Dr. Gohar Ejaz
Pakistan is spiraling into abject poverty and is slipping further into the abyss. The World Bank (WB) reports that over the last three years, real incomes have declined at a rate of 10.9%, while the wealth of Pakistani citizens has contracted by more than a half. Our current state of turmoil is a consequence of years of poor management and inefficient governance, the difficulties are made worse by a lack of long-term planning and failure to develop a manufacturing-cum-export culture. Political disunity undermines our society, while basic amenities are still missing, unemployment and lack of opportunity cause a significant brain drain.
Stagflation, aptly describes Pakistan’s current economic situation. There is a significant decrease in per capita income in dollars despite a 27.1% growth in rupee terms of GDP in FY2023, this is primarily due to currency depreciation, lower GDP growth, and a growing population. The impact of stagflation extends beyond the economic realm and poses risks to political stability, as rising prices and stagnant growth fuels discontent and erodes trust in government. The moment has come for busting myths, and establishing a firm commitment to reforming agricultural productivity, industrial performance, and consequently economic outlook.
Myth: 50% of Pakistan’s economy is informal/black.
Truth belies this assertion as estimates of the size of the informal economy provide a range between 20%-35%. Pakistan’s informal sector is no larger than its Asian counterparts, and has been declining for the last 30 years and now stands firmly within global values for developing economies. In light of this, efforts to integrate it into the formal economy or broaden the tax base with 80% of the population living at subsistence, will yield diminishing and marginal returns. Analysis of the money supply (M2) implies an informal sector that is roughly 25% of GDP. By most estimates, 75%-80% of the money supply is used in the formal economy. Further analysis of the bank deposits of 24.4 trillion and NSC 3.1 trillion, a total of 27.5 trillion which are all declared in the documented system with ID cards and are DNFB compliant, with tax on income deducted. Thus only 5 trillion cash or less than 20 percent of M2 money supply is not documented in system. The people of Pakistan are now 80 percent compliant and documented paying their due taxes, although all might not be filing returns but income is taxed as withholding tax regime on income is in place. Even if return of 80 percent of owners of this wealth is filed there will be no increase in tax revenue.
The informal sector cannot decrease below 15% of the economy, and that is at par with advanced nations. Pakistan needs to balance its fiscal deficit through promoting efficiency in public spending by slashing its government footprint rather than bloating its fiscal income through unsustainable taxes and loans.
Myth: Pakistan can progress without aggressive family planning.
Low-income families in Pakistan are finding it difficult to survive. This is manifested through nearly half of children under the age of five are suffering from stunted growth, while 30% experience wasting, leading to estimated annual losses of approximately $3 billion, accounting for around 1.33% of Pakistan’s GDP. The problem is Pakistan’s high population and fertility rate, which is the highest in South Asia and the surrounding region, at 3.56 births per woman. Such a large rate of growth, raises inequality, places greater pressure on government services, and drives more people into poverty. Family planning is often challenged as being antithetical to Islam, this is also a myth. Many of the world’s Muslim societies such as Iran have had comprehensive family planning initiatives which brought their fertility rate down to 1.71 births per woman.
Change in Fertility Rates, 1960-2022
|5.26 births per woman
|3.56 births per woman
|3.22 births per woman
|1.95 births per woman
|2.02 births per woman
|1.71 births per woman
Source: World Bank
Myth: Remittances and foreign currency loans lead to sustainable GDP growth.
Although, Pakistan’s remittances contribute to its Balance of Payments their impact on sustainable economic growth is negligible. Instead, remittances have been shown to decrease labour force participation, increase the import bill, and negatively impact investment. Loan conditions from the IMF add fuel to the fire, as the country’s inflation is expected to increase further due to tax hikes and rising fuel prices and self-generated economic recession.
Myth: Devaluation will increase exports.
Devaluation has little or no impact on exports, as various studies have concluded that a 10% devaluation yields a 1% increase in exports with a time lag of two years. Furthermore, the soaring exchange rate has spurred a dearth of working capital as whatever is available is now totally inadequate to finance the export momentum achieved in the prior years. Export-led-growth is the only sustainable solution to address our structural economic issues. For this to happen, Pakistan needs to develop an export culture which can only be done via reforms and ensuring their implementation.
Myth: The export sector is demanding a subsidy on energy tariffs.
This is summarily not the case, as the cost-of-service based tariffs are below the Regionally Competitive Energy Tariff (RCET). Exporters are expected to cross-subsidize other sectors and underperforming DISCOS at the cost of their own competitive pricing for exports. This is leading to a permanent loss of market share, resulting in factory closures, investment losses, deindustrialization, unemployment, and poverty. The export sector cannot be expected to maintain or increase exports and employment under the unnecessarily high-cost cross-subsidy burden placed upon it.
Myth: Pakistan’s economy can survive without reducing government expenditure and massively curtailing borrowing.
The FY 2023-24 bugdet framework has an estimated outlay of Rs. 14.46 trillion, with half allocated to debt servicing. We’re now trapped in a ‘witch cycle’ whereby nearly 100% of our tax revenue is diverted towards debt servicing.
There is evidently a lack of focus on rationalizing government expenditure, and a heavy reliance on increasing debt in budget framework 2023-24. The formal sector is squeezed with additional taxes, hindering investment and job creation. The available options to increase the national kitty is through industrialization and expanding exports. However, the export sector is facing great difficulties on its own ranging from energy availability and pricing issues to absence of working capital and the unacceptable level of interest rate leading to an unserviceable cost of doing business.
Myth: Pakistan has cheap labour.
This is not the case as Pakistan’s labour productivity renders the actual cost of that labour far above its competitors. Regrettably, when comparing the region, Pakistan exhibits the lowest level of work ethics and labor productivity across all the sectors of the economy. According to the International Labor Organization (ILO), India’s per capita output has increased by 177 percent, Bangladesh’s by 109 percent, and Pakistan’s by only 32 percent in between 2009-2019. From 2015 to 2020, Pakistan experienced an annual growth rate of 1.6 percent in productivity, significantly lower in the region.
Furthermore, around 445,000 students graduate from Pakistani universities, and approximately 31% of those with professional degrees remain unemployed. In 2022 alone, more than 765,000 young qualified professionals left the country in search of employment overseas. The loss of talent is a serious threat to productivity.
Myth: Higher interest rates will control inflation in Pakistan.
In Pakistan’s case, it is paradoxical that high interest rates have not been effective in controlling consumer spending and inflation. This is because approximately 80% of borrowing in Pakistan goes towards fulfilling government budget deficits. High interest rates typically work well in countries with a substantial proportion of commercial borrowings, which is not the case in Pakistan’s economic structure. Instead of increasing national savings, the hike has led to an upsurge in public debt and repayment burdens. Inflation is outpacing the interest rate hike, reaching levels around 35-40%. In 2021, Pakistan’s domestic credit to the private sector was 15.4% of GDP while 84.6% was borrowed by the government.
Pakistan certainly has the chance to climb out of the growing crisis, but it cannot do so without serious reforms and severely curtailing the size of government. According to experts, Pakistan’s problems are small in the grand scheme of things. What is required is to add a mere $10 per capita to exports. This can be achieved through enhanced agricultural productivity, increased industrialization, and developing a serious export culture.