Pakistan’s Economy

By: Farooq Lakhani
It has been a tough year for Pakistan’s economy. Economic growth is expected to slow sharply this year to around 4% as against 5.8% in the previous year. Consumer spending, which accounts for over 70% of the economy has been negatively impacted due to declines in household incomes, both rural and urban. The agricultural economy was hit by water shortages which resulted in declining production of summer crops mainly cotton, rice and maize. Disposable incomes of urban households were squeezed as inflation accelerated due to currency depreciation impacting the cost of imports and increases in the prices of utilities, principally electricity and domestic gas. With the cost of healthcare and education mostly borne by households, one can imagine the budgetary pressures on middle and low income families.
Industrial production experienced its first decline in almost a decade. The decline was widespread including consumer staples, discretionary goods, construction materials and automobiles. With shortfalls in tax revenue, the government was forced to cut back on development spending. Viewed from any angle, this was one of the severest declines in aggregate demand the economy has suffered.
The country’s central bank regularly monitors the health of the economy through regular surveys of business and consumer confidence. The contraction in the economy is reflected in the latest data collected by the bank. Optimism amongst consumers and businesses which were at a peak in September 2018 declined sharply in the ensuing months and is now gradually recovering.
Despite an advisory panel of experts, the government has yet to establish policy direction other than recovering wealth accumulated via corruption. The existence of a large underground economy variously estimated to be 50-70% of the official gdp complicates matters. Given the significant share of undocumented businesses, there can be negative repercussions on output and employment in small and micro-enterprises during the transition phase to a more tax compliant economy.
The immediate risks to the economy have been staved off by bilateral flows from friendly nations. Lack of clarity on policies pertaining to addressing deficits on the external accounts as well as its fiscal situation along with the interest rate and exchange rate outlook has compounded the prevailing uncertainty.
Recent polls have pegged the government’s popularity at 57% of the electorate. Almost 3 out of 4 voters consider the resolution of economic challenges to be the government’s overarching priority. Inflation, poverty and unemployment are top of mind. Balancing the burden of fixing the economy equitably among all segments and protecting the vulnerable constitutes the key challenge for the government.