Pakistan is receiving bad predictions from the experts over the economic decline to continue. Pakistan’s economic outlook for the fiscal year 2023 has deteriorated following heavy flooding as the economy was already reeling from the effects of macroeconomic and fiscal instability. Flood disruptions and damages are expected to slow real GDP growth in combination with tight monetary stances, high inflation and an unconducive global environment. The flooding is expected to have spillover effects on the services, textile, food processing and transportation industries.
The fiscal year 2023 forecast for Pakistan reflects a weaker currency, higher domestic energy prices, crop and livestock losses and supply disruption which may cause food shortages and price hikes. Supply chain issues may further exacerbate these shortages broadening inflationary pressures and production bottlenecks.
The economy has taken a nosedive during recent months partly due to external factors but mainly due to domestic policy decisions like widening the gap between interbank and open market rates which is causing the Hundi-Hawala system to flourish thus leading to a decline in remittances inflows. An equally discomforting fact is that approximately 750,000 plus Pakistanis decided to leave the country in 2022 in search of greener pastures. It remains to be seen whether there is an uptick in workers’ remittances in 2023 given the fact that Europe is facing a recession and middle-income nations are also feeling the brunt of debt issues.
Pakistan’s economy is trapped in a vicious cycle. We are basically a consumption-ridden society relying heavily on imports. Now, when curbs on imports are placed to check the domestic demand and balance the current account, tax revenue collection takes a hit which leads to fiscal imbalances and that translate into a current account deficit and this is how the cycle goes on and on. On the other hand, if consumption and imports are allowed to support GDP growth, then the current account deficit becomes unmanageable. In order to break this cycle, the industries need to start producing for exports rather than exporting production surpluses. Once the exports reach 12 to 15 percent of GDP, we may see an uptick in Foreign Direct Investment (FDI). The current taxation structure is also lopsided and needs reforms. It needs to be fair by bringing in those sectors in the tax net where tax collection is abysmally low.
As regards the outlook for the year 2023, the first area of concern continues to be debt servicing. The budget deficit in 2023 is likely to be above the very low target of 4.9 percent of GDP which necessitates more borrowing. The cost of debt servicing will also be higher due to a hike in the policy rate. Since almost all the deficit financing has been through domestic bank borrowing, it is a clear indication that there is limited access to external borrowing due to the loss of the international creditworthiness of Pakistan. Only between July 1 and November 18, the government borrowed Rs. 1.238 trillion whereas the bank’s lending to the private sector totaled just Rs. 42.6 billion leading to a “crowding out” effect. If credit demand remains unmet, companies will be left with no option but to use their retained earnings for their day-to-day operations instead of diverting them toward R&D, innovation and capacity building. As commercial banks are content with lending to the government, the vacuum created is being filled by private lenders which is giving rise to a shadow economy. It remains to be seen how soon the efforts of coming out of the FATF gray list are undone.
The global economy is also slowing down and the outlook has darkened into recession in recent weeks. After the pandemic, we have seen politics of confrontation and belligerence whereas now the need of the hour is international cooperation. Till the time the help from ‘friendly countries’ arrive, the following steps should immediately be taken by the government (despite opposition from elite capture) if Pakistan is to be salvaged from an implied default situation given the multi-crises brewing up for the year 2023:
- Introduce taxes on real estate that will generate revenues for city governments
- Reform the tariff structure to address the anti-export bias in the trade policy
- Reform the agriculture pricing policy to ensure food security
- Introduce a plan to shift the energy mix towards renewables and water conservation in agriculture