At the turn of the century, Pakistan had the highest GDP per capita when compared with India, Bangladesh, and Vietnam. Twenty years later, it is at the bottom of the group. Political upheaval, a violent insurgency fed by the war in Afghanistan, and the inability of successive governments to carry out reforms are to blame for this decline. Today, a polarized political environment and elite intrigue among civilian, judicial, and military institutions have made sustainable economic growth and reforms that much more unlikely. The COVID-19 pandemic has further sharpened the challenge.
Inflation is still the biggest issue facing the government today. Headline inflation climbed to 9 percent in September 2020 and double-digit food inflation continues to erode citizens’ purchasing power. This has worsened the situation for millions of households who have seen a decline in their purchasing power since 2016, according to data from the Pakistan Bureau of Statistics. In its most recent monetary policy statement, the State Bank of Pakistan raised its concerns as well, warning that while “core inflation has been relatively stable,” food inflation remains a risk, “especially in the wake of recent flood-related damages and potential locust attacks.” With households spending a larger share of their incomes on food—an emerging wheat crisis is compounding problems—consumption spending on other items will remain subdued, leading to a lack of economic growth in a country where consumer spending drives more than 80 percent of the economy.
At the same time, a weak economic recovery around the world, particularly in the European Union and the United States, will subdue demand for Pakistan’s exports. After declining by 20 percent on a year-on-year basis in August, exports grew by 6 percent in September. The outlook, however, remains bleak due to a weak global economic recovery. The issue has been further exacerbated by chronic structural inefficiencies — exporters who received additional orders in recent weeks are facing gas and cotton shortages. This means export growth is unlikely to drive a significant uptick in economic activity and employment. As a result, the structural issue with Pakistan’s economy, i.e., its inability to earn sufficient foreign income to pay for its import and debt servicing needs, remains its Achilles’ heel.
Questions:
i. Discuss the underlying problem with Pakistan's sustainable growth?
ii. Anticipate the outcome of Pakistan’s foreign income vis-à-vis its export growth.