The writer is an
economist, anchor,
analyst and the
President of All
Pakistan Private
Schools’ Federation
president@Pakistan
privateschools.com
Over the past two decades, Pakistan has achieved significant poverty reduction, but human development outcomes have lagged while economic growth has remained volatile and slow. Expansion of off-farm economic opportunities, and the increase in migration and associated remittances allowed over 47 million Pakistanis to escape poverty between 2001 and 2018. Despite rapid poverty reduction, human capital outcomes have remained poor and stagnant, with high levels of stunting at 38 percent and learning poverty at 75 percent. With the central bank’s liquid foreign exchange reserves plunging to their eight-year low to just above $6 billion amid drying foreign inflows, concerns over the government’s capacity to timely make its foreign debt payments without an early restoration of the IMF funding programme are resurging on the delay in the disbursement of the new tranche of $1.2bn. Pakistan’s home currency has weakened more than 27 per cent since the start of the year and hit its weakest level of almost 240 to a dollar at the end of July, reflecting the country’s fragile financial situation. The average fiscal deficit during the last four years has been 7.23pc of GDP, with the current account gap growing in tandem and hitting almost 5pc of GDP during the last financial year that ended on June 30. Political instability, high global commodity prices, destructive floods and drying foreign inflows have only sped up the rot that was already in the making. With the country’s external financing needs during the present fiscal year estimated by the IMF at nearly $34bn, the flood losses, recessional global environment and hyperinflation have together made the challenge of economic revival tougher than ever. The government claims that it expects increased financing from other multilateral and bilateral lenders, including friendly countries like Saudi Arabia, China and the United Arab Emirates but it is not helping. On the other hand, if the IMF agrees to finance, the government will be forced to significantly increase the cost of electricity and gas in addition to raising additional taxes of Rs1.5 trillion. That will be a death knell for the economy and the industry that is already shutting down. Only a government with a clear, fresh public mandate can steer the economy out of its present crisis. In Pakistan, the dangerously fragile currency, high-risk premium in international financial markets, a high debt burden and the recent shock of the devastating floods add to our sad story of economic downturn. Expensive imports and a softening in global demand for exports as well as China’s slowdown will add further pressure on Pakistan and the region. All of these negative economic indicators point towards a looming recession in Pakistan. Reflecting a growth model based on private and government consumption, with productivity-enhancing investment and exports contributing relatively limited, Pakistan has experienced frequent macroeconomic crises. Growth of per capita gross domestic product (GDP) has been low, averaging only around 2.1 percent annually over 2000-18. The COVID-19 pandemic has also had serious impacts on human development outcomes and economic growth.
In early FY23, Pakistan’s economy was undergoing an overdue adjustment, as it recovered from the impacts of COVID-19. Supported by accommodative macroeconomic policies, the economy expanded by 6.0 percent in FY22. Strong domestic demand, coupled with low productivity growth, high world commodity prices, and the global economic slowdown contributed to severe external imbalances. To stabilize the economy, the Government began implementing a range of policies to constrain aggregate demand, including a contractionary budget and increases in administered energy prices. As a result of stabilization measures, growth was expected to slow, the exchange rate was expected to stabilize, total public debt was expected to decline gradually from current high levels, while foreign exchange reserves were expected to slowly accumulate. Recent floods have had enormous human and economic impacts. Pakistan has been experiencing heavy monsoon rains since June 2022 leading to catastrophic and unprecedented flooding. Almost 15% of the country is underwater and just over 33 million people are affected. More than 2 million houses have been damaged or destroyed. Loss of life has also been considerable with 1,700 fatalities reported to date. Loss of livestock is also significant with more than 1.1 million animals estimated to have perished, while over 25,000 animal shelters have been damaged. More than 13,000 km of roads are reported to have been affected and 440 bridges have been damaged or destroyed, with these numbers expected to rise. Economic impacts are concentrated in the agricultural sector, with over 9.4 million acres of cultivated land destroyed, resulting in significant losses to cotton, date, wheat, and rice crops. Lower agriculture output is expected to negatively impact industrial and services sector activity, especially given textile sector reliance on cotton for around 25 percent of industrial output. Flooding will impose a lingering drag on output through infrastructure damage, disruption to crop cycles, possible financial sector impacts, and loss of human capital. Preliminary estimates suggest that as a direct consequence of the flood, the national poverty rate will increase by 2.5 to 4.0 percentage points, pushing between 5.8 and 9.0 million people into poverty. The economic impacts of flooding is likely to delay much-needed economic adjustment. Growth is now expected to reach only around 2 percent in FY23. Due to higher energy prices, the weaker Rupee, and flood-related disruptions to agricultural production, inflation is projected to rise to around 23 percent in FY23. With disruptions to exports especially textiles and higher import needs on food and cotton, the current account deficit is expected to narrow only slightly to around 4.3 percent of GDP in FY23 from 4.6 percent in FY22. The fiscal deficit including grants is projected to narrow only modestly to around 6.9 percent of GDP in FY23 relative to a budgeted deficit of 4.7 percent, reflecting both negative revenue impacts from flooding and increased expenditure needs.
