An economic crisis
Pakistan is undoubtedly facing an economic crisis of gigantic proportions caused by the gross mismanagement of the economy by successive elected and military governments over the past decades.
These governments have taken the easy way out while managing the economic crisis, which has only worsened over time. Necessary but difficult corrective decisions have been avoided or postponed at enormous cost to the nation as a whole. This politically easy approach has made the task of each successive government more difficult than it otherwise would have been, as the scale and severity of the country’s economic problems have steadily grown. As a result, the country is now virtually on the brink of economic disaster unless decisive action is taken to stem the rot.
The most serious problem facing our economic policymakers is the tendency of the Pakistani economy to run unsustainable current account deficits whenever the government attempts to accelerate the rate of GDP growth. For example, in 2017-2018, when GDP growth was estimated at 6.1%, the current account deficit reached the high level of $19.1 billion. In subsequent years, the PTI government slowed the rate of GDP growth, which led to lower current account deficits. However, as he attempted to accelerate the rate of GDP growth, the high current account deficit reappeared. The 2021-22 fiscal year with a GDP growth rate of 6% is expected to end with a current account deficit of $17 billion.
The immediate cause of the increase in the current account deficit in fiscal year 2022 is the sharp increase in imports compared to relatively slow growth in exports. The import bill jumped to $72.18 billion between July 2021 and May 2022. At this rate, the total import bill for 2021-22 would be around $78 billion from $54.27 billion a year earlier. On the other hand, exports, estimated at 28.84 billion dollars over the period from July 2021 to May 2022, will increase to 31 billion dollars at the end of June 2022. The situation calls for drastic fiscal, monetary and administrative measures to reduce the sharp reduction in imports while encouraging exports and import substitution in order to be able to balance our external account.
In the final analysis, however, the current account deficit reflects the excess of national investment over national saving. This is why whenever the government tries to accelerate the GDP growth rate by increasing the national investment rate without increasing the national saving rate, it inevitably leads to high current account deficits. It happened in 2017-18 and is happening again in 2021-22. The moral is that if we are to achieve high GDP growth rates in the years to come without running into unsustainable current account deficits, we must raise our national savings rate to at least 20% of GDP or even more relative to the current low level of 11.1% of GDP. Austerity coupled with effective policies to promote exports and substitute imports is therefore a prerequisite for sustainably accelerating Pakistan’s GDP growth rate.
High public deficits are another source of weakness and vulnerability in our economy. The proposed federal budget for 2022-23 pegs total expenditure at 9.50 trillion rupees against the estimated net federal revenue of 4.9 trillion rupees. The budget deficit is therefore expected to be around 4.6 trillion rupees. The stark reality is that debt service (3.95 trillion rupees) and defense (1.52 trillion rupees) alone will exceed net federal revenue by 570 billion rupees.
The budget deficit as a percentage of GDP is expected to decline from 6.3% in 2021-22 to 4.9% in 2022-23. Despite everything, its high level in absolute terms will keep the federal government’s budgetary position tight in addition to generating inflationary pressures. Given the high level of the budget deficit, the rising prices of gasoline, diesel and other petroleum products and international inflationary trends, it is unlikely that the government will be able to contain inflation in the 11.5% limit set for 2022. -23.
The tight fiscal position of the federal government calls for a reform of the tax system to raise the tax-to-GDP ratio from 9.2%, as projected in the draft federal budget for 2022-23, to more than 20%. Until the federal government is able to implement these reforms and tightly control its current spending, its fiscal deficits and public debt will continue to grow rapidly. Already, total public debt, which was estimated at 24.953 trillion rupees at the end of June 2018, has risen to 44.366 trillion rupees at the end of March 2022 – hardly a story of fiscal prudence.
The 2022-2023 budget sets the objective of a GDP growth rate of 5%. It envisages a federal development expenditure of 727 billion rupees against actual development expenditure of 550 billion rupees for the year 2021-22. In addition, the provinces will incur development expenditure amounting to Rs 1.4 trillion, bringing the total development expenditure to Rs 2.1 trillion in 2022-2023.
Overall, the draft budget aims to stabilize the economy by maintaining a reasonably high GDP growth rate, easing inflationary pressures, and reducing current account and fiscal deficits. However, the 2022-2023 budget does not go far enough to raise the tax-to-GDP ratio and the national savings rate to the high levels required to place the country on a path of sustainably high growth rates. It also remains to be seen whether and to what extent the government is taking steps to reduce imports and promote exports and import substitution with the aim of reducing the current account deficit.
Historically, education, which is a prerequisite for economic development, has received low priority from Pakistani governments in terms of resource allocation. Our national expenditure on education has generally remained below 2% of GDP, against the standard of 4% of GDP recommended by Unesco. Ideally, our national expenditure on education should be above 4% of GDP on the model of rapidly developing economies, if we are to transform Pakistan into a dynamic and progressive country with a worthy place in the community of nations. Unfortunately, the budget for 2022-2023 does not reflect the high priority this critically important sector deserves.
The writer is a retired ambassador. He can be contacted at: [email protected]