Milieu of Pakistan’s Economy

The government-led development program, including PSDP at the Federal level and ADP at the provincial level, is the main contributor to growth episodes

M. Ali Kemal

Since its inception, Pakistan has experienced several cycles of growth, with stability requiring consistent policies. The country has seen consecutive years of over 5% growth rates, but the irregular percentage segments of growth are often associated with policies that rely on modern capital, resulting in a balance of payments deficit and inflation.

The country’s economy is highly dependent on imports, but exports remain stagnant, leading to an increase in the trade deficit, which has been financed by remittances for the past decade and a half. The government-led development program, including PSDP at the Federal level and ADP at the provincial level, is the main contributor to growth episodes, with funding coming from various sources, including

 international financial institutions, government loans, and recently, public-private partnerships.

Pakistan had face numerous episodes of drought, floods, earthquakes and other calamities. Due to these natural disasters overall economy suffers a lot. Since 1990 we have faced more than 8 times devastated floods. These floods not just negatively affect the crops, livestock but also put a significant dent on the ongoing development programs. Development funds, thus are diverted for at least 1-2 years towards the reconstruction.

Increase in rains in certain areas and lack of rain in some, melting glaciers than normal are among the major effects of climatic changes. Our greenhouse emissions are lower than the world target of one percent of GDP. This implies that climatic issues are not due to the Pakistan’s bad climate, nevertheless, Pakistan is the sixth most vulnerable country facing damages due to climate change. Growth suffers significantly though managed adaptation and mitigation, which is not enough. Pakistan must get the compensation of ecological debt created by the west.

Growth of the economy did suffer due to the natural calamities, however, it was never negative besides 1952-53. During COVID -19 that shutdown the entire world. Industrial as well as services sector faced the maximum hit. Growth rate due to lockdown in the last quarter was negative one percent in 2019-20. Social distancing was critical role in closing down the shops and asking everyone to stop going into the markets. Airlines business were shut down, cargo services were stopped, transport and communication and other services were stopped due to lockdown in implementing social distances.

Several employees were laid off especially those who were contractually employed and whose income was totally dependent on the transactions, i.e., informal workers and informal sector workers. The negative effects of COVID were worrisome, supported by Social Protection Cash Transfer, smart lockdowns and supported by the provision of vaccines and testing kits. Soon after the pandemic diminished, we have faced high freight prices, surging oil prices and rising inflation due to extra money holdings during COVID.

Ukraine – Russia War put another dent in the economy. Oil prices went up to $100 per barrel. Being an oil dependent economy, oil import bill has increased thus balance of payments started deteriorating. To maintain exchange rate, reserves started depleting and ultimately IMF tranche was required as a last resort.

While we were coping with these issues, we had another episode of floods in 2022. Floods, this time, destroyed most of the bridges, agriculture fields, demolish houses and killed livestock. Approx. one-third of the country was under water, 33 million people were affected, and nearly 8 million people reportedly displaced.

Growth creates employment opportunities. Global evidence show that it ranges between one third to one half. In Pakistan evidence show that it is less than one third. Few researchers also call it jobless growth. Unemployment is associated with levels of growth. Higher growth may not create more job.

Our production units are not working on full capacity and while running on full capacity they may not need more employees but the existent work for extra hours. Similarly, in agriculture sector increase or decrease in production may have several factors including the temperature, rain, support price, last year price etc. But it does not affect the employment in the agriculture sector.

Due to higher population growth addition 1.4 million people are adding in the labour force. We were unable to reduce population growth significantly. The inability is due to design flaws that needs to be corrected. Numerous demographers believe that it should be done by change in behaviors than procurement and distribution of contraceptives. Thus we have huge number of young population which can create demographic dividend.

Inflation in the recent month is among the biggest issue Pakistan is facing. Inflation along with growth/unemployment are the core macroeconomic variable which all policymakers want to address as a first priority. The trade-off among these especially in the short run is the key and macro management plays critical role in adjusting it. Global episodes especially after the 2007-8 global financial crisis and COVID-19 recovery process confirms that growth is more important than inflation. Simply stating, employed person may cope with the inflation but unemployed cannot.

The triple crisis (covid, floods and higher inflation) that affects the overall economic situation. On top of that problems of balance of payments deficit, reserves depletion, external debt payments, exchange rate management as well as fiscal deficit requires quick fixtures. The IMF conditions include reduction expenditures especially the untargeted subsidies, increase tax burden especially on the luxury items including increase in sin tax on cigarettes etc reduce the fiscal deficit.

Nonetheless, increase in interest rate to cope supply side inflation is debatable. All of these policies are adopted because the economy was over heated that requires structural change in the short to medium run. However, higher inflation and lower growth are the two main outcomes of these policies. This also shows that IMF conditions impact the overheating economy to cool down but at the cost of lower growth.

Following this scenario, increase in petrol prices has been pass on along with implementation of Development Levy and Sales Tax that has increased the prices to Rs. 272 per liter, i.e., approx. Rs. 122 in a year, partly due to depreciation in exchange rate. Thus prices of all the commodities linked with oil/petrol has increased. As a result our inflation rate is as high as 32 percent per year, which is the second highest after 1973 and it is expected to increase few percentage points more in the next few months. Food inflation is higher than the general inflation.

We may argue that due to increase in inflation, poverty may increase but it may not be the case. Poverty is linked to unemployment more than inflation. It is alarming that numerous researchers believe that the persistence in inflation to increase will continue for the next 6 months to 2 years. However, it may not be the case. It is possible that inflation remain in the double digit but start decreasing by June 2023.

Keeping in view the persistent problems discussed as well as the disasters we have faced in the last three decades, especially it is very critical to have charter of economy and plan for the next 10 years (medium) and the vision for the next 25 years, i.e., 2047, when Pakistan will be 100 years old. It must be complemented with the charter of social sector, that provides human capital social capital and innovation capabilities without which sustainable higher growth is not possible. In addition, charter of climatic action must be integrated with the other two charters that provides the resilience to the economy.

In short, to create opportunity from the existing crisis, an overall skills and vocational trainings must be started in all possible fields with certification. Everyone who is unemployed, looking for job must enhance his/her skills. As a result, he/she may start his/her own work, get employment, which may be linked to industries or go abroad.