Pakistan's Economic Performance: A Critical Analysis

Strategic Insights -

Pakistan's economic performance has been a subject of discussion for several decades. The country has struggled to maintain a stable economy, despite efforts to implement reforms. According to Dr. Aasim Husain, a former senior official of the IMF, several factors have contributed to Pakistan's economic woes. In a recent paper titled "Rescuing Pakistan's Economy," he outlines the reasons for Pakistan's poor economic performance and proposes solutions to unlock better performance in the future.

Key Takeaways:

  • Pakistan's economic performance has been hindered by rupee overvaluation and fiscal profligacy, which have led to a massive buildup of debt and crowded out private investment.
  • The country's population growth has been rapid, resulting in low household savings and a savings rate of only one-fifth that of neighboring countries.
  • Pakistan's borrowing from abroad has been expensive due to its credit rating, which remains many steps below investment grade, and the country's exchange rate risk.
  • The country's economic growth has tended to be higher during periods of military rule, but this has been short-lived and has ultimately led to economic crises.
  • Pakistan needs to reduce its budget deficit, maintain an exchange rate that supports domestic industry, and slow its population growth in order to escape the poverty trap.
  • Bangladesh's economic success was due to a dramatic slowdown in its population growth, which raised domestic savings and investment, and the economic empowerment of women through microfinance institutions.

Statistics:

  • Pakistan's per capita income is half that of its neighbors, and it trails them in education, health care, and most other development indicators.
  • The country's budget deficit has translated into a massive buildup of debt, with interest payments on public debt eating up over half of the government's revenue by 2022-23.
  • Pakistan's savings rate was under 10%, and investment averaged only around 12%, while Bangladesh achieved a savings rate of 25% and investment averaged 30% over the last decade.
  • If Pakistan's population growth had slowed to match neighboring countries, saving and investment would have been much higher, and the economy today would have been 30-45% larger.
  • The exchange rate risk associated with borrowing in foreign currency has resulted in a dramatic increase in the rupee amount needed to repay loans when the country runs short of foreign exchange.

Sources:

  • Dr. Aasim Husain, a former senior official of the IMF, author of "Rescuing Pakistan's Economy."
  • The Washington-based Atlantic Council.