June 02, 2018
Pakistan is in a “Middle Income Trap”, as economists like to call it, unable to get to the lower end of the High Income group. A country is categorised as Middle Income, when it has a per capita Gross National Income (GNI) of between $2000-$12,000. We have a long way to go with out per capita GNP around the lower mark of $2077 while India may soon make it to that club. The economic reason is simple- we just have not been able to diversify our exports which are either agricultural or low tech (e.g. cotton and food manufacturing). We import the expensive stuff, and even the not-so-expensive stuff like low-value added goods from China. Generally, our trade deficit has never been a fun figure to look at. With the way our economy is specialised today, we will not be able to break out of our middle-income ways, which means that the growth in our GDP will taper off, and it probably already has.
In May the IMF downgraded Pakistan’s economic growth from an estimated 5.6 % in FY2018 to 4.7 % whereas Bloomberg predicted a slowdown to 5.2%. Under the outgoing government the economy was apparently in good shape. In the last fiscal year, the economy grew at 5.8 percent, the fastest rate in 13 years. It may be too early to call it, but we are losing momentum. This seems okay, since slowdowns are natural, but for a country of our size and population, we cannot slowdown and are too far behind already. In the 1960s no one could have predicted we would still be a small economy with a large low-tech agricultural base and an even larger services sector full of unskilled labour.
We all knew our growth was unbalanced and depended particularly on investment from China. The Pakistani government spending to match CPEC’s aims like the purchase of Chinese heavy engineering and other inputs though arguably necessary many not have a payoff for years to come. Such imports have contributed to a current account deficit by 50 percent to a record high of over $14 billion. Pakistan’s central bank has devalued the currency twice but has felt that it has few options other than depleting the country’s foreign-exchange reserves. Since last June a third of the reserves have vanished.
This is not China’s fault. It is a titan that does not need Pakistan, and if it looks our way, it’s for some gain of its own. No country can be blamed for being self-interested, that is how the system works - one’s own state comes first. The problem is that economic managers at home have been too fixated on the short run survival of the economy, rather than plan big and plan ahead. And if they are planning indeed, some feasibility studies of the CPEC by known impartial agencies would be a happy read. If they exist, please do let me know.
The problem of a too-loose fiscal policy has been compounded by this being an election year. The economic belt hasn’t been tightened significantly, and there has not been any effort to plug the holes in the leaking skip being kept afloat by China. In the budget the government did cut infrastructure spending by 20 percent but then other expenditures went up by 20 percent including wages and pensions and the military budget. Admittedly, these are expenditures that are hard to decrease, but it’s a hard job no one is even trying to do.
And so, many analysts are predicting that Pakistan may be back with the IMF next year considering its depleted foreign reserves. Additionally, economists have started talking about a “Chines Debt Trap”, a term that implies that economies like Pakistan, Bangladesh, Sir Lanka and perhaps the Maldives will soon be beholden to China, and China can thus neatly encircle India. Bangladesh for example carries about $8 billion in Chinese debt but has a close military relationship, purchasing many of its latest weapons systems from China. Anything that is bad for India is usually good for us, but we’d rather not have that happen if we have to be locked in debt for decades, right?
Even then, we are relatively stable and the Chinese umbrella may shelter us for a while longer. But what if we find in ten years that the CPEC was just not enough to generate income at home? That we wasted our time in relaying on grand infrastructure projects that do not generate money in themselves but only aid economic activities. If the productivity of our indigenous projects does not rise, and we do not move towards a larger reliance on manufacturing we will not gain from the grand highways. They are only useful if we can produce goods that can become part of global firms supply chains. Else, Chinese goods will fall though Pakistan into the sea China so desires.
What it looks like now is that there will be a lot of Chinese debts to pay, and there will be a trip to the IMF. None is what the Pakistani economy requires to maintain a steady and high growth and it is discouraging that such predictions are cropping up in newspapers frequently.
The writer is studying South Asian history and politics at the Oxford University and is the former Op-Ed Editor of The Nation.