Commonly, we hear that from 2013 to 2018, Pakistan's economy went upward trajectory, coupled with a stable exchange rate and steady inflation which boosted the economy. However, the government adopted short term solutions instead of sustainable long term policies.
A stumbling economy using inadequate economic indicators to measure Growth.
This is not the first time in Pakistan's economy is facing a serious crisis, but every economic crisis is much bigger than its predecessor.
Repetitive ups and downs made the Country's economic progress unpredictable. In the last 20 years, Pakistan had multifaceted challenges. Each passing year, efforts were made to subvert the short term issues on the cost of long term economic stability.
Masses started to believe that finally, they are going in the right direction. Little they knew that the Government is addressing macroeconomic indicators only, while fundamental reforms are not made.
During 2013 to 2017, Pakistan witnessed tremendous Growth and GDP went up from $231 billion in 2013 to $304 billion by June 2017 while the foreign currency reserves went up from mere $8 billion to $17 billion.
Between 2013 and 2017, the total exports went down from $25 billion to $21 billion. Many agree that poor infrastructure leads to power outages and blackouts for more than 16 hours a day; therefore, affected productivity.
Also, Pakistan did not diversify its exports, and due to complex regulations and insane web of different taxes, by each passing year, Pakistan started to lose its competitive edge and an increase in the cost of doing business.
Between 2013 and 2017, the total imports went up from $44 billion to $57 billion. Many argue that this is mostly due to the import of machinery for CPEC projects.
However, things changed between 2016 and 2017, a whopping 42% increase in imports, sow the seed of instability which Pakistan is still struggling today to balance.
In Economic Survey of Pakistan (9.1), the Government argue that such imports were inevitable due to CPEC related projects. But this is partially correct. CPEC related machinery accounted for 38% growth while the remaining came from petroleum, food, automobiles and others.
Over the last 5 years, Pakistan has seen around 45% growth in the power sector. There are around 40 to 45 Independent Power Producers operating in the country. By each passing year, Pakistan relies more on petroleum-based fuels which contribute around 25 to 30% of total import value.
Pakistan Energy mix is:
Lack of diversification in energy sources is a significant risk that can completely change the landscape of Pakistan's economy in days. The rising fuel prices is a dent to foreign reserves and real pain for a common man to bear the rising costs.
During previous government tenure, from 2013 to 2018, the tax revenue increased from Rs. 2,226 billion to Rs. 3,842 billion, growth of 72% which should be appreciated.
However, the devil is in the details.
On average, 62% on revenue drives from indirect taxation, while 38% constitute direct taxation.
Indirect taxes are imposed on goods and services, while direct taxes are imposed on an organization or individual.
60% of the direct tax collected is from withholding tax, easy to collect and monitor while an excessive number of indirect taxes result in inflation.
Withholding tax revenue derives from nine heads, namely, imports, salary, dividends, banking transactions, contracts, export, cash withdrawal, electricity bills and telephone.
The tax revenue increased was due to the continuation of import led policy, resulting in a hike in indirect and withholding taxes.
In the last five years (2014 to 2018) Pakistan was showing progressive revenue growth, but the tax to GDP ratio remained constant around 10%, showing a bleak picture of tax reforms. Do refer to Tax year books for details.
During the successful closure of the IMF program in 2016, IMF appreciated the government efforts in managing the macroeconomic indicators but also cautioned that if reforms are not made on time, Pakistan soon banging the IMF doors.
You might be wondering that how come Pakistan made a greate comeback while its exports were declining, tax to GDP ratio was constant and imports were rising.
After the 2013 elections, the new Government went for the IMF program, which allows Pakistan to raise cheaper finance from the international lenders. Also, Pakistan took a few expensive foreign currency loans.
During 2013 to 2018, Pakistan took foreign currency loans amounting to $45 billion and returned $19.8 billion. Hence, the total debt went up from $60 billion to $95 billion.
Near mid-2016, Pakistan foreign currency reserves went up to whopping $23 billion, highest in her history, but, this didn't last long.
As Pakistan continues to import more, the current account deficit started to rise sharply, and, to keep the growth momentum, Pakistan did not revalue its currency, and State Bank keeps on providing dollars at a constant rate to banks which later sell the same to importers.
By June 2019, the current account deficit went to whopping around $38 billion, with meagre reserves of around $16 billion.
From December 2017, Pakistan started to devalue its currency to slow down the outflow of dollars, also agreed by the former finance minister. And, this proved to be a costly delay.
Do you know that US Dollars support the Pakistani rupee? The more dollars with the State Bank of Pakistan, the stronger the rupee. It does not matter whether the inflow of dollars is from loans, exports or remittances.
An economy, which consumed its forex reserves, built up from loans, to keep its economic growth, is inevitably designed to fall, having little room for the new government to breathe. Ultimately, the poor have to bear the consequences of government decisions.
Therefore, Pakistan's economy needs to grow organically. A certain percentage of GDP growth, perhaps between 4 to 5% is best suited, as whenever Pakistan crosses this limit, her current account deficit increases and it requires pain and time to normalize.
Pakistan requires stable homegrown productivity to sustain its economic growth. Pakistan's economy is the victim of Dutch disease variant but on steroids. Also, to keep the current account deficit, not more than $6 billion to $7 billion, to support growth. In addition, Pakistan needs to document its informal economy in order to collect enough revenues to meet its both ends.
We have to wait until the dust settles.