“Crucial decisions are being made to correct the course of the economy and stabilize it.” said Advisor to Prime Minister on Finance, Dr Abdul Hafeez Shaikh as he unveiled the Economic Survey of Pakistan 2018-19.
While addressing a press conference in Islamabad, he said that the country is facing a twin deficit and there is no room for maneuvering. If we don’t fix our economy, we face default.
But what exactly is the Economic Survey of Pakistan 2018-19?
The survey is basically a report that highlights everything that a country’s economy went through in the preceding fiscal year. It highlights all the things that were done right and all the things that went wrong, and how exactly was it all managed by the government.
If there’s anything to know about economics, it is the GDP. The Gross Domestic Product is the single most important measure of how a country’s economy is faring.
While the GDP rate flew up to 5.8% just last year, it is expected to go down by quite a margin this year, to 3.3%, an all time low for the last 5 years.
The most direct impact of this was seen on employment, when the highest number of people were laid off. When the economy slows down, businesses and the government halt hiring new employees or even lay off people.
And while the GDP growth of last year was high, it was entirely consumption driven. Spending power increased, which led to a rise in the demand for imported goods. This growth was not sustainable as more dollars were going out of the country than coming into it. Simply put, for every dollar earned we spent two. And what does such a phenomenon lead to?
In the last 10 years, our export growth was zero, Dr Shaikh said. In the last two years, the trade loss hit $32 billion a year. On the contrary, our ability to earn dollars didn’t increase, which is not sustainable when you have a $97 billion foreign loan (that needs to be paid back in dollars).
With fewer dollars left in the central bank’s coffers, the government desperately needs to borrow more dollars from international sources to avoid a sovereign default and keep the economy afloat. Besides, this also put pressure on the Pakistani rupee. This explains why the dollar rose more than 20% to Rs150 since last August when it was trading at Rs124. A stronger dollar pushes inflation further up since everything that is paid for in dollars becomes expensive.
Drowning In Debt
On the local front, things aren’t any better. In the last fiscal year, the budget deficit was Rs2,300 billion because the government spent more than it earns. To plug this gap, it resorts to borrowing, which rose to Rs31,000 billion. According to Dr Shaikh, the government needs to pay off Rs3,000 billion in the next 12 months alone. The national debt should not be more than 60% of the GDP, but we crossed that threshold in 2018, as mentioned in the Economic Survey.
To pay off the debt in local currency, the government resorts to printing more money which creates inflationary pressures. Yes, this is another reason why prices across the economy have been going up. This year, inflation crossed 9%, the highest rate in five years. Since the debt servicing obligations are huge, the government also takes fresh loans to retire its previous debt.
We are exposed on both fronts, internal and external, Dr Shaikh said, summing up where the economy stands.
Taxation is a fundamental problem faced by Pakistan. “Pakistan’s rich are not willing to pay taxes,” Dr Shaikh said, “If we can’t raise tax revenue, we can’t meet our expenses or pay off our debts.”
The government is taking steps to broaden the tax net and the tax amnesty scheme is one of them.
But What is The Government Doing?
Dr Shaikh said the economic mess has been several decades in the making and will need more time to be fixed. However, to ward off an immediate economic threat, the government has taken several decisions based on this Economic Survey.
The government has obtained $9.2 billion from cash-friendly countries to shore up its depleting dollar reserves. Besides cash, the government has also obtained a $4.3 billion credit facility to import oil from Saudi Arabia and the Islamic Development Bank.
“To show the world we are ready for fiscal discipline and big decisions, we did a program with IMF for $6 billion,” Dr Shaikh said, adding the IMF arrangement will open up other financing opportunities. including $2 billion to $3 billion from the World Bank and Asian Development Bank.
Talking about other measures he said, “There is no need to import luxury goods so we have increased tariffs. If rich wants luxury items, they have to pay,” he said. Exporters were given subsidies on gas and electricity so they don’t have excuse for not being able to increase exports.
What More Should Be Done
The country’s new economic advisor attributes Pakistan’s dismal economic status to the inability to increase exports. “All the countries that have prospered in the last decade did so by increasing their exports,” said Dr Shaikh. Reforms need to be made to counter this.
The PM’s economic adviser said that in the long term, the government has to fix institutions and human capital to produce goods and services that can be exported to the rest of the world.
The government-owned companies are a drain on the economy and bailouts given to them come at the expense of development. These loss-making companies eat up Rs1,300 billion a year, the money that could be spent on education, health and infrastructure development programmes, he said. The government is trying to fix all of this but it will need more time to show results.
According to the advisor, the government’s main priority is to stabilise the economy first and protect it from immediate threat. Carrying out economic reforms is also top of the list, along with forming friendly relations with other countries; boost economic growth; protect the less privileged; make the rich pay tax; and adopt austerity measures.