Inflation has become headache number one for the government. Underneath high inflation sits increasing demand for goods and services. What triggered this giant wave of insatiable demand was the government’s desire to boost Pakistan’s economic growth rate.

Accelerating economic growth primarily through private consumption and, to a lesser extent, via increased government spending is not bad. In fact, it is desirable. However, if policymakers remain fixated on the model of consumer-led economic growth ignoring the role of investment and net exports that is surely bad for long-term GDP growth and development.

Regardless of all the lip-services, the PTI government has so far failed in boosting the investment-to-GDP ratio and has also failed in enhancing volumes of net exports. What we see today — and we have seen it also during previous regimes — is “consumerism” generating more demand in the economy than can be sustained — and producing high inflation in the process. This “consumerism” — or buying beyond one’s needs — is also partly responsible for the fall of the rupee against the US dollar. It, in turn, is fueling inflation further.

Pakistan’s gross fixed capital formation was between 14.6pc and 17.3pc from 2012 to 2021, whereas Bangladesh’s was between 28.3pc and 31.6pc

A large part of the country’s shadow economy continues to make this consumerism more dangerous. The parallel economy also devours benefits of greater consumer spending — and consumer-led GDP growth.

Tax-dodgers, owners/operators of undocumented businesses, accumulators of illicit wealth, money launders, smugglers, corrupt people and those involved in outward capital flight also thrive — but their contribution to tax revenues remains negligible or nil.

On the other hand, the opportunity costs of “consumerism” — including diminishing investment in human capital and technology upgrading, is borne by all Pakistanis. (In 2015, Pakistan’s shadow economy, according to the International Monetary Fund estimate, equalled 31.6pc of its GDP, an alarming number when we compare it with Bangladesh (27.6pc), Turkey 27.4pc, Malaysia 26pc, Indonesia 21.8pc, Iran 18.4pc, India 17.9pc— and China 12.1pc).

Whether — and to what extent — the size of our shadow economy has shrunk during 2016-2021 remains a matter of academic debate. But even the most optimistic would agree that the size of our undocumented economy as a percentage of GDP remains quite large.

Keeping this in mind, the policymakers of the PTI government should have ideally aimed at boosting aggregate demand for economic growth through all its four main components ie private consumption, public sector spending, investment and net exports. But that was not done. Initially, the focus remained on enhancing private consumption and public sector spending — then ground realities led them to scale down public sector spending. Improving total domestic investment or gross fixed capital formation did not find much attention throughout the three and a half years of the PTI’s ‘hybrid’ democratic rule.

Only recently, the government has taken some serious measures to enhance gross exports. But net exports continue to fall and because of a surge in imports — both due to high international fuel and food prices and also due to growing “consumerism” at home.

Pakistan’s overall exports of goods and services were equal to 17.27pc of its GDP back in 1992 while in 2020 our total exports equaled just 10.57pc of GDP

A closer look at 2020-21’s list of imported goods, routinely updated by the State Bank of Pakistan, indicates an uptrend in forex spending compared to 2019-20 even on dairy products, eggs, honey, vegetables, fruits & nuts, coffee, tea, spices, prepared foodstuff, beverages and cutlery.

Increased import volumes of these and other hundreds of food items not individually named in general official documents also continue to inflate the food import bill — and, by extension, overall import bill.

When import bills rise faster than export proceeds — and it happens time and again in Pakistan especially during times of economic growth hovering around or exceeding 4 per cent — trade deficit increases. In other words, our negative net export becomes larger in size.

This means, the aggregate demand in the economy that the policymakers try to boost originate entirely in the domestic economy — with no element of net foreign demand being met with exports.

This issue can be addressed by keeping an eye on exports as a percentage of GDP and not just yearly export numbers. If exports continue to rise as a percentage of GDP over the long-term it is bound to reduce trade deficit drastically and can even start yielding foreign trade surplus ie net exports may jump out of the negative territory into a positive zone. But that can happen only when the country deliberately aims at achieving GDP growth with the right combination of private consumption, government spending as well as investment and net exports.

Pakistan’s overall exports of goods and services were equal to 17.27pc of its GDP back in 1992, according to the World Bank data. But it continued falling since then, sometimes inching only to slide again and in 2020 our total exports equaled just 10.57pc of GDP, SBP stats reveal.

The poor performance of the export sector can be attributed to a large extent by the fact Pakistan’s gross fixed capital formation or total investment has remained—and still remains—far lower than where it should be to promote productivity on a sustainable basis and to make our exports competitive in the world. Between 2012 and 2021, Pakistan’s gross fixed capital formation as a percentage of its GDP never touched even 18pc — it remained range-bound between 14.6pc and 17.3pc, according to SBP stats. Bangladesh did far better: its gross fixed capital formation ranged between 28.3pc and 31.6pc.

When economic growth is constantly obtained primarily through increased private consumption and some additional government spending, it also reflects in our banks’ credit distribution behaviour. Year after year, banks lend an excessive amount of money to the government through short-term debt papers, offer to private sector businesses short-term working capital — and not long-term investment finance — and make lots of pricey consumer loans. This is exactly what most commercial banks are doing now.

Published in Dawn, The Business and Finance Weekly, November 1st, 2021