Business Today

Imran Khan's worst nightmare will be Pakistan's crumbling economy

From human development indicators like health and education to economic parameters like tax-to-GDP ratio, currency performance, and current account deficit, Pakistan's track record is dismal on all fronts.

Manoj Sharma and Mudit Kapoor    New Delhi     Last Updated: August 3, 2018  | 11:03 IST
Imran Khan's worst nightmare will be Pakistan's crumbling economy
Photo: Reuters

Pakistan's economy is in shambles, and there is very little hope of its revival anytime soon. As the country's new leader, Pakistan Tehreek-e-Insaf (PTI) chief Imran Khan is about to secure democratically elected power from the previous government -- it has happened only once previously -- the task ahead of him is daunting. From human development indicators like health and education to economic parameters like tax-to-GDP ratio, currency performance, and current account deficit, Pakistan's track record is dismal on all fronts. Its economy survives on bailout packages from the global organisations like the IMF (International Monetary Fund) and the World Bank, and allies like China and the US. The country has received around a dozen bailout packages in the past 40 years.

This time too, Pakistan is drawing up a plan to seek a massive $12 billion bailout package from the IMF. The country needs around $3 billion of immediate funds to avoid default on loans from the IMF, China and the World Bank. Its ever-expanding trade deficit and declining foreign reserves leave no option for the new government but to knock on the IMF's door. The US, which is the highest contributor of funds to the IMF, has already warned the global fund body, saying it should "think twice" before handing out the package as the money would be used to repay Chinese loans.

So, how bad is the Pakistan economy, after all? Let's take a look at the country's economic condition.

GDP, inflation & currency performance

As per the Pakistan Bureau of Statistics, Pakistan's total population is around 20.7 crore (2017 figure) and its current GDP stands at $305 billion. According to World Bank data, Pakistan's GDP growth at the constant market price was 5.5 per cent in FY18, while inflation grew 5.8 per cent in July.

As per the Pakistan Bureau of Statistics, Pakistan's inflation rate expanded to 5.83 per cent as against 2.9 per cent in July 2017. Policymakers believe a developing nation's inflation should not exceed 4 per cent, while it should be around 2 per cent or below for a developed nation.

The country ranks at number 25 and 42 in terms of GDP on purchasing power parity and nominal GDP, respectively. This is not a happy situation. To put it in perspective, let's compare it to Brazil. The South American country has as much population as Pakistan, but its  GDP was way more at $1.7 trillion in 2016.

Pakistan's current account deficit (CAD) and fiscal deficit are exploding with 4.1 per cent ($18 billion in the fiscal year that ended June 30) and 5.9 per cent, respectively. Again, Brazil fares much better, at least comparatively, with its current account deficit at $9.8 billion and fiscal deficit of around $3.6 billion.

Pakistan's dependence on oil imports, poor CAD, and declining foreign reserves are signs of a deep worry. Pakistan imports around 80 per cent of oil from countries like Saudi Arabia, Iran, Kuwait, and Qatar. Its foreign reserves have dipped to about half -- $9 billion in July -- from $16.4 billion in one year since May 2017.

The problems don't end here. The Pakistani rupee is the worst performing currency across the Asian continent and the country's foreign reserves of $10 billion are dipping by the day and is unlikely to last even two months. It's essentially a situation of financial emergency. Ideally a country should have enough forex to pay for 3-6 months of import bills. India's forex reserves stood at $405.17 billion in July. For a country like China, the largest foreign exchange reserves holder in the world, this number stands at $3.5 trillion.

In terms of investment from global companies, Pakistan recorded total foreign direct investment of $2.41 billion in 2017 as against $2.30 billion in the previous year, and the net FDI has been rising at a steady pace.

On July 12, Pakistan's Finance Minister Shamshad Akhtar said the country's debt-to-GDP ratio was 72 per cent which could go up to 74 per cent by end this fiscal year. Akhtar claimed that Pakistan's total public debt stood at $199 billion as of May 2018. Of this, $134 billion was domestic debt while the rest as external debt.

