By Dr. Moniba Sana
Pakistan economy after achieving 6 percent growth in FY2022 has been facing unprecedented challenge of slowdown but at the same time recording hyperinflation. In FY2023 real GDP is expected to grow just by 2 percent whereas inflation is more than 25 percent.
State Bank of Pakistan, in line with rest of the world has increased discount rate to 17 percent to control inflation but emphasizing that fiscal policy need to be aligned with tight monetary policy to achieve inflation target of 5 percent in medium term. There are many factors responsible for the current macroeconomic instability including weak position in the external sector. The current account deficit of US$ 3.7 billion in H1-FY2023 although contained due to import control has financing issue under current scenario where SBP reserves have reduced to support less than 3 weeks imports as compared to 3 months required benchmark.
Pakistan needs US$ 8 billion repayment of loan in H2-FY2023 out of which US$3 billion may be rolled over by a friendly country thus requiring US$ 5 billion in the short run which is not possible without resumption of 9th review of ongoing Extended Fund Facility(EFF) program with International Monetary Fund(IMF). The depleting reserves compelled SBP to remove cap on exchange rate thus rupee depreciated from 230 per dollar to 262 in just 2 days in the last week of January.
This was followed by 35 rupees per litter increase in prices of petrol and diesel on 29th January, 2023. In the coming days, the expected electricity and gas price increases coupled with pass-through of exchange rate depreciation and additional taxes would put tremendous pressure on prices making life of common man even more difficult.
The current economic situation needs to be analysed considering global economic volatility and geopolitical tensions especially Russian invasion of Ukraine and US-China tight relations. According to World Economic Outlook released on January 31,2023 world growth is projected to decline from 3.4 percent in 2022 to 2.9 percent in 2023. The title of the said report “Inflation Peaking Amid Low Growth” is reflecting stagflation phenomenon in the global economy. Pakistan economy is also facing low growth with highest inflation having negative consequences for employment generation.
Pakistan has more than 60 percent population of age less than 25 years demanding 8-9 percent GDP growth for employment generation for new entrants in the labor market. Furthermore, according to estimates, Pakistan economy has reportedly lost $30 billion, accounting for 8% of the $375 billion GDP due to devastating floods causing economic losses throughout the course of the summer. In other words, the economy has been halted for nearly a year and a half.
Pakistan is dealing with a multifaceted crisis. Due to a potential political crisis, the rupee’s decline, decades-high levels of inflation, disastrous floods, and a severe energy deficit, its economy is on the verge of collapse. In light of the aforementioned predicament, it is crucial to offer a course of action for rescuing the nation from its multifaceted catastrophe.
1. Promote Investment in the context of ease of doing business, presently investment to GDP ratio is just 10 percent.
2. Expatriates remittances of US$32 billion is great source of containing current account deficit, however, their prudent use for investment and employment generation is the key for success. Empirical evidence suggests that remittances inflow in Pakistan promotes growth but at the same time creates demand-escalated inflation.
3. As of right now, fossil fuels generate 64 percent of the nation’s electricity, with solar power making up just 1.16 percent of that total. Two further sources of electricity are nuclear (5%) and hydropower (27%) respectively. Despite being located in a region that is being impacted by climate change, renewable energy only makes up 4% of all electricity generation. Pakistan needs to switch to solar/wind energy in order to address energy crisis and reduce its reliance on imported fuel. This will need investment to increase productivity of industry and agriculture.
4. Austerity measures must be implemented immediately to reduce the twin deficits. The devastating flood of 2022, as well as the effects of the global financial crisis caused Pakistan to add a significant amount of debts in order to finance its fiscal and balance of payments deficit. As a result, Pakistan’s debt burden increased once again since 2022. The bailout loans must be repaid, which would cause Pakistan’s debt obligations to skyrocket. If the debt is not cancelled, the government will face pressure to request additional bailout loans from the IMF. High debt burdens can impede growth and sustainable development. Hence, debt must be pro-growth in both the public and private sectors.
5. The government should impose a prohibitive tax on all imports that are not necessary. The nation that is struggling with its balance of payments is importing luxurious items in sizable numbers. There is need to limit the amount of such costly imports to save dollars and economy. Pakistan can cut its import bill by around $10 billion a year immediately through discouraging imports of fast-moving, high-value and non-essential goods.
Finally, we need to link education with economy for value addition, wealth generation and driving the financial engine comprising of industry, commerce, research & development, products and services.
Writer is PhD Economics and serving as an Assistant Professor of Economics at University of Chakwal, Punjab, Pakistan. She can be reached at email@example.com