Over the years, Pakistan economy is struggling with growth.There has been some occasional rise in the GDP growth but that had never been sustainable. Recession, unemployment, inflation, fiscal deficit, rising debt and external imbalances remained salient features of Pakistan economy. Every four-five year, the economy isback on the same track.
Most of the economists agree, Pakistan economy is going through its most critical phase and technically, it’s in stagflation. Economic dictionaries define stagflation is a situation whereeconomy faces tripartite challenges- high unemployment, soaring inflation and low growth rate. Stagflation is complex situation as it puts policy makers in dilemma. Any counter measure to control inflation would aggravate unemployment and probablyfurther deepen recession.
Does Pakistan economy is in stagflation?. If we look into the data recently released by the Central Bank of Pakistan, the answer is-Yes.According to the SBP handouts, in the first half year of 2019, inflation rose to 7.3 percent, while in June, the consumer price Index(CPI) reached to 8.9 percent. The SBP has further warned that inflation will continue to be in the range between 11-12 percent in 2020.As is well known, inflation is dangerous phenomena because it affects consumer’s purchasing power, discourage saving and investment and cause uncertainty and confusion. For any economy, inflation above2-3 percent is highly undesirable.Zimbabwe and Venezuelaare just two examples, due to inflation, the both economies almost collapsed.In May 2019, inflation in Zimbabwe surged to 97.8 percent, similarly, Venezuelahas witnessed worsehyperinflation and there is no good news for the current year. The IMFforecasts that Venezuela’s inflation rate will reach to 10 million percent in 2019!Pakistan is notZimbabwe or Venezuela, but given sharpincrease in prices and decrease in Pak Rupee against US dollar, there is a possibility of currency crisis followed by hyperinflation. Recent rise in inflation in Pakistan has already taken its toll andpeople has started feeling the pinch.
What about the growth rate? Thanks to queerish and inadvertent fiscal and monetary policies-specifically, introduction of new tax policy, whammyraise in policy rate and weaker domestic demand, the GDP growth rate will remain 3 percent this year and 3.3 percent in 2020. With these figures, one could easily foretell that this year, Pakistan is likely to postthe lowest GDP growth rate in the region.
While analyzing the external sector, things are even bleak. Though, the current government has been able to narrow down the trade deficit by reducing some imports, however, it failed to boost exports. For the fiscal year 2018-19, the export target was $ 27 billion butthat remained a distant dream. Figures from Pakistan Bureau of Statistics shows that our trade deficit stood at $ 31.8 billion-highest in last five years.
While tackling with inflation, SBP has decided to raise the policy rate 100 bps to 13.25 percenteffective from 17 July. In current circumstances, such approach iscounter-productive,as rise in interest rates, will increase cost of borrowing,it also affect both-consumersand producers.
Imposing taxes for a cause is always welcomed but putting taxes on funerals, Tandoors or baking Naans, taxes on crossing bridges- will only remind us old days of Soviet Union or European Revolutions! Most of the economists agree that Pakistan should widen its tax base. If government wants to impose new taxes, why not putting taxes on owners of hundreds of acres of land and luxury goods?
On the fiscal side, it is true that Pakistan tax-to GDP ratio is low. Current government plans to increase tax -to GDP ratio to 20 percent. But we all know, tax reduces consumer and producer surplus alike. Rising value- added tax, directly hit consumer surplus and squeeze public spending. Pakistan is still lowermiddle -income country, its per-capita income and wages are meager. Above all,nearly half of the population live below the poverty line. Given these conditions, putting additional taxon almost all goods is unethical if not illegal. Imposing taxes for a cause is always welcomed but putting taxes on funerals, Tandoors or baking Naans, taxes on crossing bridges- will only remind us old days of Soviet Union or EuropeanRevolutions! Most of the economists agree that Pakistan should widen its tax base. If government wants to impose new taxes, why not putting taxes on owners of hundreds of acres of land and luxury goods? Since the inception of Pakistan, thanks to landlords, tax on agricultureishighlycontroversial. Alike agriculture tax, defense budget and auditing of non- development expenditures remained a mystery. Is there anyone who dare to look into these matters? Mr. Khan is much inspired from the Chinese economic miracle. But does he really know, how much Chinese are spending on capital formation- creation ofinfrastructure, construction of roads, buildings, transport, communication etc? How much Chinese earmark fordefense budget? How they evaluate and monitor the military budget? What percentage of Chinese GDP is being spent on human capital, education and health? How Chinese have lifted millions of people out of poverty?
The fundamental problem with Pakistani economic model is that it is heavily reliant on foreign assistance, loans and aids. For sustainable growth, Pakistan has to rely on itself and generate real GDP growth by spending borrowed money on specific sectors. Recall-Heckscher-Ohlin(H-O)Model-“countries export products that use their abundant and cheap factors of production”. China has rightly utilized their abundance factor-human capital. Pakistan is also endowed with young population and that is our abundance factor. We have to spend on human capital, adoptexport driven policies, improvement in our Ease of Doing Business Ranking, good governance and establishment of strong institutions. This is the secret beyond China miracle. Can Pakistan replicate the Chinese model without understanding the real dynamics of economics?
The writer is a Professor, Director One Belt One Road Research Centre, Yancheng Institute of Technology. School of Economics and Management