Reassessing economic priorities

Reassessing economic priorities

Dr. Muhammad Shahid

Economy of Pakistan shows signs of contraction and registered a negative growth for the first time since 1952. There are two main reasons. First, economic reforms and the stabilization policies of the current ruling PTI government negatively affected the health of Pakistan’s economy. The second reason is the crisis caused by the corona virus which further accentuated the slow economic growth.

The contractionary fiscal policy and austerity measures of the government along with tight monetary policy of the State Bank badly hit the industrial sector and economic activities much before the current corona virus pandemic. Government has missed all the targets set for the Services, agriculture and industrial sectors.

Services sector is the largest contributor in the overall economic growth in Pakistan. The contribution of services sector in the gross domestic product is around 60.43 percent.  In the current fiscal year growth in the services sector is 0.6 percent against the target of 4.6 percent. Tran-sport, storage and communication sub sectors normally provide key support for other productive activities hit hardly, shrank and registered a significant minus 7.1 percent growth. Performance in the housing sector, general government services and private services are somehow satisfactory and registered 4 percent, 3.9 percent and 5.4 percent respectively. This is worth to mention that services sector registered a growth of 6.4 percent in fiscal year 2018.

The contractionary monetary policy of the central bank badly affected activities in the industrial sectors. Industrial sector registered a negative growth of -2.64 percent against the target of 2.3 percent. Under the economic stabilization program, State Bank adopted tight monetary policy and increased the interest rate repeatedly to bring hot foreign money to the country. This policy of the monetary managers acted as a double edged sword. First, this policy miserably failed to attract hot foreign money. Secondly, the tight monetary policy stance negatively affected the domestic investment and reduced economic activities considerably. Currently the contribution of industrial sector in GDP is 20.58 percent against the 20.80 percent in the last fiscal year. Besides the unrealistic monetary policy stance, the bad performance in industrial sector is further accentuated by the increased in government taxes and current lockdowns.

Agriculture sector grew by 2.7 percent in the current fiscal year against the target of 3.5 percent. Growth in the agriculture sectors showed signed of improvement after poor performance of 0.6 percent in the last fiscal year. Thanks to the kind weather, production of the major crop registered and increase of 2.9 percent and other crops increased by 4.6 percent.

The GDP volume or size of the economy was 313 billion dollars before the current PTI government took oath of the treasury benches. The size of the economy reduced to 280 billion dollars last year. This year the overall size of the economy is expected to further reduce to 265.6 billion dollars. The shrinking economic activities and devaluation of the Pakistani currency are the main drivers of the reduction in the size of the economy. Double digit inflation contributed to increase GDP in rupees term from 37.9 trillion rupees in fiscal year 2018-19 to 41.7 trillion rupees in the current fiscal year 2019-20 registered an increase of 9.9 percent. There is decline of 6.1 percent per capita income has reduced to 1366 dollar in the current fiscal year from 1460 dollar last year. For those who wants to make you happy and show you a rosy picture, the per capita income in rupees terms has increased from 198,028 rupees in fiscal year 2018-19 to 214,539 rupees in fiscal year 2019-20 registered an increase of 8.3 percent.

The above projections are provisional and made on the basis of data available for the first ten months of the current fiscal year. There will be no drastic changes in these statistics at the end of this fiscal year on 30th June. Earlier ministry of finance and International Monetary Fund had projected 2.4 percent GDP growth rate. The main reason for this low projection was the economic reforms and stabilization policies adopted by the government under the IMF bailout package program.

Now this is high time to reassess our economic priorities to secure a modest economic growth in the coming years to accommodate the growing population and generate employment opportunities for the youth bulge. The government needs to introduce and adopt transformative reforms with potential to arrest the growing macroeconomic imbalances. Sustainability in government’s expenditures demands improving legislative framework governing public finance, spending efficiency, reforming tax administration and increasing government revenues. Legislative framework and arrangements are there in the form of Fiscal Responsibility and Debt Limitation (FRDL) act to restrict the debt to GDP ratio to 60 percent. But in practice, FRDL act miserably failed to restrict the behavior of politicians to stop excessive spending and borrowing. Similarly Fiscal and Monetary Policy Coordination Board is also ineffective to ensure the in-creased coordination bet-ween the treasury benches and monetary managers. Investment has consistently decreased due to the poor business environment in the country. Improving business environment to enco-urage domestic investors and attract foreign direct investment is also instrumental in stimulating gro-wth and generating opportunities for the people. Last but not the least; human capital is very important component of the growth equation. The most important resource of the country is youth bulge. The government needs to increase inv-estment in humans by providing them good health, skills and education to increase their productivity.

Twitter: @shahidpide1

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