Economic crises brewing up

In 2022, Pakistan is expected to withstand the long-term economic growth. Yet, it can come under severe pressure, owing to the rupee depreciation against the dollar, high inflation, burgeoning twin deficits, surging circular debt and hike in the international oil prices.

The Covid-19 pandemic continues to take its toll on the world economy with the emergence of coronavirus variants and there is no respite in sight in the near future. This will definitely weigh on the economic recovery of Pakistan.

Keeping in view the uncertainty regarding the coronavirus pandemic, the International Monetary Fund (IMF) and the World Bank have already downgraded the growth forecast for Pakistan’s real GDP to 4 per cent in 2022.

In its recent report, the World Bank noted that high inflation in Pakistan led to the removal of monetary accommodation. The monetary policy around the world is expected to tighten but continue to be moderately accommodative in 2022, except Pakistan, to support growth, while protecting against an increase in medium-term inflation expectations.

According to the Pakistan Bureau of Statistics (PBS), the annual inflation rate in Pakistan eased to 12.2 per cent in February 2022 from 13 per cent in the previous month, pointing to the lowest level since November 2021.

The World Bank has also projected a decline in the per capita incomes in 2021/23, the largest fall of almost 2 percentage points/annum.

In 2021, Pakistan’s economic growth somewhat remained on the higher side on the back of improved domestic demand, record high remittances, rise in the foreign exchange reserves and an accommodative monetary policy, which saw a drop in 2020 and remained negative in most parts of 2021, according to the World Bank.

The report also noted that Pakistan saw the goods trade deficit widened to record levels on strong domestic demand and high energy tariffs.

There is a lot to be done to fix the issues, as the rupee depreciation, sluggish growth, inadequate productivity and rising debt burden are hitting the economy hard.

Fiscal crisis

The revenue shortfall and a persistent low tax-to-GDP ratio have constrained the developmental spending, depressed domestic resource mobilisation, crowded out private investment, contributed to the long running current account deficits and is responsible for the rising public debt.

Pakistan collected 11 per cent as a percentage of GDP in FY21, which is below the global average of 15 per cent and even the average for South Asia at 12 per cent. Pakistan’s tax capacity is around 22 per cent but its efforts continue to lag behind other economies of the world.

Pakistan needs immediate measures to come out of the vicious cycle of fiscal and balance of payments crises, which are persistently dragging the economic and social development of the country.

The failure to sustain economic growth will not bode well for the country and it should be wise on the part of the government to realise the changing geopolitical circumstances and devise strategies to tackle the crisis.

The International Monetary Fund (IMF) after approving the tranche of $1.3 billion under the Extended Fund Facility (EFF) facility urged the Pakistan government to commit a decisive fiscal policy so that the large public debt can be reduced.

“Achieving the fiscal objectives will require a multiyear revenue mobilisation strategy to broaden the tax base and raise the tax revenue in a well-balanced and equitable manner. It will also require a strong commitment by the provinces to support the consolidation effort and effective public financial management to improve the quality and efficiency of public spending,” the IMF said.

Industries and exports

Pakistan has to sustain high growth rates with an increase in productivity, as sluggish growth rates over the last three decades have sharpened the edges of all other crises.

The country mainly exports textiles, garments, leather goods and other low labour-intensive value items. It failed to bring value to other products.

Over time, the country’s economy has become more inward looking, as export competitiveness has diminished and productivity has stagnated.

Achieving the desirable growth acceleration in the unfolding global environment will be an uphill task and the government has to take measures to make a double-digit increase in domestic savings and investment, trade reform, a major diversification of industry and exports into products with growth potential, a focus on high-end tradable services and substantial complementary investment in infrastructure and human capital.

It appears Pakistan is woefully unprepared to overcome these economic crises.

(The writer is the Assistant Editor, Business Desk at the BOL News)