This article is part of a series titled “Is there a way forward for Pakistan?” Read more about the series here.
The Achilles heel of Pakistan’s economy is the failure to institute stable and sustained economic growth. There is a mad rush to growth for a few years, followed by collapse with high fiscal or current account deficit or both. The IMF is called in. Some patchwork is done and a sigh of relief is enjoyed. The relief is temporary as the anti-growth structure of the economy remains untouched. This game of musical chairs has now been played 23 times in the half century elapsed since the second partition of the country in 1971. All players are equally to blame – politicians for their short-sightedness, military for its long term delusions, judiciary for myopic interference in economic affairs, bureaucracy for its lack of professionalism, businesses for poor competitiveness, landlords for failing to make their own lands productive, media for ignoring economic realities, intelligentsia and ulema for obfuscating discourses and even the ordinary people for not protesting enough against the rot.
Part of the explanation is that, over the years, understanding of the economy has been made a complex game. This article is an attempt to show that there are simpler and more accessible ways of looking at the economy and appreciate what ails it fundamentally. Ask a housewife in Lahore or Karachi, the question posed by the German chancellor, Angela Merkel, in 2008: “The root of the crisis is quite simple. One should simply have asked a Swabian housewife, here in Stuttgart, in Baden-Württemberg. She would have provided us with a short, simple and entirely correct piece of life-wisdom: that we cannot live beyond our means.” Instead, we have followed Keynes without paying attention to the context. Keynes had observed in one of his Essays in Persuasion (1931) that “We have plenty of cloth and only lack the courage to cut it into coats.” Clothes in Pakistan, as we all know, are not plentiful. A senior federal minister has publicly stated that the country has defaulted. Yet the programme with the IMF is not focusing on the expenditure side of the budget. Relatedly, the attention has been diverted away from the expenditure side of the national accounts as well.
When the country embarked on its development plans in the 1950s, there used to be a major debate on the saving and investment gap. Over the years, questions of saving and investment rates have been relegated into the background. Their place has been taken by fiscal deficit and the current account deficit. The twin deficits do suggest that saving is low. But how many of us know what is the domestic saving rate and where is the growth, whenever it happens, coming from?
The real GDP growth at basic prices was negative in FY20 due the devastating impact of the pandemic. It revived to 5.74 percent FY21, mainly because of the base effect. But its continued upward path with a growth of 5.97 per cent in FY22 created an illusion of revival, which was shattered soon by the international as well as local forecasts of growth of less than the population growth in the current year. Initially, the State Bank expected it in the range of 3-4 per cent but subsequently reviewed it further down. Consistent with Pakistan’s known history of political cycles of booms and busts, some economists fear a negative growth. Regardless, the official forecast of the government was 5 per cent.
Source: Planning Commission
Table 1 tells a story not told often. First, and foremost, growth in Pakistan is almost entirely driven by consumption. As its point contribution exceeds the GDP at market prices, it means that our consumption contributes to growth in countries we import from. Growth, to be sustained, has to be driven by investment.
In the past six years, the average contribution of total investment was 0.2 percentage point. It was less than the 0.3 percentage point contribution of public consumption. The highest GDP growth in this period, 5.97 per cent in FY22, had the highest contribution of consumption at 8.3 percentage points. The rate of total investment increased from 14.6 percent of GDP to 15.1 percent of GDP. With the private investment unchanged at 10 percent, the increase was completely attributable to public investment. Despite the slight increase, the rate of investment remains among the lowest in the world with a ranking of 133 among 151 countries. Bangladesh has a rate of investment of 30.5 per cent. In Pakistan, the rate of investment declined from 18.7 per cent in the 1990s to 17.7 in the 2000s and 15.5 per cent in the 2010s. It remains stagnant at the average for 15.6 per cent in FY16-22. Stagnant investment and declining labour productivity cannot produce growth sufficient to absorb the annual addition to the working population, what to speak of the existing pool of the unemployed.
Even the low level of investment is dependent on external financing. It will be seen in Table 2 that in FY22, national savings financed only 11.1 per cent of the investment, with a gap of 4.1 percent of GDP filled by the net inflow of external resources, or the so-called foreign saving.
The national savings rate is low, and the domestic saving rate should also worry us. Domestic savings, it may be noted, are achieved by deducting workers’ remittances and net investment income from abroad from national savings. These include household savings, business savings and public savings. Financial liberalisation and financial inclusion measures have not had the expected impact on household saving. Much of the financially included household saving is crowded in by the government for consumption, as public saving is ruled out in an environment of persistently high fiscal deficits.
Domestic financing plays a crucial role in the revenue collection efforts of developing countries. As Table 2 shows, domestic savings declined from 9.8 per cent in FY16 to 6.4 per cent in FY19. In FY20, it increased to 7.6 per cent but started to decline again reaching as low as 4.5 per cent in FY22. The average for the period is 7.4 percent. The second highest GDP growth rate of 5.97 per cent was achieved with the lowest domestic saving rate of 4.5 per cent. Domestic saving have been declining since the 1990s when it was 14.2 percent of GDP. In the 2000s, it declined further to 11.8 per cent. Now it is in single digit.
Pakistan’s low domestic saving rate is the inevitable outcome of the economic system’s failure to carry out real (not cosmetic) structural reforms over the decades.
We have an investment rate that fails to move to a respectable level, leaving growth to consumption financed by foreigners and the local elite. Debt accumulation is the inevitable result and the economy is seriously exposed to external shocks. Low domestic saving reduces financial independence and the chances of sustained economic growth.
As noted above, low domestic saving rate is the inevitable outcome of the failure to carry out real, not cosmetic, structural reforms over the decades. Periods of high growth generated by foreign saving did not bring forth domestic savers and investors. Indeed, foreign savings substituted for domestic savings. High growth leading to higher incomes that do not translate into higher domestic savings and investment is a recipe for decline in the times to come.
Immediately, there is no alternative to completing the IMF programme in a strict compliance mode. In the medium term, the approach that investment will generate its own savings has to be abandoned. The country should learn to save and invest accordingly. A domestic saving rate of 20 percent of GDP and national saving rate of 22 percent invested in productive assets is doable.
The writer is a political economist with a PhD from Cambridge. He served as the Chief Economist at the Planning Commission of the Government of Pakistan. He is presently a columnist at Express Tribune.
