Hope has once again prevailed over reality in Pakistan financial policy-making circles. The economic focus has shifted from preventing financial meltdown to spurring growth. There are few sops for the poor, borrowing and spending are back, and IMF stabilization is out in the much-hyped annual budget.
The government wants to jump-start a low growth, high inflation, chronically ill economy burdened by a mountain of debt. It is confident that it can raise the resources to finance economic growth by taking on more debt, widening the tax base, and selling state assets.
The government official forecasts of GDP growth and tax revenues seem very optimistic. The budget deficit has ballooned to over 8 percent of GDP. And the public debt to GDP ratio has skyrocketed to around 90%. Economic gimmickry and cheerleading will not fill the deep fiscal hole or support shaky public finances.
The worst ravages of Covid-19 that have devastated the region have spared Pakistan. But the problem is that the economy has been growing slowly over the past two decades. Annual per capita growth has averaged only 2 percent, less than half of the regional average. It is partly because of erratic macroeconomic policies. And an under-reliance on investment and exports to drive economic growth.
The government points to the current account surplus and record inward remittances from overseas Pakistanis. It has also rationalized import tariffs to aid the export industry. But a few hopeful signs in an otherwise bleak economic outlook offer little wriggle-room. A higher growth target will more than likely increase the import bill.
The budget follows a familiar pattern that led to the previous boom and bust cycles. Recurrent cycles that had brief periods of brisk consumer-led growth. But they often led to the frequent current account and fiscal deficits. And IMF programs and policy tightening. To expect more from the same policies to produce a different outcome is foolish.
With over 50% of the budget going towards debt servicing and national defense, there is little fiscal space to spur development. And for investment in infrastructure, health, and education that are an integral part of economic progress.
Pakistan cannot maintain a favorable balance of payments without high-value exports and import substitution. The heavy reliance on Saudi oil on concessionary terms and Chinese/Western credit will probably continue. An export-led recovery or regaining economic sovereignty seems just another distant mirage.
Tackling weak government finances, stagnant growth, and an economy in perpetual crisis mode need fundamental reforms. The status quo is an obstacle to sustained economic growth. The population explosion and rising poverty need rapid double-digit growth.
Pakistan has abysmal human development statistics, particularly for women's education and literacy. Around 40% of Pakistan's population of 210 million subsists below the poverty line. The rich pay little or no taxes. Increasingly, extremists exploit the massive rich-poor gap.
In other developing countries, land reform, pro-poor empowerment, population planning, and liberal education have played a critical role in economic progress. Deregulation, trade reform, and public enterprise reform helped as well. These reforms helped to create a competitive export-oriented economy, industrial success, and inclusive development.
But successive governments in Pakistan have lacked the flexibility or will to undertake critical reforms. Instead, governments have always chosen the easy road. They have fostered aid dependence, elite privilege, and rent-seeking. Power elites have even stymied half-hearted educational, economic, and governmental reforms. There are no signs that the present government is any different because it is beholden to vested interests to stay in power.
The fact is that a tiny, undemocratic, mostly Punjabi feudal-military elite runs the country. It is no surprise that it exercises absolute control over the allocation of limited resources. A parasitic elite culture promotes self-enrichment, corruption, and poor governance. The hybrid political system hides behind a facade of democracy. A weak state cannot exercise its authority in an even-handed manner or project a long-term development vision.
It has not helped that there is no political consensus across party lines to reform the economy. In other countries, economic crises have provided an impetus for reform. And for the formulation, implementation, consistency, and continuity of reforms. Not so in Pakistan. Scoring political points is more important than dealing with crises.
The government's policy shift from regional geopolitics to geoeconomics will remain mere jargon. Pakistan must offer more than just parroting about being a pivotal state. A failing state with a begging bowl in hand does not promote investor confidence or assist export promotion.
Quick-fix remedies and band-aid solutions are no cure for a history of economic mismanagement. The country's dismal economic prospects need visionary leadership. Hope alone will not cut it. Industrial, agricultural, and economic malaise requires a new direction. The time for hesitant reforms in low doses is long past.
(Article changed on Jul 04, 2021 at 8:22 PM EDT)