Here's a comparison of Pakistan's economic parameters with those of Brazil, whose population is close to the Islamic country.

Tax collection and inflation

Half of the population of Pakistan doesn't pay taxes. Its tax-to-GDP ratio is one of the lowest in the world at 11.2 per cent. For India, it is 15 per cent; Brazil 32.2 per cent; and the US has tax-to-GDP ratio of 26 per cent. Its Federal Board of Revenue's (FBR) tax collection data for July-Jan FY18 period stood at Rs (Pakistani rupees) 1.9-lakh crore compared to Rs 1.6-lakh crore in the same period last year, registering yearly growth of 17.5 per cent.

Human development index

The poverty rate in Pakistan was 4.9 per cent in FY18, down from 6.1 per cent in FY13. Still, the country's 40 per cent of the population lives below poverty line with over 60 per cent people living on less than $2 a day. Around 40 per cent of people in Pakistan can neither read nor write. Pakistan is one of the lowest performers in the South Asia Region on human development indicators. The country's infant mortality rate is the lowest among its neighbours. Plagued with corruption from top to the bottom, Pakistan spends much less (about 3 per cent of GDP) on basic human needs like health, education, and nutrition; 44 per cent Pakistani children under 5 are stunted. As per the World Bank's 2016 figure, the country's birth rate is 19.01 per cent, while life expectancy stands at 68.56. Its human development index was 0.624 in 2015.

China factor

The CPEC (China-Pakistan Economic Corridor) is undoubtedly Pakistan's most important national project that aims to revive the country's economy. Both Islamabad and Beijing have worked together on this "flagship" project under the ambitious Belt and Road initiative to build railway projects, roads and maritime links. This is part of China's larger plan to gain influence in the region. Over 20 CPEC projects worth over $27 billion are currently being implemented all across Pakistan. The first agreement between the two countries was signed in 2014, as per which China would invest in projects worth over $46 billion under the CPEC framework; the amount could grow up to $62 billion in a few years. In the name of CPEC, China has been consistently helping its "all-weather friend" with financial loans. But Pakistan has no concrete plan to pay them back. Pakistan received $4.5 billion worth of loans from China in the fiscal year 2017-18 in addition to a $1.5 billion trade finance facility. In the preceding year, China had extended loans worth $3.9 billion to Pakistan. This year, China aims to pump in $2 billion to help Islamabad meet its foreign currency needs of which over $1 billion have already been disbursed.

Comparison with India

While there's little to compare when it comes to India and Pakistan - as there's a huge disparity in terms of population and economic parameters -- India is way ahead than its neighbour in terms of GDP per capita, human capital ranking, money market, tax transparency and collection, imports and exports, and trade. India's annual GDP is $2597.5 billion while Pakistan's GDP stands at just $305 billion. India's GDP per capita is about $1,940, while Pakistan's GDP per capita is around $1,548. India moved into the top 100 on the World Bank's 'Ease of Doing Business Index' in October 2017, while Pakistan is still at 147. India's exports amounted to $298.3 billion in 2017, while Pakistan exported goods worth over $21 billion the same year. India, however, is far behind than Pakistan in terms of trade deficit. Pakistani rupee exchange rate is 116.04, while the Indian rupee is 68.3 against the American dollar. Total 559 stocks listed on Pakistan Stock Exchange amounts to $80 billion. India's homegrown tech giant Tata Consultancy Services' $100 billion market value alone is 25 per cent higher than all the PSE (Pakistan Stock Exchange) stocks combined.

Imran Khan to the rescue

Imran Khan, whose party won 115 of the 270 National Assembly seats, has not given a clear indication whether he'll take a reformist or a populist approach. Imran Khan's PTI, which has received the covert backing of Pakistan's military, gained the victory in the recent National Assembly polls on the promises of ending corruption and bringing economic stability. His closeness to the army could actually ease pressure on him to bring the desired changes on the economic front, unless, of course, he interferes with its business!

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