In 2011-12, a broad consensus on Pakistan’s growth prospects broke down. The latest economic survey once again expects the Pakistani growth to be much less than its regional neighbours, that is, between 4 percent to 5 percent in 2012-13, and if economic management cum governance improves, than perhaps in excess of 6 percent by 2013-14 – remember, we need to grow by around 7.50 percent to 8 percent in order to first play catch up and then go on to cover our high population growth rate, which for now seems to be untameable.
To begin with, we need to understand what in the first place has caused this sharp deceleration in our growth. Quite a few of us, including the business community, insist that primarily it is due to a combination of internal factors: deteriorating law and order, corruption, choking of energy and power, faltering operating environment and a ‘policy paralysis’ on part of the government that has dealt the real blow to growth prospects. While there is no debating the internal factors, it is important for analysts to understand that the distortions in the external environment caused by the US recession, Euro Zone crisis and an overall recessionary trend in the global economy is also largely if not equally responsible for the slow going at home. The official view or the released economic survey subscribes to and promotes this view.
Back in the Musharraf days (excluding the caretakers’ period), the economy grew at nearly 7 percent on the back of a global boom. Growth slumped to a little over 4 percent in 2008-09 due to the global bust. In 2011-12, the world was again going through a crisis similar to what we had in 2008. Therefore, one should not be surprised if Pakistan’s growth should follow the same order as in 2008 and why it took yet another downward hit. In fact, the Indian economic survey released in March 2012 points towards similar trends in the Indian economy. It reveals that in all the G-20 countries except Australia, there was a monotonic decline in growth over successive quarters during this period. Pakistan cannot be an exception!
It follows that any improvement in the global environment should then also translate into a higher growth rate for the Pakistani economy in 2012-13. Further, there are actually signs and possibilities of such an improvement. The IMF Chief, Christine Lagarde, recently, said: “World economy has finally stepped back from the brink and we have cause to be more optimistic.” And if this does indeed happen, then the next question is: how prepared would Pakistan be to capitalise on this global economic turnaround?
Somehow, the sceptics do not concern themselves with this possibility and go a step further by saying that, preparedness or otherwise, there is a slim chance that a global economic up-turnaround will, in fact, have an automatic positive bearing on Pakistan’s future economic prospects. They argue that even if the global environment becomes more benign, inadequate fiscal consolidation is a fundamental obstacle in Pakistan attaining a high-growth trajectory. This proposition deserves close scrutiny. It is now clear that given an approaching election, the fiscal consolidation will happen more slowly than thought earlier. Although the latest budget’s medium-term fiscal policy framework envisages bringing down the fiscal deficit-to-GDP to a level under 4 percent, the chances of this practically happening are slim. A high-fiscal deficit is bad for several reasons. One, it creates problems of debt sustainability. This is already now an issue that is posing serious pressure on our foreign exchange reserves and one which has also recently been picked up for review by Parliament Oversight Committee on Economic Affairs. Secondly, high fiscal deficits can fuel inflation that dampens investor sentiment. Since fiscal consolidation is not likely to happen as planned, we should expect inflation to remain above the benchmark being targeted by the State Bank of Pakistan (SBP).
It needs to be understood that a high rate of inflation per se is not a problem. It is the variability in the rate of inflation that is the problem, as economic agents are then faced with uncertainty. The worry when inflation touches double digits (as in our case) is that policymakers tend to lose control over it - meaning that, it can shoot up further despite monetary interventions to curb it. In essence, this means that if the SBP can somehow demonstrate that it has the leverage to contain inflation within a single digit, the result in turn can have a strong positive effect on growth. The biggest concern though about the present slow pace of fiscal consolidation is that it will further erode the national savings rate and, hence, the rate of investment.
High investment rates have been a crucial factor every time Pakistan has met with some success in posting respectable growth rates.
Another growing concern is on the rising current account deficit (CAD), which is now believed to have crossed 6 percent. Historically, when Pakistan was not as isolated as today and in those times when the country did indeed have a steady inflow of foreign direct investment, there was a broad based consensus that a CAD of up to 3 percent was manageable. However, today with declining exports and this, in spite of a rapidly devaluing Pak Rupee, the assumption of even 3 percent does not appear to be prudent.
The optimists (government included), on the other hand, argue that if somehow the growth rate issue can be addressed, the domestic savings rate, though eroded by the fiscal deficit, can still rise on other accounts such as greater financial inclusion, a decline in the inflation rate and a rise in corporate savings. In short, according to them, the slow pace of fiscal consolidation that appears inevitable need not come in the way of an acceleration of the growth rate itself. What it will do is to only defer by a few years for Pakistan to get back to the growth rate of 7 percent or beyond; whereas, the upward process in principle can in the meanwhile be put back in place.
Since due to a dedicated policy on honest compliance to the WTO (World Trade Organisation) rules and regulations, Pakistan’s integration with the world economy has grown in recent years, many experts wonder whether even a high investment rate generated by Pakistan itself (China style) can deliver a high growth when global growth is sluggish. Theoretically, yes it can be possible. But sadly, in our case, we just do not possess the kind of resources China does and so for the time being must bank on the resumption of foreign financial inflows. For us, it is the disruption of financial flows that has affected us more than the slow global growth itself.
To summarise, while it is surely possible for Pakistan to revert to the path of high growth, in the near to medium terms, such an outcome will only be possible through the resumption of foreign funds inflow, since our internal resource generation at present stands constrained and is likely to remain this way till at least after the upcoming national elections.
Also, it is likely that Pakistan may need to move towards a new growth paradigm in which it will have to tackle growth amidst an environment where fiscal deficit on average remains at a higher level and inflation above the traditionally prescribed comfort zone. However, if, in the meantime, our international isolation gets worse, coupled with the current dangers on a global environment, where the world economy (especially the US and the Euro Zone) enters into a full-blown crisis threatening global economic recovery that we may be banking on, then all bets are off!
n The writer is an entrepreneur and economic analyst.