The story of Pakistan’s Tattered Economy – Foreign Debt and the Twin Deficits

Shabbir Ahmad

With sky high foreign debt, rising imports, declining exports and widening fiscal deficit, Pakistan’s economy is going through a challenging phase. The KSE-100 index has dropped 25% during the last four months. Earlier this year, it progressed to its all-time high points (52,876) but that progress proved to be short lived. Speaking of all-time high level, Pakistan’s economy has plunged down to some historic figures. The country’s trade deficit has reached its highest ever figure of $32.6b, imports surged to a historic level of $53 billion while imports exceeded $50bn for the first time in its history. These facts and figures have not been reported by opposition parties or a biased media outlet. These are official figures published by the Pakistan’s Bureau of Statistics.

It is worth mentioning that we did not reach these historic figures overnight. This trend has been going on for the last four years and none of the concerned authorities has ever taken notice of this threatening development. So who to blame?

Obviously the finance ministry is mainly responsible for this slump especially for the external balance of payment but there are also several other related factors which resulted in this downfall.

Pakistan’s total debt and liabilities have crossed the dangerous mark and the country has literally fallen into a debt trap. The country has been borrowing heavily to meet budget demands as it remains unable to broaden its extremely narrow tax base. Total external debt is about $83 billion against $62 billion in 2013.  In PKR the external debt would be about Rs. 25.1 trillion. Every Pakistani now owes Rs. 120,789 compared to Rs. 91,000 in 2013, an increase of 32% within four years. The government’s domestic debt also swelled to Rs14.9 trillion – higher by Rs1.24 trillion or 9% over the previous year’s level. The debt of public-sector enterprises grew at an alarming pace of 44.7% and was registered at Rs822.8 billion. The growth in total debt and liabilities was 11% during 2016-17 – the second consecutive year when the country saw a double-digit growth.

Balance of trade was Rs.186 billion in 2013 while in 2017 it soared to Rs.337 billion. Similarly, exports were $24 Million in 2012-13 while in 2015-16 it decreased to $20 Million. On the other hand, Bangladesh’s exports hit the $34 billion mark this year. Raw cotton and cotton fabrics exports decreased enormously. Raw cotton exports were Rs.41, 392 Million in 2011-12 but in 2015-16 it slumped to Rs.7, 948 Million and cotton Fabrics Rs. 260,237 million in 2012-13 while in 2015-16 it was Rs.230, 757 million.

The financial year 2016-17 was the fourth consecutive year when the current government has missed its annual export growth target, despite the country enjoying a duty-free status on its exports to the European Union.

Unlike other South Asian countries, where the exports’ shares in the GDP are in the double figures, Pakistan’s exports are barely 6.7% of the country’s estimated Gross Domestic Product (GDP). Analysts say exports can only be increased by state intervention at the institutional, policy and entrepreneurial levels. The performance of the government is dismal at all levels. The government needs to declare economic emergency and review the entire economy. Addressing the widening gap in trade and fiscal deficit should be the topmost priority.

Some of the reasons for decreasing Pakistani exports are the sluggish growth in the Pakistan’s major trading partners namely UK, USA, and China, high cost of production due to electricity shortfall and delays in order deliveries because of non-availability of energy inputs. Among Pakistan’s major exports, rice, cotton, leather, jewelry and the chemical sector have been hit hard by the slump in exports. Given the current scenario of Pakistan’s dwindling exports, a strategy for bolstering them becomes imperative.

We need to diversify our current export base which is mostly limited to basic commodities including textiles, leather, cotton and other basics like grains and fruits. We should make a transition from these exports to more value added items in the global value supply chain.

For instance, tech related items such as computer chips, integrated circuits, semiconductors, parts used in mobile and laptop manufacturing and other high tech items. It will lead to a transfer of technology, which is in itself a barrier in Pakistan for enhancing exports. It will also encourage local entrepreneurs to build these high tech devices themselves. It may bring a revolution in Pakistan’s exports.

Government support is of utmost importance for enhancing exports’ level. We have hundreds of thousands of unemployed graduates who are capable of making a difference but they are not able to do so due to lack of resources. Loans like the youth loan scheme may prove a stimulus in this regard. Government need to take a holistic view of the situation and should adopt a rather activist and Keynesian approach towards export promotion. The government should make a multipronged strategy towards the promotion of exports.

The first prong should be the immediate supply of cheap energy to the industry. The second prong should be to build foreign partnerships with technical universities and to build industry academia linkages to build innovative and high tech R&D based products. The third prong should be to not only give the loans to the youth but to inform, train and educate the youth about the new avenues and possibilities of exports. The industry based veteran mentors should be placed in the board of directors of those firms who are taking the loans from the youth loan scheme. The government should try to promote venture capital outside the IT industry as well particularly in the export sector.

For a secure future, we must be ready to take difficult decisions. We have to increase our tax base, bring in fiscal discipline and ensure continuity of economic policies. We have to ensure that Baluchistan, Interior Sindh, Fata (Federally-Administered Tribal Areas), southern Punjab and Gilgit-Baltistan also join us on the trajectory of growth and then move forward.