The country is facing a twin deficit and there is no room for maneuvering. If we don’t fix our economy, we face default, Adviser to the Prime Minister on Finance, Revenue and Economic Affairs Dr Hafeez Shaikh said, addressing a press conference in Islamabad on Monday.
Dr Shaikh was briefing the media ahead of the release of the Economic Survey for fiscal year ending June 30, 2019.
What is the Economic Survey?
It is an overview of Pakistan’s economy with an annual account of the country’s economic performance in the outgoing year. It’s about achievements and failures of the economy and its management by the government.
Let’s start with the most important measure of economic performance: the GDP growth rate.
Unlike last fiscal year, when the economy grew by 5.8%, the GDP growth rate is expected to slow down to 3.3% this year. It was for the first time in five years our economy grew by less than 4%.
This explains why so many people lost their jobs in the last 12 months. When the economy slows down, businesses and the government create fewer jobs or even lay off people.
Until a year ago, our GDP was growing at its fastest in over a decade but much of this growth was driven by higher consumption. People were spending too much, which increased the demand for imported items and caused a dollar drain. 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. Where did this lead us?
More expensive dollar
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 puts pressure on the Pakistani rupee. We have already seen the dollar rise more than 20% to Rs150 against the rupee 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.
National debt breaches the threshold
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 earned. To plug this gap, it resorted 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.
Inflation at five-year high
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 rate 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, referring to the state of the economy.
Rich not paying taxes
“Pakistan’s rich are not willing to pay taxes,” Dr Shaikh said, calling it the fundamental problem facing our economy. “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.
What the government has done so far
Dr Shaikh said the economic mess has been several decades in the making and they will need more time to fix it. However, to ward off an immediate economic threat, the government has taken several measures and decisions.
The government has obtained $9.2 billion from friendly countries to shore up its depleting dollar reserves. Besides cash, the government has also obtained a $4.3 billion credit facility from Saudi Arabia and the Islamic Development Bank to import oil.
“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 project financing 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 the rich want luxury items, they have to pay,” he said. Exporters were given subsidies on gas and electricity so they don’t have an excuse for not being able to increase exports.
More needs to be done
The country’s new economic manager said basic reforms were not done and exports didn’t grow. “All the countries that have prospered in the last decade did so by increasing their exports,” said Dr Shaikh.
The PM’s economic adviser said that in the long term, the government has to fix institutions and develop skilled 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.
The economic adviser said the government’s priorities are to protect the economy from immediate threat and stabilise it; carry out economic reforms; have friendly relations with other countries; boost economic growth; protect the less privileged; make the rich pay tax; and adopt austerity measures.