At the turn of the century, Pakistan had the highest GDP per capita when compared with India, Bangladesh, and Vietnam. Twenty years later, it is at the bottom of the group. Political upheaval, a violent insurgency fed by the war in Afghanistan, and the inability of successive governments to carry out reforms are to blame for this decline. Today, a polarized political environment and elite intrigue among civilian, judicial, and military institutions has made sustainable economic growth and reforms that much more unlikely.
Pakistan’s economy is facing a three-pronged challenge: internationally, it is facing soaring prices of essential commodities such as oil, gas, wheat, and sugar and unusually high shipping charges on its foreign trade; regionally, it is grappling with economic and financial fallout of an extremely volatile situation in Afghanistan; and domestically, it is trying to come to grips with a falling rupee value and the lack of resources to keep the prices of electricity, gas and oil in check.
The economy was forecast to contract by 0.4% for the year due to COVID -19. The pandemic has further sharpened the challenge. Like almost every country around the globe, Pakistan’s economy suffered in 2020. The GDP growth rate for fiscal year 2019–20 was 0.4% the first time it fell negative in seven decades. Per capita income fell from US$1625 to US$1325. COVID-19 closures and lockdowns to limit the spread of the virus are also contributing to growing unemployment and poverty. Pakistan’s economic freedom score is 51.7, making its economy the 152nd freest in the 2021 Index. Its overall score has decreased by 3.1 points, primarily because of a decline in fiscal health. Pakistan is ranked 34th among 40 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.
PML-N government with high fiscal and balance of payments deficits were always going to be a challenge for any successive government coming into power after the elections of July 2018. When Pakistani Prime Minister Imran Khan entered office in August 2018, Pakistan’s economy was facing twin deficits—the country’s foreign exchange reserve was running low and its fiscal deficit had reached breaking point.
The economic upheaval in those early months of Khan’s government led to declining economic growth, devaluation of the currency, double-digit inflation, and sky-high interest rates. The government’s initial attempts to fend off an IMF bailout did not help. Ten months after its election, the PTI government was back at the IMF’s doorstep for Pakistan’s 13th loan program since the 1980s. The 39-month $6 billion Extended Fund Facility was suspended when COVID-19 hit in March 2020. As the economy contracted, one supposedly positive consequence was the decrease in Pakistan’s balance of payments and trade deficit. Not only did economic activity slow down, but also marked a fall in oil prices meant that less was being imported at even lower prices.
Successive governments in Pakistan have spent the majority of their term trying to consolidate power, which means that they do not have the will to shake things up.
Less than a year later, the COVID-19 pandemic dealt a body blow to Pakistan’s economy. Lockdowns in response to the health crisis turned economic growth negative, a first in decades. The Khan government sought debt relief and secured an additional $1.3 billion from the IMF. The government rolled out Rs. 1.2 trillion stimulus package. Cash transfer programs were expanded to protect the most vulnerable segments of society. While a significant portion of the total stimulus included already-budgeted spending and more than Rs.500 billion remained unutilized, the government’s prompt response eased the pain, particularly for the most vulnerable.
Additionally, the State Bank of Pakistan sharply cut interest rates and provided monetary stimulus to businesses. With the stringent IMF program halted, the government found fiscal space to make support payments to mitigate the economic impact of the virus. Pakistan also received $1.4 billion from the IMF under its Rapid Financing Instrument scheme, as well as $2 billion in debt relief and assistance from the G20 and other multilateral institutions.
The incumbent government heralds the improvement in the current account as one of its major achievements. Added to this was the rather unexpected trend of Pakistan receiving over US$2 billion worth of foreign remittances for the sixth consecutive month. Remittances were at US$11.77 billion in the first five months of the fiscal year, up 27 percent compared to the same period last year. And remittances are up by US$500 million on average each month in fiscal year 2021 compared to the previous year. Pakistan’s central bank predicts 5% growth for the economy despite inflation worries. Pakistan is predicted to grow about 5% in the current fiscal year that ends in June 2022
The biggest relief, however, was provided by the state’s ability to effectively slow down the spread of the coronavirus. The government and its supporters are sure to point to a current account surplus and positive growth as evidence that the economy is on the right track. The journey must begin with energy sector reforms. No country can grow sustainably and meet its full potential with an energy sector plagued by debt, lack of investments and a growing dependency on imports. The end result is that the economy suffers due to an unreliable and expensive supply of power.
Successive governments in Pakistan have spent the majority of their term trying to consolidate power, which means that they do not have the will to shake things up. Leaders fear that if they try to change the status quo, then the beneficiaries of the existing rent-seeking economy, both within and outside the government, will weaken their hold on power.
The ultimate goal for Pakistan’s policymakers must be to meet the ambitions and aspirations of its youth. To do that, the country must generate millions of well-paying jobs that expand citizens’ purchasing power. Weak economic growth and a lack of jobs create conditions that are ripe for instability. Measures taken to induce economic growth include infrastructure spending, deregulation, tax cuts and tax rebates.
Rezwan Ullah Beijing Institute of Technology, also contributed to this article.
