Pakistan is on the verge of economic collapse and this has not happened by accident but is a result of 'deliberate policy mischoices', the country's top economist has said. Murtaza Syed, former deputy governor at Pakistan's central bank SBP, has pointed to three major forces that brought the country to this close to default on its sovereign debt. Pakistan has plunged into crisis due to critically low levels of forex, runaway inflation, and lower economic growth.
Syed, who also served as the acting governor of the central bank, said the seeds of the current economic problems over the last quarter century were sown by three major forces - guns, babies, and China, all of which he said were deliberate policy mischoices. For guns, the economist said Pakistan wasted generous debt restructuring and aid flows that accompanied its role in the war on terror during 2001-2003 on running large fiscal deficits - a bad habit that has since lingered.
The second force was exceptionally bad demographic trends that kept fertility rates high and the working population ratio low, pulling down the country's savings (and investment) and increasing consumption rates. The third factor was Pakistan's lop-sided free trade agreement with China in 2006 which, Syed said, led to a mushrooming of imports with nothing to show on exports, exacerbating current account deficits.
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Detailing the 'guns' part which means spending beyond one's means, Syed said Pakistan had a real chance to take off after the generous debt restructuring of 2001, courtesy of geopolitical tailwinds from our participation in the war on terror. This also opened the floodgates of US largesse, during which aid flowed into the country like there was no tomorrow and gave Islamabad precious foreign exchange. During 2001-3, he said, this aid allowed Pakistan to run an average current account surplus of over 3.5 per cent of GDP, the largest in its history.
But instead of using the fiscal space and foreign exchange provided by this to enact difficult structural reforms to boost investment and grow exports, Pakistan wasted it on promoting consumption and running huge fiscal deficits of around 5 per cent of GDP since 2001, the financial expert noted. "As a result, after falling from 72 per cent of GDP in 2001 to 47 per cent by 2007, general government debt went back up to almost 80 per cent by 2020."
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Syed, who has also served at IMF and was its deputy resident representative in China between 2010 and 2014, then went into details on a free trade agreement signed in 2006 with Beijing. He said in the previous five years before the agreement with China, Islamabad's exports averaged 14 per cent of GDP and imports 15 per cent of GDP - they were roughly balanced. However, since then, Pakistan's exports have fallen to 11 per cent of GDP, while imports have jumped to 18-20 per cent. "This is a large cause of our current account deficits," he said, adding that only 10 per cent of Pakistan’s exports go to China.
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Syed then underlined how India and Bangladesh fared in trade with China. He said since the early 2000s, India has seen its exports double on average from 13 to 25 per cent of GDP on the back of IT and Bangladesh has increased them from 13 to around 20 per cent, benefiting from GSP (Generalized System of Preferences) and LDC (Least Developed Countries) status for its textile exports.
The GSP, a US trade preference programme, provides opportunities for the poorest countries - by slashing duties on a number of products - to grow their economies and climb out of poverty.
The economist then explained how Pakistan's uncontrolled rise in population set the country back in the subcontinent. In 1960, he said each woman in Pakistan and Bangladesh was producing 7 babies, also known as the fertility rate. In India, however, the fertility rate was at 6. By the mid-1990s, both India and Bangladesh were down to 3.5, while Pakistan was still at 6.
Today, at around 4, Syed said, Pakistan’s fertility rate was twice the number needed to keep the population stable. It is also twice that of India and Bangladesh, despite similar levels of development. "As a result, our population grows by a whopping 5 million each year," he said, adding that years of high fertility (together with rising life expectancy) have translated into a very high "age dependency ratio" in Pakistan. "This ratio is the number of very young (less than 15) and very old people (65+) expressed as a percentage of the working-age population (15-64)."
Syed said this ratio matters because the very young and the very old tend to consume more and save less. Therefore, he said, a high age dependency ratio tends to pull down savings (and hence investment), while pushing up consumption and imports. "This results in pressure on the current account." Today, Pakistan’s age dependency ratio is 70 per cent while in India and Bangladesh, it is less than 50 per cent. Since 2005, the economist said, Bangladesh has run a current account deficit of almost 0, India 1.5 per cent of GDP and Pakistan 3 per cent. "Demographics are a major explanation."
In concluding points, he said while the underlying reasons for Pakistan's economic malaise were complex, they were rooted in a complete capitulation to the malleable forces of guns, babies, and China. "India and BGD did not succumb. We have only ourselves to blame," Syed, who holds a PhD in economics from Nuffield College at the University of Oxford, said.
Syed's readings of the crisis evoked reactions from noted policymakers including Pakistan's former finance minister Miftah Ismail. Ismail said he absolutely agreed with the deleterious effects of population growth on the country's economy. If Pakistan's population were growing only as fast as India or Bangladesh over the last 15 years, he said the country would have had 3 crore fewer people and its per capita income would have been higher by 15 per cent.