It is a measure of the gross mismanagement of the economy by the PTI government that in a brief period of ten moths it has lowered Pakistan’s GDP growth rate from 5.5% in 2017-18 to 3.3% during the current financial year as against the target of 6.2%, devalued rupee to dollar rate from 115 in May, 2018 to 157 in June, 2019, and raised the inflation rate to 9.11% during 2018-19 from 3.9% a year earlier. All this was done for the sake of lowering the current account deficit from $18 billion or 5.7% of GDP to a more sustainable level. While the current account deficit did shrink to $12.68 billion in July 2018-May 2019 through the reduction of imports to $50.47 billion from $55.14 billion a year earlier, the above mentioned negative developments also had the inevitable effect of increasing unemployment and poverty, thus, breaking the back of the downtrodden and the low income groups in the society. In addition, they raised enormously the burden of external debt in rupee terms and increased fiscal pressures on the government for the payment of mark-up on foreign debt and the repayment of foreign loans during the current and succeeding years. As another worrisome development, exports remained stagnant at $19.16 billion during the first eleven months of the current financial year.

A careful look at the developments in our economy over the past year clearly show that the massive devaluation of the Pakistan rupee to lower the current account deficit was not the right decision because of the enormous economic and fiscal costs and the huge inflationary pressures that it has entailed as against marginal benefits. Besides, our exports failed to register any increase during the past eleven months of the current financial year. The expectations to the contrary were unrealistic because they ignored the constraints on the supply side which prevented a rapid increase in exports in response to devaluation. In economic terms, our exports have proved to be price inelastic so far.

A substantial increase in exports in response to devaluation presupposes the presence of unutilized productive capacity and the availability of exportable surpluses of goods and services, required by the outside world, at competitive prices. Our exporters were unable to take advantage of the devaluation to make inroads in foreign markets due to a variety of factors including lack of unutilized productive capacity, non-availability of exportable surpluses, our technological and managerial backwardness, marketing incompetence, and the high costs of inputs. Ideally these factors should have been immediately attended to by the government’s economic managers as the rupee was devalued so as to obtain maximum possible benefit in the form of increase in exports.

It also needs to be underscored that the current account deficit in the final analysis reflects the excess of national investment over national savings or, in other words, the excess of national expenditure over national income. From this point of view, our high current account deficits are the logical result of our low national saving rates as compared with our national investment rates. In 2017-18, our national saving rate was as low as 10.4% of GDP as against national investment rate of 16.7% of GDP translating into a current account deficit amounting to $18 billion. During the current financial year, the current account deficit declined to $12.68 billion in July-May FY2019 as compared with $17.92 billion during the same period a year earlier. This reduction was achieved by lowering the national investment rate to 15.4% of GDP and thus slowing down the GDP growth rate while our national saving rate, the critical factor for a long-term decline in the current account deficit, remained at the low level of 10.7% of GDP.

Thus, the improvement in the current account deficit by about $5 billion was achieved at the huge cost of slowing down the GDP growth rate from 5.5% to 3.3% (loss of about $6.8 billion) and devaluation by about 27% during the current financial year which lowered the dollar value of Pakistan’s GDP from $315 billion in 2017-18 to $291 billion in 2018-19 (loss of $24 billion). Thus, the economy suffered the total loss of about $31 billion for reducing the current account deficit by just $5 billion! In addition, the country suffered from the high inflation rate of 9.11% causing extreme hardship to the poor sections of the population, increased fiscal pressures in rupee terms, and slow growth of almost all sectors of the economy. As for large scale manufacturing, its output declined by 2%. The massive devaluation, therefore, was like using a sledgehammer for killing a fly on the table and, in the process, breaking the table and the china on it!

The same goal of a reduction in the current account deficit could have been achieved without such heavy costs by holding the rupee-to-dollar rate around 125 while encouraging the growth of exports through appropriate supporting measures and reducing imports by imposing heavy import duties on luxury and non-essential items and on those products whose domestic production needed to be encouraged through an import substitution program taking into account a long-term view of the principle of comparative advantage. In addition, bold steps should have been taken to encourage austerity on a nation-wide basis to raise the national saving rate substantially and to raise the tax-to-GDP ratio from the low figure of 12% of GDP to at least 19% in the immediate future with the long-term target of 25% of GDP. Tax revenues could have been increased substantially by widening the tax net, withdrawing consumption-oriented tax exemptions while providing incentives for investments in productive sectors, and raising the tax rates on the consumption of luxury and non-essential consumer items. Unfortunately, the economic planners of the present PTI government proved unequal to the task and brought the economy to a virtual standstill.

The budget for 2018-19 does not indicate that the PTI government has drawn the right lessons from its past experience. It continues to follow without due diligence the prescription dictated by the IMF in the hope of getting a paltry sum of $6 billion (by way of comparison, Pakistanis abroad annually remit over $20 billion to Pakistan) over a period of three years instead of carefully analyzing the prevailing difficult economic situation and taking the required tough decisions to put the country on the course of economic stability and rapid growth. It is not surprising, therefore, that the government’s medium term plan projects a low GDP growth rate of 2.4% with inflation rate of 11-13% for the year 2019-20. This would mean increased poverty, unemployment and hardship for the low income groups.

According to the budgetary estimates for 2019-20, the net revenues of the federal government will increase from the estimated amount of Rs.3070 billion in 2018-19 to Rs.3462 billion in 2019-20 whereas the federal government expenditure will rise sharply from the revised figure of Rs.6, 419 billion in 2018-19 to Rs.8, 238 billion during the next financial year. Consequently, reliance on internal and external loans will increase. It is worth noting that fresh external loans will increase from Rs.1, 353 billion in 2018-19 to Rs.2, 991 billion in 2019-20. Therefore, the total public debt, which grew from Rs.24, 952 billion in June, 2018 to Rs.28, 607 billion by March, 2019, will further increase substantially. In short, the country’s economic prospects remain extremely gloomy at present because of the gross mismanagement by the PTI government. It is still not too late for the government to radically overhaul its economic and budgetary policies in the best interest of the country.