which are progressively addressing some of the energy and infrastructure related shortcoming of Pakistan. Work on setting up Special Economic Zones (SEZ) along the CPEC land route is at an advanced stage. CPEC has attracted investments from a number of countries including the US and KSA. Over a dozen countries in Pakistan’s neighbourhood and extended neighbourhood have expressed keenness to formally join CPEC. Credible analysts opine that CPEC would be a game changer for Pakistan’s economy.
Saudi Arabia’s Perpetual Helping Hand. Pakistan’s relationship with Saudi Arabia represents the most important bilateral partnership in the foreign policy of Pakistan. Saudi Arabia has always been a fall back of last resort during Pakistan’s economic difficulties. Following the nuclear explosions by Pakistan on May 28, 1998, Saudi Arabia supplied 50,000 barrels per day of free oil to help Pakistan cope with economic sanctions in the aftermath of nuclear tests. Once again Saudi Arabia donated US$ 1.5 billion in 2014 to stabilise Pakistan’s foreign currency reserves and strengthen its rupee against other major currencies. Saudi Arabia is the largest source of petroleum supply for Pakistan on favourable terms, including honouring frequent requests for such provision on deferred payment. KSA also gives extensive financial aid to Pakistan and is a major destination for immigrant Pakistani workers. The presence of over 1.5 million Pakistani diaspora in KSA has contributed significantly towards development of infrastructure in the Kingdom. These overseas Pakistanis are a major source of remittances back home, which sustains Pakistan’s foreign currency account at a viable level. KSA alone caters for over 25 percent of inflow from overseas Pakistanis.
Flashback: The Glorious 1960s. The journey to Pakistan’s development has many glorious patches, the era of 1960s is remembered as deployment era modelled on Harvard School of Business theories and practices. Manufacturing growth in Pakistan during this time was 8.51 percent far outpacing any other time in Pakistani history. During the same period there were construction of several infrastructure projects like dams (notably Tarbela and Mangla dams), power stations and irrigation canals. At that time Pakistan was seen as a model of economic development around the world, and there was much praise for its economic progression. Many counties followed Pakistan’s methodology, the most prominent being South Korea who copied Pakistan’s second “Five-Year Plan”; the World Financial Centre in Seoul was modelled after Karachi, then the capital of Pakistan. Most of the Middle Eastern airlines owe their raising and development to Pakistan International Air Lines (PIA). Pakistan’s labour force transformed the Arabian Gulf countries from a desolate desert to sparkling metropolises of twentieth and twenty first century.
Fiasco of Nationalization. The I970s brought in socialist economic practices through nationalization of major industrial units and Banks alongside untenable land reforms. This changed the texture of Pakistan’s economy form “Capitalist” to “Mixed Economy”. The impact was catastrophic, domestic and international investors held back their investment and process of industrialization came to a grinding halt, 1980s and 1990s saw an effort to undo the damage through denationalization and deregulation. The economy is still struggling to offload major non-performing state enterprises through privatization, but process is slow, akin to one step forward and two backwards.
Population Surge. Pakistan’s population has grown rapidly from around 30 million in 1947 to over 207 million in 2017 that accounts for 2.63% of the total world population. The rate of annual growth has been over 2 percent, the national census of 2017 has projected a marginal decline in population growth and urbanization trend. In rural areas, the joint family system prevails, members of a typical family/ clan pool their resources to maintain the family and invest in business ventures. The system ensures that younger members are trained and employed in the family business and the older and disabled persons are supported by the family. Towns and cities are home to industrial units and salaries class population. The youth bulge is the evolving challenge for economic planners.
Growth Summary. Average annual GDP growth rates were 6.8 percent in the 1960s, 4.8 percent in the 1970s, and 6.5 percent in the 1980s. Average annual growth fell to 4.6% in the 1990s with significantly lower growth in the second half of that decade. During 2017-18 growth rate was 5.4 percent, the highest in South Asia; economy managers are struggling to reach 6 percent mark. Overall Pakistan’s average economic growth rate since independence has been higher than the average growth rate of the world economy.
Action points for the new government
• The new government has inherited a fragile economy, with dipping performance indicators. It needs to follow multifaceted strategy to reverse the trend. Some of the points requiring urgent attention are surmised below:-
• One of the biggest and immediate challenges for economic managers is to shore up foreign currency reserves in a sustainable manner, which had depleted to less than two months of import cover, and stood at $9.78 billion, on June 29, 2018.
• Rupee depreciation of over 15% to Rs. 121.53 to the US dollar has also started impacting and may push inflation beyond the targeted level of 6% in FY19. High domestic demand lagged impact of adjustment in energy prices, and rupee depreciation are likely to contribute to higher CPI inflation in FY19.
• Smooth supply of staple food items and soft oil price on the other hand could offset these underlying pressures and help keep inflation around the target of 6% set for FY19.
• The import bill is likely to stay high owing to a notable increase in international commodity prices, especially of oil. This would keep the trade deficit high in FY19 as well. Debt level is likely to further increase to 74% of gross domestic product (GDP) by June 2019. On the external side, prospects of a growth in exports remain encouraging on the back of rupee depreciation, recovery in global demand, fiscal incentives for exports, ease in power supply and improved price outlook of rice and cotton in the international markets.
• Pakistan needs to have a forward-looking debt management strategy, both fiscal and current account deficits are unsustainable at their current levels. Against the target of 4.1%, the budget deficit remained above 7% of GDP in FY 2017-18.
• Pakistan’s biggest problem is very low resource mobilisation. It is hard to contain expenditures and the only way to tackle the debt is to enhance revenues. Enhancing the tax base and incentivizing the savings are likely to help.
• Managing the interest rate and exchange rate would be another challenge for the new government as both have a direct bearing on the country’s debt level, inflation and trade deficit. Choices are hard, if interest rates are increased by 1%, the debt servicing cost would shoot up by Rs100 billion. A one percent-rupee depreciation will push external public debt up by Rs. 70 billion and increase its servicing cost by Rs8 billion. The recent 15% depreciation of the rupee against the US dollar has added Rs.1.19 trillion to the public debt. Had there been no depreciation, the debt-to-GDP ratio would have been 68.5% by June 30, 2018. Increasing balance of payments requirements are leading to a situation where Pakistan would have to keep relying on Eurobond and foreign commercial loans.
• The Eighteenth Constitutional Amendment has devolved a number of key functions to the provinces. Functions of 17 federal ministries have been devolved including Agriculture, Education, Environment and Health. And a greater share of revenues has been passed to the provinces through the National Finance Commission Award (NFC) in order to enable them to perform these functions. Attention should be focused on capacity enhancement with regard to service provision at provincial level.
Conclusion
The journey of Pakistan’s economic growth is quite interesting. Within the constraints that be, Pakistan’s economy has been well managed. Pakistan’s economy has formidable fault lines, some just falling from the sky spontaneously and hitting hard without any prior warning. The going has been tough but Pakistan has performed well, there has been no instance of economic default. Overall the economy is in safe hands despite roller coaster pattern no serious setback is foreseen in short to medium time frame. Continued reforms to broaden the tax base and increase revenues will therefore need to remain a priority. Seeking an IMF programme is a viable option to stabilize economic indicators.
