Economic growth hitting rock bottom

The World Bank expects the GDP growth rate to plunge to 2.4 percent by the end of the ongoing fiscal year, 'as monetary policy remains tight and the planned fiscal consolidation will compress domestic demand'

In a joint press conference held in Islamabad on Saturday, by Prime Minister’s Advisor on Finance Dr Abdul Hafeez Shaikh talked up the condition of Pakistan’s economy. Shaikh pointed towards the trade and budget deficits, which have shrunk by 35% and 36% respectively in the first quarter of the ongoing fiscal year 2019-20, as compared to the corresponding period of the previous financial year.

However, Shaikh visibly dodged giving precise answers to queries related to development funding, which the Financial Advisor claimed was ‘more than last year’ or indeed inflation, which has resulted in mass discontent among the deprived classes.

As of September, the inflation rate had jumped to 11.4 percent, from 10.5 percent in August and 8.5 percent in July, as per Pakistan Bureau of Statistics. These figures are relative to the new base year (2015-16), with inflation actually rising to 12.55 percent if 2007-08 is used as the base year, which had been the case till the end of the previous fiscal year.

Almost on cue, a day after Abdul Hafeez Shaikh’s press conference, the World Bank released a report on Sunday painting a gloomy picture of the Pakistani economy. The report, entitled ‘South Asia Focus: Making (De)centralisation Work’, not only predicted a further slowdown in economic growth, it also foresaw a hike in the rate of inflation in the near future.

Pakistan’s GDP growth rate fell to a nine-year low 3.3 percent in FY19, after registering 5.79 percent in Fiscal Year 2017-18. The growth rate had showcased a steady rise from FY14, registering 4.05, 4.06, 4.56 and 5.37 percent rates till FY17.

The World Bank expects the GDP growth rate to plunge to 2.4 percent by the end of the ongoing fiscal year, "as monetary policy remains tight and the planned fiscal consolidation will compress domestic demand".

Given that Pakistan initiated the International Monetary Fund programme following the culmination of the previous fiscal year, the World Bank hopes that the growth would gradually recover after FY20. However, the report warns that any upturn in growth from Fiscal Year 2020-21 depends on policy rates.

“In Pakistan, increased pressures on the asset quality and capital adequacy buffers due to the economic slowdown and inflationary environment could hold back the forecast rebound in growth, especially when strong short-term deposit mobilization (due to recent increases in policy rates) continues to be intermediated mostly towards government securities,” the report says.

The State Bank of Pakistan has maintained high interest rates over the past six months, which led to the deterioration of the fiscal deficit. However, analysts believe that the central bank would lower the interest rate sometime next year.

The SBP had increased the key interest rate to an eight-year high 13.25 percent, indicating a 7.5 percent hike, over the previous two and a half years. The central bank retained the interest rate during the review last month, and is expected to maintain it doing into next year during November’s review as well.

Analysts are critical of the steps taken by the central bank and the finance ministry in recent months, with many citing the appointments made at the helm as the reason why policies aren’t designed towards the uplifting of the masses.

Multiple reports and sources within the Finance Ministry confirm that a reshuffle of those leading the economy was orchestrated as per the instructions of the IMF in the lead up to the bailout package. These include the appointment of IMF’s Dr Reza Baqir as the SBP Governor in May and Dr Abdul Hafeez Shaikh as the Financial Advisor in April.

“When you bring people from overseas, they have absolutely no idea about the ground realities of Pakistan. Those who don’t live here, don’t understand the problems of the masses,” says former Financial Advisor Dr Ashfaq Hassan.

“That’s why they are now quoting books, using various terms and creating webs of selective figures. The government might have inherited a tough economic situation, but the kind of people required to address it aren’t at the helm. That has compounded the challenge,” he adds.

Economist Shahid Siddiqui, the chairman of the Research Institute of Islamic Banking, doesn’t buy the government’s claims.

“They’re not being honest with the mases. They say the PML-N government left the economy in a bad condition, but the inflation at the time was 3.9 percent and the growth rate was 5.8 percent. Inflation is now over 11 percent and the growth rate is 3.3 percent. The foreign debt has increased by $11 billion in a single year,” he says. 

“Their policy boils down to bolstering the powerful, the tax thieves, by giving them concessions and amnesties, while putting the entire burden on the masses through indirect taxation, hikes in power and fuel, and discourage savings,” he adds.

Political scientist and economist Farrukh Saleem, the author of A Feasibility Analysis of Marginal Trading System, who briefly served as the current government’s advisor on energy and economy maintains that a financial mismanagement of large scale is going on.

“10 years ago, Pakistanis paid Rs 1.4 trillion in taxes, whereas last year they paid Rs 3.8 trillion worth of taxes. Government’s expenditure 10 years ago was Rs 1.5 trillion, now they’ve reached Rs 7.2 trillion. There’s no country in the world where government expenses have increased by 500 percent,” he says.

“And what are these expenses, they are basically losses. Rs 1,700 billion losses in power, Rs 2,100 in public sector enterprises. These losses need to be addressed, and the wheel of the economy would start working properly,” he adds.

KK Shahid is a Lahore-based journalist and a member of 101Reporters, a pan-Asia network of grassroots reporters

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