Pakistan’s economy is a classic example of a country which for decades has been living far beyond its means. This addiction to excessive expenditure is the fundamental reason for current account deficits and the nation’s dependence on foreign loans and assistance for meeting its economic requirements leading to high levels of external debt. According to economic analysis, the excess of national investment, which determines the GDP growth rate, over national savings translates into current account deficit. The higher this excess, the higher would be the current account deficit. What is true about Pakistan as a nation also applies to the financial balance sheet of the government of Pakistan which year after year runs high levels of fiscal deficits because its total expenditure invariably far exceeds its total revenues. Until there is an adequate understanding of the real reasons behind high levels of current account and fiscal deficits and necessary corrective steps are taken, our economy would come out of one crisis only to fall victim to another.

The PTI government’s experience in the economic field is quite instructive in this regard. It inherited from the outgoing government an extremely high level of current account deficit which was estimated to be $ 19.8 billion mainly because of the trade deficit amounting to $ 31.8 billion offset partly by workers’ remittances. On the positive side, in the fiscal year 2017-18, the GDP growth rate was 5.8 % and the inflation rate was estimated to be 4.5%. Fifteen months later, the economy has witnessed a sharp and welcome decline in the current account deficit which was reduced to $12.75 billion in 2018-19 and to $1.47 billion during July-October, 2019 compared with $5.6 billion during the corresponding period a year earlier. However, this welcome reduction in the current account deficit was achieved at a very high cost, which does not speak highly about Pakistan’s current economic managers.

The reduction in the current account deficit was brought about through a massive devaluation of the Pakistan rupee lowering the rupee to dollar rate of exchange to about rupees 155 to a dollar and a sharp increase in the State Bank’s discount rate which is currently 13.25%. These measures led to a marked decline in imports which were estimated to be $52.44 billion in 2018-19 as against $56.60 billion a year earlier. Unfortunately, however, the exports more or less remained stagnant at about $24 billion because of serious supply side constraints which had apparently been overlooked by the policy makers.

The most worrisome development was the sharp decline in the GDP growth rate from 5.8% in 2017-18 to 3.3% in 2018-19 as against the budgeted target of 6.2%. This sharp decline in the GDP growth rate was a huge setback for Pakistan’s economy, especially when combined with the inflation rate of about 11% and the massive devaluation of the Pakistan rupee. The combined effect of the decline in the GDP growth rate and the massive devaluation of the Pakistan rupee was a reduction in GDP per capita from $1652 in 2017-18 to $1497 in 2018-19 according to the official figures. Pakistan’s GDP declined from $284 billion in 2017-18 to $236 billion in 2018-19, a huge loss of $48 billion just for reducing our imports by about $ 4.16 billion!

The purchasing power of an average Pakistani was reduced further if one takes into account the inflation rate of 11-12% over the past year. According to some estimates, about one million Pakistanis may have lost their jobs because of the slowdown in GDP growth rate and the business activity in general, adding to the pain of an average Pakistani family. Millions of Pakistanis reportedly have been pushed below the poverty line aggravating the misery of the people. It is not surprising therefore that there is general discontent among the people about the economic performance of the present PTI government. According to a recent Gallup & Gilani poll, 53 percent of the Pakistanis identified inflation as the biggest problem followed by 23 percent who said that unemployment was the biggest problem. Only four percent of the people identified corruption as the biggest problem.

Arguably, the same or even better results could have been achieved in terms of reducing the current account deficit at a much lower cost to Pakistan’s economy and without causing so much pain to the common man in the country. For instance, the desired reduction in imports could have been realized by raising tariffs drastically on luxuries and other non-essential items while giving exemption to the import of machinery and raw materials required for building up the country’s productivity and increasing exports. The revenues raised through higher import duties could have been allocated for the facilitation of exports. In addition, the State Bank should have imposed high rates of interest selectively on financing the purchase of non-essential items and other wasteful expenditure while offering lower rates of interest for productive and export promotion purposes. Therefore, instead of patting itself on the back for reducing the current account deficit at such a heavy cost, the PTI government should consider other policy options which would reduce the current account deficit while increasing exports, accelerating the GDP growth rate, reducing inflation and increasing job opportunities.

Perhaps the most serious constraint on accelerating the country’s GDP growth rate while balancing the current account deficit is its low national saving rate. The GDP growth rate is a function of the national investment rate. The higher the national investment rate, the higher would be the GDP growth rate, other things remaining the same. As pointed out earlier, the excess of national investment over the national saving is reflected in the form of current account deficit. Therefore, for avoiding high current deficits, high national investment rates to generate high GDP growth rates must be supported by high national saving rates. Failing that, any effort to accelerate the GDP growth rate would lead to high levels of current account deficit as happened under the previous PML(N) government.

The present PTI government has simply slashed the GDP growth rate to balance the external account. The danger is that if the national saving rate is not raised through changing our life style as a nation and through appropriate fiscal and monetary policies, the acceleration of the GDP growth rate in later years would again lead to high levels of current account deficits. Pakistan’s current low national saving rate of about 11 percent of GDP can only sustain a GDP growth rate of about 3-4 percent per annum without incurring a high level of current account deficit. Therefore, the only viable option for Pakistan to raise its GDP growth rate substantially and achieve economic prosperity without incurring high current account deficits and raising external debt abnormally is to raise our national saving rate to 25-30 percent of GDP. If India can maintain a high national saving rate of 30 percent of GDP, why can’t we do it?

However, the goal of rapid economic progress while remaining within our means would be within our reach only if our elite consisting of top politicians, senior armed forces officers and members of the civilian bureaucracy, judges, businessmen, landed aristocracy, and professionals adopt a simple life style as behooves the citizens of a less developed country. In addition, our governments would have to ensure that we live within our means by adopting austerity, self-reliance and social welfare as the guiding principles of governance. Until we do that, we will remain mired in economic stagnation and our country will remain prone to social, political and economic crises.