The government and the policy makers should consider shifting their policy focus from populist infrastructure projects to targeted subsidies and delegated institutional models for the implementation of key reforms to diversify the structure of the economy in order to build a resilient economy.
destroyed, with these numbers expected to rise. Economic impacts are concentrated in the agricultural sector, with over 9.4 million acres of cultivated land destroyed, resulting in significant losses to cotton, date, wheat, and rice crops. Lower agriculture output is expected to negatively impact industrial and services sector activity, especially given textile sector reliance on cotton for around 25 percent of industrial output. Flooding will impose a lingering drag on output through infrastructure damage, disruption to crop cycles, possible financial sector impacts, and loss of human capital. Preliminary estimates suggest that as a direct consequence of the flood, the national poverty rate will increase by 2.5 to 4.0 percentage points, pushing between 5.8 and 9.0 million people into poverty. The economic impacts of flooding is likely to delay much-needed economic adjustment. Growth is now expected to reach only around 2 percent in FY23. Due to higher energy prices, the weaker Rupee, and flood-related disruptions to agricultural production, inflation is projected to rise to around 23 percent in FY23. With disruptions to exports especially textiles and higher import needs on food and cotton, the current account deficit is expected to narrow only slightly to around 4.3 percent of GDP in FY23 from 4.6 percent in FY22. The fiscal deficit including grants is projected to narrow only modestly to around 6.9 percent of GDP in FY23 relative to a budgeted deficit of 4.7 percent, reflecting both negative revenue impacts from flooding and increased expenditure needs. and buttress market sentiment, including through articulating and effectively implementing a clear strategy for economic recovery; constraining fiscal expenditures to the extent possible and carefully targeting any new expenditures; maintaining a tight monetary stance and flexible exchange rate; and remaining on-track with critical structural reforms, including in the energy sector. The government must understand the dynamics of a global slowdown and its potential impact on Pakistan’s macroeconomic fault lines. There hasn’t been any relaxation in the IMF programme or a sympathetic response to cover the damages from the devastating floods. Pakistan is left with no choice but to complete the Fund programme that will end in June 2023. It is very likely that Pakistan will need another IMF programme to complete the adjustment process during the next three years. The GDP growth forecast for 2023 has already been slashed downwards to 2-3pc and it will continue to remain low in the adjustment period as the IMF will push for monetary tightening and demand compression till the easing of inflationary pressure. There will be a high political cost for any government to fulfil prior actions linked to cutting down subsidies, power sector reforms and removal of several distortions. The predictability of continued bailout support from Saudi Arabia and China is also linked to an endorsement from the Fund. China’s slowdown has been worse than anticipated amid Covid-19 outbreaks and lockdowns. Moreover, further lockdowns and a deepening real estate crisis in China has pushed growth down to 3.3pc this year — the slowest in more than four decades, excluding the pandemic. Pressures on exports are going to rise due to the higher cost of doing business, slowing down of demand in our traditional trading partners and the lack of competitiveness in the manufacturing sector. Remittances and traditional FDI flows are already showing a downward trend. Some of the large multinationals may decide to cut down their operations in Pakistan as Eurozone growth has been revised down to less than 3pc this year and 1.2pc in 2023. The Job cuts are imminent in a recessionary period and pressures of non-performing loans will be high on the banking sector. With 2.5 million new entrants in the labour market every year, there is no way that the current structure of the economy can provide decent employment opportunities for the youth. Pakistan must prioritise and invest in knowledge-based skills such as IT and nursing, and devise a strategy to export human resources to aging countries like Japan and Germany. This will not only ease the pressure on jobs but will lead to a higher level of remittances. More losses are expected in the stock market and real estate sector but both these sectors are linked to the richer segments of society. Since a large portion of Pakistan’s economy relies on informal transactions, it could shield small and medium enterprises from some of the recessionary shocks due to lower reliance on bank loans. Among the limited options, the only practical way forward in the recession period will be to cut down on non-essential imports and reliance on oil, energy conservation and selling strategic stakes in profitable state-owned enterprises to raise foreign exchange. Incentives will have to be created for increased production of essential food items and productivity in the manufacturing sector. The government and the policy makers should consider shifting their policy focus from populist infrastructure projects to targeted subsidies and delegated institutional models for the implementation of key reforms to diversify the structure of the economy in order to build a resilient economy.