Pakistan Reader# 649, 21 August 2023
On 14 August, Nasir Jammal wrote a commentary in Dawn titled: ‘Will the next Aug 14 see a stable Pakistan?’ He highlighted on short and mid-term economic challenges for Pakistan on a few recent critical policy decisions. Nasir Jamal confesses a return to feel-good sentiment and consumption driven economy.
What does the analysis say?
Pakistan has a history of boom-and-bust cycles of economic growth. Adjustment with IMF loan program has been short sighted and usually ignored when there have been signs of -stabilization.
To absorb the working employable population, Pakistan needs to grow at seven-eight per cent and hence there is critical need for investment.
Pakistan has agreed to investment terms of Gulf allies which will improve balance of payment position which can as well enable ruling class to discontinue with IMF dictated fiscal discipline. And global investors need political certainty in Pakistan for short-term to mid-term recovery.
The above analysis raises the following three questions.
1. Why is Pakistan dependent on external investment?
According to a news report by Dawn, Pakistan borrowed USD 5.115 billion in first five months of the current financial year (FY), Pakistan has borrowed USD 47.027 billion in loan money since 2018. The budget target for external inflow/support has been rising, for the current FY the expected borrowing is USD 23 billon. This might not change the characteristic of twin deficits which Pakistan faces in the short term, which means the expanded budget target for loans should be supplanted by increased government revenues, aid, and investments. A closer look at external aid data to Pakistan in the latest economic survey indicates that share of aid related to Balance of Payment (BOP) issue has increased project related has remained stagnant from 2000s up till 2022. This means that BOP related aid might as well increase but at the cost of a default, which will be more of a commercial default, one which Pakistan may not be able to afford right now. Hence investment remains a priority so that government can reprogram its balance sheet.
2. Will Pakistan remain a consumption-driven economy?
Pakistan in its modern history has witnessed periods of boom-and-bust cycles. This means that economic sectors have catered to the domestic needs and have done lesser in terms of increasing their competition. On a comparative basis, according to General Statistics Office of Indonesia, the investment (also called Gross Fixed Capital Formation) in manufacturing have increased by 201 per cent from 2010 to 2018 and GFCF in retail sector increased by 250 per cent, while, according to General Statistics Office Vietnam, the GFCF in manufacturing has increased by 314 per cent, and GFCF in retail sector increased by 248 per cent from 2010 to 2020. However, in Pakistan, due to rebasing of the economy, the data from the previous economic survey can mislead. As per the latest survey published recently, GFCF in the large-scale manufacturing (LSM), and retail and wholesale trade sector by private sector has decreased by 0.78 per cent and increased by 165.3 per cent respectively from 2016 to 2022. According to Business Recorder, LSM growth rate in LSM has been in negative double digits in 2023, as was also evident from foreign manufacturers selling their subsidiaries in Pakistan.
Therefore, the LSM and other allied industries in Pakistan have not gone ahead with comparative intensity when compared to its counterparts, like Vietnam and Indonesia, while retail and whole sector continues to grow. This implies that trade is not much a big indicator of macroeconomic growth in Pakistan, as Nasir Jamal also hinted. His commentary in Dawn was candid in confessing that each period of boom was consumption driven followed by bust due to high fiscal and current account deficits.
3.Will IMF provide more than short-term stability to Pakistan?
No. Multilateral financing in the post war period has enabled countries and their governments in supporting issue of deficits and maintaining reserves. The staff agreements with Pakistan and other countries have mainly focused on improving sentiment for the market, while methodologies and framework to assess has been biased. The neo-imperial nexus through financial interdependence has not bode for well long-term growth projections in global south countries. The problem in methodology, which is based on a rational individual consumer needs to be addressed, as decolonised countries have their own historical experiences mercantilism and trade.
The problem of financing deficits has become so strong that more than the macroeconomic fundamentals, other factors like the role of geopolitics, debt-trade linkages, and finance-iability of debt rescheduling weighs more than the former. It is quite evident in Pakistan, as the trade sentiment is down, advanced economies are looking inwards, the debt-trade linkage seems to be reducing for Pakistan. As Naseer Jamal discussed that around USD 37 billion of worth of investment is being expected in Pakistan but at the cost of privatizing public sector enterprises and ports. The services share of government will decrease but it does not mean private sector will take over loss making enterprises, if not at throw away prices. Therefore, the short-term stability by institutions like IMF is more like a extending the lifetime of global south specific critical issues in macro-governance. Pakistan may see a stability in the narrative of short term but a lot needs to be done for it catch up with its peers.