Pakistan’s weak economic growth outlook

The July update of International Monetary Fund’s (IMF’s or simply Fund’s) flagship report, titled ‘World Economic Outlook’ (WEO) projected Pakistan’s economic growth rate for fiscal year (FY) 2023-24 stood at a paltry 2 percent, while for FY2024-25 the Fund expects it to only increase to 3.5 percent.

Similarly, Asian Development Bank (ADB) in its flagship report ‘Asian Development Outlook’ (ADO) expected a similarly weak growth rate for the economy, only slightly better at 2.4 percent for the fiscal year that just passed.

Moreover, BMI, a Fitch Solutions company, in its recently released ‘Pakistan Country Risk Report’ projected economic growth – among other macroeconomic indicators up till 2033, and in addition to providing political economic analysis, and predictions for the country – for FY2023-24 at 2.4 percent, which is consistent with projections of an overall low growth situation facing the country by IMF, and ADB.

For the current fiscal year, the BMI report, similar to the projection by IMF, expected growth rate to increase slightly to 3.2 percent. The Report highlighted a number of downside political economic risks, which could push the rate below projection.

The Report indicated in this regard: ‘Pakistan’s economy remains very fragile in the face of external shocks. Given that 40% of Pakistanis work in agriculture, another flood or drought would pose a significant risk to the economy. The country’s fragile political situation could also derail the recovery. …Another round of protests in urban areas could disrupt economic activity.’

The report by BMI expected growth rate on average to be 3.5 percent over the next ten years. This is indeed a worrisome situation, given more than 40 percent of the population is below the poverty line, that the country has the highest youth bulge globally, putting pressures for generating employment, is heavily dependent on imports for growth, and that the country is among the top-ten most climate challenged countries, for which reasons it is exceedingly important that the country has a much higher economic growth rate— both in terms of domestic production and exports.

Higher economic growth is also exceedingly important to increase domestic resource mobilization, given the country has very little fiscal space, and for enhancing capacity to repay debt, given the country is highly debt distressed, and both in terms of domestic-, and external debt. So, at a time when the country needs to make a lot of economic resilience and welfare- related spending, the economic growth is very weak.

On top of that rather than assisting the country with climate change-related enhanced allocation of special drawing rights (SDRs) by IMF on an annual basis – consistent with overall weak multilateral spirit as reflected, for instance, in low provision of climate finance, in terms of more meaningful debt restructuring framework, or in lowering the walls of intellectual property rights (IPRs) and overall reducing trade restrictions for developing countries – the multilateral institution over-emphasizes pro-cyclical, and austerity based policy prescription in its programmes, both of which squeeze aggregate demand for making consumption, and investment expenditure, which are otherwise significant for enhancing economic growth.

Instead, in addition to receiving much-needed multilateral support, both in terms of financing and better debt restructuring framework, the country should follow counter-cyclical policy, whereby tax rates are reduced, tax base is broadened, tax orientation is shifted from indirect taxes to direct taxes, and productive, and allocative efficiency of government expenditure is enhanced, while subsidy needs are reduced through plugging leakages; for instance in the energy, and state-owned enterprises (SOEs) sectors.

Secondly, the country should adopt non-austerity policy, whereby there is no over-emphasized use of policy rate (monetary austerity) to control inflation, and there are no IMF programme conditionalities to ask the country to produce primary surplus (fiscal austerity), which basically results in reducing otherwise much-needed development expenditure, given weak economic institutional capacity, and high level of inflation not allowing much reduction in non-developmental (or current) expenditure.

The goal here should be to rein in policy rate, which given the high level of debt would mean significant decrease in interest payment related expenditure, and instead meaningfully, and sustainably control inflation through bringing a balanced policy emphasis in terms of aggregate demand-, and supply-side policies. Also, subsidy-related expenditure, which is very high, given a lot of losses in the energy-, and SOE sectors, should be reduced through bringing in non-neoliberal economic institutional, organizational, and market reforms.

With regard to expecting low economic growth situation over the next ten years, the BMI report indicated ’We forecast that real GDP growth will average 3.5% over the next decade, essentially in line with the performance between FY2012/ 13 and FY2021/22. However, risks are weighted to the downside.

The combination of falling agricultural production, currency weakness and political instability that caused growth to stall in 2022/23 could easily reoccur. On the other hand, we believe that a meaningful acceleration is very unlikely without significant structural reforms.’

Specifically, the Report projected real GDP (gross domestic product, or simply national income) growth rate at 2.4 percent for FY 2023-24, 3.2 percent for FY 2024-25, and 3.8 percent each for FY 2025-26, and FY2026-27, respectively.

Copyright Business Recorder, 2024