Balance of payments crisis in Pakistan | Political economics


ecent events in Pakistan have left the country in a precarious balance of payments situation. Given the lack of consensus on key issues, the country could face the same problems later this year or early next year. The only reason there is some stability in the exchange rate is the nod from the International Monetary Fund (IMF) and $4 billion in aid from four friendly countries, including China and Saudi Arabia.

Let’s see where we are and what is the best way forward. Trade in goods and services dominates the current account of an economy. Primary and secondary revenue streams are also included. The term “primary income” refers to payments made internationally to factors of production, such as investment income and compensation of employees. “Secondary income” includes transfer payments between countries, such as personal remittances, pension payments, and aid from other countries.

Pakistan has a large current account deficit (CAD). The problem has persisted for several decades now. In 1958, Pakistan was mired in an endless cycle of accumulating balance of payments deficits. The results of its foreign trade in 1953, 1954 and 1956 were satisfactory. Until the end of the 1956-57 fiscal year, the country’s annual exports exceeded its annual imports by about $161 million, resulting in a trade surplus. In fiscal year 1973, Pakistan had a positive trade balance for the first time after 15 consecutive years of deficit. Since then, Pakistan has always had a current account deficit. The current account deficit reached $4,575 million in 1996. This was equivalent to 4.96% of GDP. The current account surplus peaked in fiscal year 2003 at ($3,165 million, equivalent to 4.77% of GDP).

The situation was completely different in fiscal year 2005: the current account was in a favorable position, even though the trade deficit had reached $6,185 million (8.2% of GDP, the highest in the history of the Pakistan). It is clear that Pakistan’s growing trade disparity is the main contributor to its current account deficit.

Recently, the State Bank of Pakistan (SBP) released the balance of payments data. He revealed that the country has C$17.41 billion available for the 2021-22 financial year. The imbalance was attributed to rising energy imports.

Balance of payments crisis in Pakistan

It is possible that long-term deindustrialization is the cause of a growing trade imbalance. Since 1973, Pakistan has experienced a steady decline in the size and scope of its industrial sector.

Given the different causes of persistent CAD, several solutions exist.

It is possible that long-term deindustrialization is the root cause of a growing trade imbalance. Since 1973, Pakistan has experienced a steady decline in the size and scope of its industrial sector. It is useful to examine the country’s progress towards modernization in light of the experience of East Asian economies. Compared to East Asian economies, Pakistan had a low GDP per capita at $1,317 in 2014. Korea’s GDP per capita was $27,970, followed by Malaysia’s at $11,300. China, Thailand, Indonesia and the Philippines had comparable figures: $7,590, $5,977, $3,492 and $2,813. Pakistan’s real GDP per capita grew by 2.4% annually between 1960 and 2014, above the Philippines’ 1.6% annual increase. Pakistan’s growth has lagged behind other East Asian economies. China had the lowest starting base in 1960, but grew the fastest at 6.6% per year. Korea had the second highest GDP per capita growth rate, 5.9%. Thailand and Malaysia followed with 4.3% and 3.8% per year. It would be beneficial for Pakistan to adopt advanced technologies in the name of industrialization.

The lesson from East Asia is not to imitate the models used in South Korea, Indonesia, Malaysia, the Philippines or Thailand. Instead, the goal of industrialization should be to catch up with technology in high-tech industries and develop sectors that complement existing economic activity, such as information and communication technology, machinery and equipment and biotechnology. The government should work on institutional change to control, monitor and evaluate the incentive system developed to stimulate industrialization and technological catch-up.

Another source of concern is circular debt. For years, Pakistan’s economy has been in disarray over the electricity sector. Load shedding occurs every day due to power outages. There have been delays in the distribution of government subsidies to electricity distributors, usually state-owned companies. When these companies do not receive money from the government, they are unable to pay power generation companies, maintain and expand transmission lines and systems, or meet maintenance and development costs.

Power companies should be compensated for buying fuel and boosting their generation capacity. In the event of frequent interruptions in the supply of electricity, many consumers do not pay their bills. This leads to significant financial challenges for electricity distribution companies, affecting the utilities that generate electricity. “Circular debt” is expected to top $14 billion this year. How can an industry thrive under these circumstances?

The government is in disarray as it tries to eliminate subsidies that have been given since the 1960s. This risks social and political discontent. The rising cost of energy can make it impossible for low-income segments of society to pay for it. Nadeem Babar, chairman of the prime minister’s task force on energy reforms, says the government has decided to raise energy tariffs rather than remove subsidies. This decision was taken to avoid an “economic catastrophe”.

To make an accurate forecast regarding the country’s balance of payments problems, the government and other political actors must come up with a real strategy to get out of the dire situation. Trying to stimulate the economy by artificially lowering prices without a comprehensive plan will only bring the nation to its knees. It is time for major political parties and other key players in Pakistan to come up with comprehensive plans to meet the country’s long-term energy needs.

The author is director of the business finance program at Birmingham City University, UK. He tweets at [email protected]

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