Pakistan’s economy is in a state of paralysis with every indicator showing a drastic decline. The gap between income and expenditure has increased at an alarming rate. The growing gap between imports and exports has stifled progress. In fact, the agricultural and manufacturing sectors (the backbone of our economy) paint a dismal picture. In this context, economics suits the vested interests of the elite. All of these factors culminate in the form of state-distorted policies.
The performance of the economy is usually defined by numbers and unfortunately even high growth rates are sought at the cost of inflation, but it is still economic growth without jobs. The distribution of the benefits of growth is inequitable and increases income inequalities. Why can’t strong economic growth be sustained? The question chanted in the political corridors. But the right question should be: is Pakistan’s economic growth sustainable or not?
The external economy is at the heart of Pakistan’s staggering financial affairs. The galloping import-export gap has become a headache for leaders. The post-2000 period marked a rapid increase in dependence on foreign products. Perhaps the most shocking aspect is that our manufacturing sector depends on imported raw materials, excluding local materials. This is a structural anomaly in our system. Moreover, Pakistan’s services deficit is negative and it is confusing to see that most foreign direct investment (FDI) in the country is in the services sector. Conversely, in China, FDI has mainly focused on manufacturing industry for export.
The Pakistani rupee continued to depreciate against the US dollar, FDI was heading in the wrong direction, with negative flows of $30.4m in March and growing budget and current account deficits. The relief package was not well thought out and well targeted. Meanwhile, the International Monetary Fund’s $6 billion lending program remained on hold, with $3 billion undisbursed. Pakistan’s foreign exchange reserves fell below $11 billion, most of what was left was callable short-term capital from friendly countries. Pakistan is on the brink of economic collapse. The lack of foresight is visible among Pakistan’s policy makers who seem determined to stick to traditional economic policy tools: raise interest rates, control inflation. If this policy was, in fact, practical, it would have helped curb inflation in Pakistan, which soared to 13.8% (SBP May 2022).
Challenges for the government
The current government faces multiple challenges. Chief among them is political uncertainty which overlaps with economic uncertainty without a reform agenda. Also, time and space for policy interventions are very limited, but expectations are high. This government must also negotiate with the IMF, as the political cycle is about to end.
The government must also take steps to manage imports (the recent ban by the government is a positive step); petroleum payment deferral agreements; negotiations with the IMF; and reassessing fuel and food subsidies (the removal of oil subsidies was inevitable because the earlier decision to grant them was politically motivated to retain public content rather than sound economic policies).
In the future, the annual budget will define the stability of the government, depending on whether it is a popular budget or an electoral budget.
Another challenge facing this government is to strengthen the social contract between the state and citizens.
Pakistan first-political second
Eight hundred years ago, on the same month (June 15), King John of England sealed the Magna Carta, a groundbreaking legal document that served as the foundation of our constitutional democracy. There is extreme political polarization in Pakistan, political parties play blame games without focusing on solutions. The lack of political will to take tough decisions and solve structural problems persists. Economic thinking resides in electoral gains.
No political party thinks long term. A general framework for economic reforms in this country has been floating around since 2011. However, to date, no concrete steps have been taken to have a Charter for the economy.
Under such circumstances, it becomes absolutely impossible to execute sound economic policies. Keep in mind that political economy is an essential component of long-term progress. And constant political fiascos jeopardize the internal state of the economy.
The light at the end of the tunnel
Pakistan needs an inclusive economic system free from political interference. The country needs a broad multiparty political consensus on economic policy. Prosperity should not be a matter of party affiliation, but a common task for all political actors who want to see a better Pakistan, neither new nor old.
An economic charter is absolutely necessary to create a stable economic base. The charter will help to identify the nature of the problems or constraints before proposing solutions or reforms. Tax revenues, exports, savings and investment are the lifeline of an economy. The country should focus on capital account liberalization and use it wisely keeping in mind the mantra of productivity.
Projects of a particular variety should be launched. Capital accounts are not used for speculative measures. It is important to understand what remittances mean for Pakistan. Overreliance on remittances to Pakistan can lead to Dutch disease.
Once these essential preconditions are met, we can then start the process of structural reforms such as revising the tax system, improving productivity and creating job opportunities. Failure to do so would plunge the country into the same vicious cycle of debts and deficits. Economics is a combination of statistics and sentiment, both essential to economic prosperity. Positive sentiments come from political stability and certainty which, in turn, boosts investor confidence and discourages capital flight.
The author holds the chair of economic security at the Islamabad Policy Research Institute