Pakistan Fiscal policy and issues in the economy
The federal government’s annual budget is an opportunity to put the economy on track for growth and recovery through fiscal policy management. The budget represents the government’s priorities.
It is an important tool for economic growth and desired outcomes as the Government can go for high growth or low growth-expansionary or contractionary fiscal policy. But unfortunately, we failed to achieve the desired outcome from budgets throughout, and we are stuck in slow and stagnant growth, high inflation, high unemployment, fiscal deficit, and high foreign debt.
For three decades, Pakistan has plunged with poor economic growth with a 4.1 percent increase in real GDP. At the same time, South Asia was growing by 6 percent. Furthermore, our economic growth contracted further in the past three years and, real GDP growth was as low as 1.9% on average due to the combined effect Balance of Payments (BOP) crisis 2018 and the Covid-19 pandemic.
In countries like Pakistan, where, according to the World Food Program, 43 percent of people are food insecure, and 18 percent of the population lacks access to food. In countries with high unemployment and price inflation, policies that support economic growth are highly welcomed. Because economic growth is the engine that lifts people above the poverty line and provides them food security and safety. Moreover, economic growth paves the way to enhance domestic agricultural productivity, curb price inflation, and offer employment opportunities. But, on the other hand, it is hard to fight against socio-economic challenges and more challenging to provide the necessities without economic growth because it troubles the national treasury to feed them.
According to World bank estimation, Pakistan has an export potential of 88.1 billion dollars, four times higher than it is right now. Political instability and deadly neglect to improve the export sector created this difference. However, strong motivation, consistent allocation of resources, and adaptation policies are much needed to ledge this considerable difference.
Pakistan is in a debt trap; we borrow more and more money to repay our massive external loans, finance current accounts and maintain forex reserves. At the end of 2008 Pakistan, foreign debt was $45.4 bn. Now it crossed 116.3 billion dollars with a growth of 145%. PTI-led Government aggressively relied upon heavy foreign debt and substantial growth in foreign loans; similarly, all the Governments failed to achieve their tax revenue target and ended up with high foreign debt. After this failure and deadly negligence to improve the export sector, the Government could not pay rising import bills, and the current account deficit was growing rampantly.
It is believed that all the governments presented their fiscal policy after consulting with all stakeholders and donor groups, yet we failed to achieve the targets. The target of sustainable economic growth and social equity? It is no doubt that budgeting is an important challenge for federal governments around the globe in which political rivals and international pressure groups create pressure. Still, the success is who maintains the balance between his political survival and national interests.
Initial impressions of the budget were good, but it neglected some core issues in Pakistan’s Economic ground realities and the effects of the growth-oriented budget on BOPs. Our economy is less export but more income-led import elastic. It means a slight change in income will lead significant change in imports. In 2005 real GDP growth was estimated at 4.5 percent. In the same period, growth in imports was recorded at 11 percent. It means an increase in imports is two times that in the actual gross domestic product. Three things that affect the Current Account more are remittances, imports, and exports. If the country attains 5 percent growth in real GDP, 12 percent expected growth in imports. So, our imports will touch 62-64 billion dollars. Exports are not much responsive to domestic growth and are expected to remain at 27 billion dollars. In the current scenario, remittances will also not increase. It will alter the Current Account from a surplus to a 7 billion dollars deficit. Pakistan will need 25 billion dollars to finance external debt payments and other domestic needs. Saudi Arabia already announced $2 billion in deferred payments for oil. Pakistan will be in dire need to knock at the doors of IMF and other international donors and investors to pay our external debt.
Secondly, in the right direction, Government gave incentives to boost growth in the potential sector of the economy like agriculture, industrial, and CTIs. But there is a structural problem in these sectors because these sectors were ignored for years. Furthermore, some policies even contracted these sectors. Therefore, for the revolution and structural change in such sectors, strong will, political stability, and consistency are required. Without political stability, one cannot attain sustainable economic growth in the long run.
Thirdly, Government used Public Sector Development Program (PSDP) instrument for growth stimulus (43% increase in public spending). But it is of no denial that the efficiency of spending under PSDP has fallen drastically since 1990. International Monetary Fund and other international institutions criticized efficiency and deliverance in public sector spending.
In the end, although the fiscal policy made a good initial impression to boost economic growth, it ignored the long-run impacts on the economy. Economic Growth and inflation go side by side. Of course, we have no other choice than economic growth, yet Government must take some initiatives before time to avoid its drastic effects. Moreover, the current hike in cotton yarn prices in international markets may generate some revenues but we have to put focus on the long run.
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