THE prevailing global economic and geopolitical volatility has put severe pressure on many transition economies. Pakistan is no exception, as the country has remained in an acute economic recession for the past three years, with a high risk of continued macroeconomic instability.
But Pakistan’s response to the unprecedented economic challenges has been of a transactional nature rather than a policy one, which could lead to a structural shift from a patronage-based old-school mindset of economic management.
The investment climate remains jittery and has failed to give investors confidence to come forward with the much-needed industrial expansion for increasing the production base required for jobs, higher value addition, and technology transfer.
Meanwhile, the ruling elite continues to sell populist slogans and misplaced dreams of large sums of foreign investment in government-to-government deals rather than creating space for the private sector to reach out to Chinese and Middle East investors for productive joint ventures.
Living on short-term transactional handouts is dangerous and unsustainable. This is what our multilateral and bilateral partners are telling us as well
In fact, space for the private sector shrank considerably during the past few years as banks extended a disproportionately high level of credit to the government, crowding out private-sector financing, whose options are shrinking due to a very high cost of capital with the prevailing policy rate at 22 per cent.
Due to prevailing uncertainties, high inflation and a decline in investments, the projected economic growth is much lower than what is desired and downside risks to the economic outlook remain exceptionally high.
According to various estimates, real GDP growth is projected to reach only 1.7pc in the current fiscal year and 2.3pc in the next. The continuation of a low-growth scenario is risky in many ways, as it may lead to further social fragmentation in a country where 150 million people are below the age of 30 and looking for sustainable economic opportunities.
Let’s now take an objective view of Pakistan’s response to the prevailing economic challenges.
Pakistan has seen many economic crises before but has managed to use its geopolitical leverage to obtain financial bailouts from Western allies or friendly neighbours. However, with the withdrawal of US-led forces from Afghanistan, this transactional leverage has not only eroded but the country is now seen as being in the Chinese camp. This has also impacted Pakistan’s negotiations with Bretton Woods Institutions — the IMF and World Bank — as no favours were granted to relax loan parameters.
Unfortunately, the ruling elite continues with their old tactics, and despite all-out efforts by the highest political offices, the IMF programme remained inconsistent, with a huge trust deficit between the lender and Pakistan’s economic managers.
The approval of the $3 billion IMF stand-by arrangement in July last year did unlock some new external financing and averted a severe balance of payments crisis. However, despite that short-term loan agreement, the State Bank’s foreign exchange reserves are expected to remain under pressure, necessitating continued import controls and constraining economic recovery.
The current bridging arrangement with the Fund is expected to convert into another Extended Fund Facility (EFF) for the next three years. This would mean a continued slowdown in aggregate demand, tight monetary policy and stricter fiscal discipline in the medium term.
Pakistan desperately needs to increase the level of investment in productive sectors to revive economic growth by generating foreign exchange, jobs and productivity. However, the country’s investment to nominal GDP ratio was lowest in the region at 13.6pc in 2023, compared with 15.7pc in the previous year.
If Pakistan needs to grow on sustainable grounds, it will have to replace the dangerously high debt with a much higher inflow of investment from local and regional investors. Continuing with the transactional approach, Pakistan has reached out to the oil-rich countries of the Arabian Gulf for invest-ment in various sectors, including energy, mining, communication, and agriculture.
A new high-level coordinating body, the Special Investment Facilitation Council (SIFC), has been created to fast-track these investment deals. However, no significant transaction has been materialised so far from the sovereign wealth funds of the Gulf countries. It is crucial to keep in mind that the nature of financing from the Arab countries will look for infrastructure contracts and will not help much in reviving the productive sectors.
Chinese investment has also slowed down because of that country’s internal economic pressures, policy inconsistency in Pakistan and slow development of agreed economic zones for industrial relocation. The advantages of regional connectivity can only be realised if policies are formed to attract private capital to create jobs, exports and value addition.
Meanwhile, poverty is on the rise in Pakistan and almost 40pc of the population now lives under or around the poverty line. During the devastating floods in 2022, the agricultural, food, livestock and fisheries sectors faced damages of up to $3.725 billion.
Besides, in a business-as-usual scenario, Pakistan is projected to lose up to 3pc of its GDP by 2050 due to the impact of heat on crop loss and livestock. This estimate is much worse in a pessimistic scenario, with losses amounting to at least 9pc of GDP.
The policymakers have failed to give relief to the flood-affected people by presenting a solid case for the international community. Nothing really materialised from the much-hyped donor conference in Geneva where over $10bn was claimed to be pledged.
The donors now look for concrete project proposals with local investment and strong corporate governance. In sharp contrast to the global thinking on relief support, our ministers continued to make a case for free money for the government — a non-starter at the outset.
The above examples are not meant to highlight the failures of a particular government, but it is a reminder to make policy adjustments to the changing world and make a competitive economic proposition that could attract investors.
Living on short-term transactional handouts is dangerous and unsustainable. This is what our multi-lateral and bilateral partners are telling us as well.
The author is a senior development and economic policy expert and former chairman of the Board of Investment. He is currently advising the UN and governments as a leading expert on financing for development.
Published in Dawn, January 21st, 2024
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