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Deteriorating economic conditions

Abdul Rauf Shakoori & Dr. Ikramul Haq

As per statistics released by the State Bank of Pakistan (SBP), Pakistan’s economy posted a growth of 3.9% in the Financial Year (FY) 2021.  This seems to be an impressive recovery as compared to a contraction of 0.5% in FY 2020. The government believes this performance to be remarkable as it was achieved despite multiple waves of pandemic. The success is attributed to responding thoughtfully to the emerging challenges throughout the year. The SBP extended favourable policy rates and offered multiple refinance schemes at special rates intending to keep the economic momentum running. These measures proved to be instrumental in the economic recovery of FY 2021. However, statistical supplement of SBP’s Annual Report states that world economy grew at an average of 5.9% and Pakistan has posted growth of 3.3%. Economic experts have casted doubts on this performance result and it must be kept in mind that in FY 2019, the government initially declared GDP growth of 3.3% which was subsequently corrected downwards to 2.1%.

Analysis of historical data provides us an insight that Pakistan has not been able to sustain a prolonged duration of growth. Rather it had limited sprints of growth which were then followed by a nose-dive. This is because disruptive economic policies are subject to change with the end of the government. Despite lofty claims made by the Prime Minister as well as his cabinet members regarding revival of the economy, the current state of financial affairs is not contributing enough to facilitate the common man.

It is an undisputed fact that pandemic has taken a toll on the global economy. It brought new challenges for the health system, disrupted economic activity and business connectivity, and ignited unemployment at global level. For an average performing economy like Pakistan this was an uphill task, hence government borrowed funds at local and international level in order to execute its plans and also to avail debt relief under the G-20’s Debt Service Suspension Initiative (DSSI). In FY 2021, in comparison to regional peers, Pakistan’s debt servicing payments reached highest level as percentage of GDP. The report states that in FY2021 the ratio of interest payments-to-FBR tax revenues stood at 57.7%. As of September 2021, Pakistan’s External Debt & Liabilities have skyrocketed to US$ 127 billion. This is a massive increase of 33% or US$ 31.78 billion since this government took charge.

On the local front, total domestic debt has reached Rs. 27,137 billion. From Jun-18 level, it has increased by more than Rs. 10 trillion or 60%. The previous government added Rs. 121 billion per month, and current government is borrowing at a pace of Rs. 260 billion per month meaning thereby that more than half of tax revenue collections are being utilised for debt servicing which ultimately squeezes the space for undertaking development expenditures. This compromise can adversely impact growth prospects which ultimately dampens debt repayment capacity.

The same is also reflected in statistical supplement of SBP’s report which states that education expenditures as percentage of GDP has fallen. In FY 2018 it was 2.4% but was reduced to 1.47% in FY 2020 and health expenditure was 1.20% of GDP in FY2018 which has fallen to 1.16 in FY 2020. (There is no mention for FY 21 in the report).

Another factor that is impacting the overall economy is mismanagement on the part of executives. In FY 2021, circular debt accumulated to Rs. 2.28 trillion which is 4.8% of GDP. This accumulation of arrears arises from administrative failures and incompetence like delays in the adjustment of power tariffs, losses of Electricity Distribution Companies (DISCOs), and unpaid subsidies. On the same grounds, inefficiencies in public sector entities stem out from governance issues and other administrative elements. As a whole, these state-owned white elephants are posting losses. The major state-owned entities are National Highways Authority, Pakistan Railways, Pakistan International Airline, and power sector DISCOs are among the 10 most loss-making state enterprises. However, in the last three years, the current government has not introduced any policy to bring any serious reforms within these entities.

On the investment side, constant investment inflows are very important for the economy. It helps in generating employment, contributes to GDP growth, and earns forex reserves. However, during FY 2021, the net foreign direct investment (FDI) dropped by more than 28%. The major factor which impacted the decrease in FDI was government’s uncertain policies. Moreover, Pakistan is currently facing severe issues with its foreign policy—even close friends are unhappy with our role. China heavily invested in the China Pak Economic Corridor (CPEC). The main investment area was the power sector enabling us to overcome load shedding where we needed to convince the Chinese to invest in the second phase of the CPEC but this is slowing down with the Chinese’ reluctance to invest in this project. Additionally, our affairs with international lenders and watchdogs are also contributing towards a decrease in our FDI.

Moreover, massive devaluation of the Pak rupee could not attract the desired results in the export sector and now pressures are re-emerging from the import bill. This surge in imports is again creating current account imbalances which erode the foreign reserves and would ultimately lead to massive borrowing.  Now Pakistan has signed an $3 billion loan on a 4% interest rate agreement with the Saudi Fund for Development (SFD). Pakistan is also in talks with other countries regarding similar loan facilities. All these efforts are further adding burden on the economy. However, on the other side, the coalition  government of Pakistan Tehree-i-Insaf (PTI) is showing zero interest in improving revenue organically. The Federal Board of Revenue is trying to extract maximum from the existing taxpayers.

The PTI government has failed to introduce economic reforms. There is no visible reduction in government spending. Pakistan is committed with the International Monetary Fund regarding privatisation of state-owned enterprises, however, despite a lapse of three years, the PTI government has not implemented its plan to privatise loss-making entities. The media reported that the government has dropped its plan of privatisation till the next elections. Similarly, fluctuation in interest rates is also impacting the capacity of businesses and instability in the exchange rate is also adding to our current economic problems.

On inflation, report states that Consumer Price Index (CPI) in Pakistan was 8.9% which is almost double from global average of 4.3% and for FY 22 it estimates national CPI to remain within a range of 7.0% to 9.0% but keeping in view the pace of devaluating currency and increase in global commodity prices it seems that inflation can reach double digit anytime soon. According to a report, “The inflation skyrocketed to 11.5% in November 2021—the fastest pace in 21 months—due to government’s administrative decisions coupled with steep currency depreciation, which was making food, electricity and transport unaffordable for the common man”.

Pakistan’s economy is facing multi-dimensional challenges like hyperinflation, depleting forex reserves, alarmingly high levels of debt stock, budget deficit etcetera. These economic fault lines are posing a constant threat. The cracks on the entablature of the economy are getting more visible. The infrastructure which is already being managed with the support of borrowed money is facing the threat of collapse. With vaccinations rolling and opening up of economies, the long-awaited recovery is underway at the global level. However, developing economies and middle-income countries like Pakistan are facing the risk of falling further behind in the goal of progress.


Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. Dr. Ikramul Haq, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions, with Huzaima Bukhari.

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