The way forward for Pakistan’s economy in 2020
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As Pakistan enters 2020, the government is assuring its citizens that the country’s economy is out of deep waters. To some extent, this is true. With support from the International Monetary Fund (IMF), it is now expected that the fiscal year 2019-20 will see an improved current account deficit to the tune of 2.4 percent of GDP. This number stood at 4.8 percent during the last fiscal year and was a key reason for the fast depletion of foreign exchange reserves.
The flexibility allowed in the currency exchange rate and administrative measures also resulted in a sharp reduction in the country’s import bill – falling by 23 percent in the first quarter of 2019-20. A two percent increase in Pakistan’s exports was also seen in the first quarter. Between July-November 2019, foreign direct investment increased from $477 million (during the same period last year) to $850 million. On the back of the high-interest rate, the portfolio investment was seen increasing with investment in government debt instruments touching $1.4 billion by the end of December. With these developments, the State Bank of Pakistan (SBP) witnessed its foreign exchange reserves increased to its highest level in almost seven months, touching $9 billion in November last year.
Unfortunately, the ruling party Pakistan Tehreek-e-Insaaf’s (PTI) voter is in no mood to celebrate. While it is said that inflation has started to stabilize, the growth in prices for the ongoing fiscal year is still expected to remain in the double digits at 11.8 percent. According to the former finance minister and economist, Dr. Hafiz A. Pasha, 8 million people slipped below the poverty line last year.
Currently, voices from the central bank suggest that Pakistan should not grow beyond 3 to 4 percent due to the import-dependent and debt-induced growth structure of the economy.
Dr. Vaqar Ahmed
With slow technical and regulatory reforms in the gas sector and full cost recovery committed with the IMF, the Oil & Gas Regulatory Authority (OGRA) proposed a 221 percent hike in the gas tariff in December. The electricity tariff has also been on the increase for the same reasons.
On top of this and to achieve a primary budget surplus, the government is pressed to increase its revenues. While tax collection continues to miss its targets, it is the non-tax revenue sources which the government is now using to bridge the gap between its overall revenues and expenditures, even if these are regressive and carrying a proportionally higher burden for the poor.
So, where could relief come from in 2020? First, the government will need to use federal and provincial development spending efficiently. Timely releases of funds channeled towards increasing productivity in agriculture and industry could help. Second, the expansion of financial allocation under the Ehsaas program is a step in the right direction. However, time is running out as inflation continues to bite harder in the coming days. The disbursements under various schemes of Ehsaas will need to be expedited.
Third, the Planning Commission will need to lead a debate and envisage an economic growth road map. Currently, voices from the central bank suggest that Pakistan should not grow beyond 3 to 4 percent due to the import-dependent and debt-induced growth structure of the economy. Such thinking maybe a good diagnosis, but does not provide citizens, and more importantly investors, with a clear idea of how the government wishes to expand the economy and create jobs. If the underlying structure of economic growth needs change, now is the time to think about it and put in place corrective measures.
Some of the economic sins of 2019 will need to be reversed. An expansion in federal ministries and cabinet is never a good idea when the Prime Minister is demanding austerity. There is room to reduce the size of the federal government through the merger of ministries and departments which will save taxpayers money. After the Pulwama incident, and other incidents that followed, Pakistan not only shut land route trade with India but later during the year, embassies and consulates in Afghanistan were also shut down. This has cost the trade sector dearly and also led to a sharp, short term increase in food prices.
Additionally, the parliament didn’t function the way it is supposed to and the Senate couldn’t meet for a long period of time. Therefore, reaching a political consensus on reforms in the energy and loss-making public sector enterprises is proving difficult. Pakistan’s continued stay on the grey-list of the Financial Action Task Force will remain a concern for private investors in the financial sector. The federal and provincial institutions mandated to understand and comply with demands by FATF's International Cooperation Review Group and Asia Pacific Group will need to demonstrate success on this front.
Finally, one hopes that in 2020, the federal government will have a better plan to remain transparent and communicate stabilization and growth pathways clearly. As the debt burden continues to grow, it is essential to inform citizens if Pakistan has a strategy to manage its debt servicing commitments. The finance ministry will do good to release the much awaited bi-annual reports on debt management.
*Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.
Twitter: @vaqarahmed
