Tinkering with issues that are effects and not the principal cause of the crisis does not and cannot offer any durable solution. And the outcomes, at best, are certain temporary gains that mainly serve the purpose of some window-dressing while the economy keeps sliding downwards.
Stubborn structural imbalances have hamstrung sustainable and inclusive growth as the underlying core issue of increasing productivity remains largely unaddressed.
China’s transformation into a world factory explains much of its economic success. Burdened with heavy debts, many developed and developing countries are now focusing on expanding their manufacturing base by maximising local resources and talents.
In the current fiscal year, Pakistan’s savings-to-GDP ratio is stated to have increased from 11 per cent to 12.4pc, owing to the government’s efforts to control imports and reduce the current account deficit. But the increased savings rate did not translate into higher investment.
Improved national output and supplies in the domestic market can help combat surging inflation and resolve the current cost of living crisis
The investment-to-GDP ratio is provisionally estimated to have dropped to 13.5pc in FY23 against last year’s 15.6pc, much below regional peers. Fixed investment as a percentage of GDP has fallen from 14pc to just 11pc.
Private sector investment saw a major drop from 10.5pc to 8.5pc of GDP. Public sector investment as a percentage of GDP decreased from 3.5pc to 3.1pc, below the target of 3.3pc.
A positive development is that the projected current account deficit for the outgoing fiscal year is expected to be 1.1pc of GDP or $3.8bn, far better than the official forecast. But the rupee continues to depreciate.
And administrative measures taken to control imports have led to the stifling of the manufacturing sector, including the export-oriented segments for want of imported inputs. As a result, import-related tax revenues have also declined.
The performance of the main segments of the economy — LSM, agriculture and services — during the current fiscal year has been dismal
A significant fall in the cotton crop by 41pc from 8.33 million bales last fiscal year to 4.91m bales this fiscal year adversely affected the textile industry, the largest industrial segment, increasing the import bill for cotton and causing a decline in export earnings.
There is a strong need for the textile industry and cotton producers to work together to identify the causes of the drastic fall in farm output and take joint remedial measures, where possible, to boost cotton production.
Similarly, rice output, with significant export earnings, declined 21.5pc from 9.32m tonnes to 7.32m tonnes.
Food security is described as an area of ‘very high concern’ in Pakistan by a joint report published on May 29, 2023, by the United Nations Food and Agriculture Organisation and the World Food Programme. Pakistan imported 2.68m tonnes of wheat during July-April FY23 against 2.2m tonnes in the same period last year.
Similarly, imports of pulses jumped up to 1.14m tonnes from 783,634 tonnes. Pakistan is reportedly the second-largest importer of pulses in Asia.
The performance of the three broad segments of the economy during the current fiscal year has been dismal. Agriculture grew by 1.55pc, industry recorded a negative growth of 2.94pc and services posted a sluggish growth of 0.8pc. Large-scale manufacturing contracted provisionally with a negative growth of 7.98pc.
The UN study noted the country’s rising inability to import food with no International Monetary Fund bailout, with authorities required to repay $77.5bn external debt between April 2023 and June 2026, which it considered a substantial amount for the country with a GDP of $350bn in 2021.
According to the World Bank, Pakistan’s economy cannot sustainably grow more than 3.5pc due to structural constraints. That is not enough to provide employment or check the increase in poverty. Owing to the rupee depreciation, the per capita income in dollar terms fell to $1,568 in FY23 from $1.766 in FY22.
While official data indicates provisional GDP growth at 0.29pc for FY23, the size of the economy simultaneously declined to $341.554 billion from $375.449bn.
The situation has come to a point, says an analytical piece, where any step taken to stabilise the economy actually exacerbates the crisis. For instance, administrative curbs to improve the external account and increased interest rates to address currency devaluation and inflation are threatening to further destabilise the high-deficit budget.
Critics say successive governments’ taxation and economic policies have played a significant role in diverting funds from productive to non-productive sectors.
Dr Ali Hasnain of Lahore University of Management Sciences suggests that the government should use incentives at its disposal to nudge return-seeking rational entrepreneurs towards more productive sectors.
Prime Minister Shehbaz Sharif told a team of leading businessmen that the federal budget for 2023-24 would focus on increasing industrial growth and exports. In fact, the situation calls for placing productivity at the centre of the country’s economic development strategy.
The increase in value-added national output can create more trade surpluses for exports and help replace imported stuff with indigenous goods to cater to domestic demand.
And improved national output and supplies in the domestic market can help combat surging inflation and resolve the current cost of living crisis.
Published in Dawn, The Business and Finance Weekly, June 5th, 2023