Over the past three decades, Pakistan’s economic focus, particularly in its dealings with the International Monetary Fund (IMF), has centred on addressing twin deficits — current account and fiscal. Despite concerted efforts, these issues have persisted, signalling the need for a fundamental shift in approach.

While managing deficits remains crucial, this writer believes sustainable economic growth, driven by increased foreign direct investment, must become the linchpin of Pakistan’s policy agenda. Only through a comprehensive realignment of all policies towards this goal can Pakistan navigate its way out of the vicious cycle of debt, low growth, inflation, and poverty.

The root causes of Pakistan’s low investment and savings rates are deeply entrenched in structural issues, requiring significant political, economic, and social reforms. The recent arrival of an IMF mission for a review underscores the urgency of addressing these challenges.

While the government’s focus on seeking an Extended Fund Facility after the current standby arrangement expires is understandable, it must recognise that the IMF conditions alone are insufficient for achieving sustained growth and transformation.

As seen with Argentina, Egypt, and Ethiopia, an arrangement with the IMF is not insurance against economic failure

The current IMF conditions linked to raising taxes, abolishing subsidies, maintaining market-determined exchange rates and privatisation are remarkably similar to those in the previous programmes and are unlikely to change.

While Pakistan has been forced to take the IMF conditions more seriously this time, the history of Pakistan’s 23 prior arrangements with the IMF, as well as those in Argentina, Egypt, and Ethiopia, suggest they will not be sufficient to achieve stable growth and economic transformation needed for a country with one of the highest population growth rates in the world.

Historically, successive governments have pledged to enhance tax collection but have fallen short, adversely affecting the investment climate in the process. While digitising the tax system is a positive step, it must be complemented by broader reforms to stimulate economic activity.

Recognising the pivotal role of investment, efforts have been made to attract FDI through initiatives such as the Special Investment Facilitation Council. However, a coherent economic revival plan is imperative for long-term stability and prosperity. Foreign private investors should be the primary focus of this plan.

A comparative analysis with neighbouring India and Bangladesh highlights Pakistan’s lag in key economic indicators, such as revenue-to-GDP ratio, savings rate, and investment-to-GDP ratio. These disparities underscore the need for a paradigm shift in policy priorities and sequencing of reforms.

It may surprise some that while Pakistan’s revenue to GDP lagged behind India’s by an average of 7 percentage points, it stayed above Bangladesh’s by an average of 4 percentage points.

Low Savings Rate

Another critical indicator is the domestic savings to GDP ratio. Historically, Asian countries with some of the highest saving rates outperformed the rest of the developing world by a wide margin.

Pakistan’s low savings rate can’t be due to a large informal economy as Bangladesh and India also have large informal sectors but higher savings

Pakistan’s savings rate is strikingly low compared to Bangladesh and India. It cannot be attributed to just a large informal economy as both of these countries have large informal sectors as well.

In 2022, India’s savings rate was 29.1 per cent, Bangladesh’s 25.2pc and that of Pakistan barely 4pc. From 2003 to 2022, India’s average was 31.1pc, Bangladesh’s 22.9pc and Pakistan’s a lowly 8.6pc.

Low Investment Rate

Why has Pakistan’s growth faltered so much compared to its South Asian neighbours? Let’s look at the investment-to-GDP ratio of the three countries.

In 2023, Bangladesh’s tax-to-GDP ratio was under 10pc but investment-to-GDP was 31pc compared to Pakistan’s 13.6pc. India’s tax-to-GDP ratio was 11.2pc but the investment-to-GDP ratio was 34pc.

While IMF engagement is necessary, Pakistan must develop a well-prepared plan that extends beyond meeting its conditions. It should encompass radical liberalisation and deregulation measures, drawing lessons from the experiences of successful economies like India and South Korea.

The cautionary tale of Ethiopia’s state-led growth model serves as a reminder that unsustainable borrowing for large-scale projects can exacerbate economic vulnerabilities.

China accounted for nearly 50pc of Ethiopia’s $28 billion external debt in 2023. The state-led model saw Ethiopia’s exports fall from 13.7pc of GDP in 2012 to an average of 7.7pc in 2019-2022.

Last December, Ethiopia became the third African country to formally default on its debt in as many years after missing the deadline to make a $33 million interest payment on its only international bond. This default places the East African country among a growing number of emerging economies that have defaulted on their debt in the aftermath of the pandemic.

According to the World Bank, there have been 18 sovereign defaults in 10 developing countries in the past three years, a number greater than any recorded in the previous two decades.

The different growth models and lessons therein merit carefully reviewing our priorities and goal-setting process. As we have seen in Argentina, Egypt, and Ethiopia, an arrangement with the IMF is not insurance against economic failure or even default.

Pakistan should focus on fostering investments and technology transfer to drive growth sustainably. While collaboration with the IMF may be necessary (as South Korea and India did in the 1990s), it should not be viewed as the ultimate objective.

Rather, Pakistan must chart a course tailored to its unique circumstances, judiciously mobilising international support, particularly that of foreign private investors, to realise its economic potential.

The writer is former head of Citigroup’s emerging markets investments and author of ‘The Gathering Storm’

Published in Dawn, The Business and Finance Weekly, March 18th, 2024