Economy in Doldrums

By: Dr. Ashfaque H. Khan
Published: October 1, 2017
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I will start with at least three major challenges that Pakistan faces today. The first being the low economic growth that has been persisting since 2008-09.

Pakistan’s economy is growing at an average rate of 3.0 to 4.0 percent per annum, notwithstanding what our honourable finance minister has claimed about the growth accelerating to 5.3 percent or whatever ‘highest growth rate in a decade.’ This is nothing but political sloganeering and has been forcibly attained from the national income accounts office’s bureau of statistics.

The question is why has the growth rate slowed down? If we look at the private sector investment as percentage of GDP, it is on the decline. The credit off-take to the private sector as percentage of GDP has also declined substantially from 27 percent in 2006-07 to roughly 14.5 percent in 2016-17. This is also reflected in a decline in the private sector investment rate (private sector investment as percentage of GDP has come down from roughly 13 percent to 9.5 percent).

Now, as a result of low economic growth, Pakistan’s economy has failed to create enough jobs. Today, we are facing a serious issue of job creation. If we survey the market, we will see MBA degree holders roaming around willing to work for monthly salaries of Rs. 15,000-20,000. However, some 10 years ago, MBA graduates were not willing to accept jobs below salaries of Rs. 40,000-50,000 per month. Because of the non-availability of jobs these days, they willingly agree on lesser pay scales. This creates a sense of despondency in the hearts and minds of many young graduates.

If we look at the labour force survey, particularly the labour force participation rate – persons of a certain age bracket actively seeking jobs in the labour market – we find that it has been on the decline substantially. If we look at the male population, especially the age group of 15 to 19 years and 20 to 24 years – the age when students normally go out into the job market – their participation rate has declined substantially.

A slowdown of the economic activity has created a grave national security issue. We don’t know what the 2.0 million people – who are out of the labour market – are up to

In other words, approximately 1.7 to 2 million of the workforce has been pushed out of the active labour market. If a person remains unemployed for a prolonged period, he or she often loses the confidence and may stop looking for employment. This is a dangerous phenomenon. No wonder, many disillusioned educated youngsters are  entering into the fold of terrorists, extremists and even criminals.

The recent incident involving students of the University of Karachi and before that the person responsible for the Safoora carnage, were all university graduates. This indicates a growing sense of frustration and disillusionment among many of our youngsters. Some of them easily become natural foot soldiers of terror masterminds and of those, who want to destabilise Pakistan.

Therefore, a slowdown of the economic activity has created a grave national security issue. We don’t know what the 2.0 million people – who are out of the labour market – are up to.

Pakistan needs to address the issue of unemployment and more importantly of the urban educated youth unemployment, on a war-footing.

Over the directives of this government, the Pakistan Bureau of Statistics (PBS) stopped releasing employment/ unemployment numbers since 2014. As a result, today we have no idea about the current state of unemployment in the country.

The second challenge that we are facing today is that of the balance of payments. Pakistan has landed itself in a difficult position on this front thanks to the myopic policies of Finance Minister Dar.

Last year, our current account deficit surged to over $12 billion. In other words, Pakistan needed at least $12 billion to bridge the gap between exports of goods and services and imports of goods and services, commonly known as the current account gap. Pakistan also needed $8.2 billion on account of debt servicing. This means we required over $20 billion – our financing need – to pay for debt servicing and to bridge the current account gap.

I don’t know how much Pakistan received, but as per my knowledge it wasn’t more than $10 billion, collected from all the sources they could tap; including borrowing from traditional sources, such as the World Bank, the Asian Development Bank, the Islamic Development Bank, Foreign Direct Investment (FDI), and the Chinese finances among others.

How did we finance the remaining gap of $10 billion? We have lost roughly $6 billion of our foreign exchange reserves. And then we had to borrow the remaining amount from non-traditional sources that is from private foreign commercial banks (over $4 billion).

Going to the IMF at this stage will be disastrous for the country. This time around, the IMF will not be a benign lender

Fiscal 2017-18 will be even more challenging. My projection is that Pakistan’s current account deficit will be somewhere around $18 billion, and our debt servicing requirement will be somewhere around $9.0 billion, meaning that we would need $27 billion for debt servicing and financing the current account deficit.

According to my calculations, our inflows will be in the range of $11.5 to $12 billion. Therefore, the projected financing gap in 2017-18 would be around $15.0 – 15.5 billion.

How is this gap going to be financed? Who will fill this gap and at what cost?

These are serious issues, but unfortunately the government is busy “elsewhere” and economy is not on its radar. In such a situation, Pakistan has no option but to go to the IMF for a fresh bailout programme sometime in March – April 2018.

Going to the IMF at this stage will be disastrous for the country. This time around, the IMF will not be a benign lender as it was during the previous programme (2013-2016) when Pakistan was accorded 15 waivers. Never in its history has the IMF given such a large number of waivers to any country. Pakistan would be slapped with harsh and biting conditions by the IMF in any new programme as Islamabad’s relations with the masters of the Fund have soured. Pakistan should do everything to avoid going to the IMF this time.

How can we avoid going to the IMF?

Pakistan needs to adopt a multi-pronged strategy that deals with some import-compressing and some exports-promotion measures with some adjustment in the exchange rate. Pakistan also needs to tighten its monetary policy. To put it simply, Pakistan needs to reduce imports worth $5-6 billion and increase exports by at least $1.0-2.0 billion in 2017-18.

Furthermore, Pakistan needs to float two to three sovereign bonds during this fiscal year. If any further gap still exists, Pakistan can go for the non-traditional financing (private foreign commercial banks). Pakistan can also request friendly countries to support its economy at this critical moment. Some additional measures to improve capital flows can be undertaken, but its details merit a separate article.

The situation of the current balance of payments requires serious action but unfortunately at this crucial juncture, our tainted finance minister is busy trying to save himself and his boss Nawaz Sharif from corruption cases.

If the government goes for the expansionary fiscal policy, as is stated in the budget for 2017-18, it will harm the country’s economy even more

The first step to bring the economy back on track starts from the resignation or removal of Finance Minister Dar because the international financial institutions would not feel comfortable in dealing with such a tainted person. Pakistan needs a full-time, serious, knowledgeable and active person to head the Ministry of Finance to steer the country out of the current financial mess.

We need to understand that in order to ward-off crises, one instrument will not be enough. I see people talking about sharp adjustments to the exchange rate, but it won’t be enough to address our balance of payments’ woes. Rather, there should be a combination of instruments dealing with the fiscal, monetary and exchange rate policies.

This is an election year and the government will be bent upon rolling out its resources, which will be dangerous for the country. Expansionary fiscal policy at this stage will accelerate imports at a time when we need to cut them substantially.

If the government goes for the expansionary fiscal policy, as is stated in the budget for 2017-18, it will harm the country’s economy even more.

Pakistan needs to review its fiscal, taxation, expenditure, monetary and exchange rate policies immediately. Three areas – growth, budget, and balance of payments – are the key challenges. We need some serious thinking and a good team to get ourselves out of the troubled waters. Interestingly, measures required to protect the country’s balance of payments stand at odds with the government’s plans of reckless spending to win elections.

But will this government be able to take timely corrective measures? The past gives us little hope.

About the Author
Dr. Ashfaque H. Khan
is the principal and dean at NUST School of Social Sciences and Humanities, Islamabad.