A bleak future

No matter how much one tries to be optimistic, policymakers continue to make decisions that only push the country and its people to an uncertain future. There is little realization among policymakers that the current structure of the economy does not work for the people of the country, and only serves interests of a very small rentier class. As the population of the country grows at the highest rate in the world, amidst food insecurity and historically high food inflation, the number of children who are malnourished will increase by the millions every year.

At this point it’s not even about how many children are out of school, it is about how many children are malnourished, and whether the state even has the capacity or the realization that it is supposed to take care of its children. A malnourished generation that will largely stay out of schools will essentially make up the country’s workforce in the future. The state fails to take care of its current and future generations, and there is no silver lining for the future.

The recently announced budget is a masterclass in the apathy that is prevalent among policymakers. Per capita incomes have stayed flat over the last five years in real terms. Electricity consumption per capita, which is deemed as a metric to assess industrial growth in an economy, has also stayed flat in the last five years. Pakistan will be one of the very few countries in the world where real incomes have stagnated in the last five years. Due to a foreign currency liquidity crunch, industrial units have been shutting down across the board during the last many months, resulting in colossal job losses that are not even acknowledged by the government.

Due to the inability to ensure availability of foreign currency liquidity by taking corrective actions early, industrial activity has virtually mothballed in the country, and is largely contingent on the ability of various entities to lobby with the central bank to get preferential access to foreign currency liquidity. If lower production, and eventually lower output wasn’t enough, the government – without any rational or economic consideration – slapped another super tax on the formal economy – further squeezing an already fragile real economic position. Such a tax would ensure that there is no reinvestment in the economy, and no new jobs are created either. The government through lack of will or ability is pushing the country towards an increasingly informal economy, where avenues to tax get shrunk further.

Even the government isn’t confident in its own numbers. The projected real growth rate at 3.5 per cent remains lower than the population growth rate, which means that per capita income in real terms is going to erode further. Having a largely anti-growth stance, imposition of heavy taxes on an already shrinking tax base will also ensure that there is little investment in the economy, and very few new jobs are created.

The government at this stage has uncontrollable expenditures. Not much is being done to rationalize these, or reallocate such expenditures to social programmes or development expenditure. The losses of state-owned entities continue to mount. Largely financed by the government taking on more debt, these losses will increase even further. Like every government, this government also does not have any plan to restructure or revitalize state-owned enterprises as they continue to bleed losses, creating bigger problems on an already stressed taxpayer base.

The government has projected to run a fiscal deficit of Rs7.6 trillion. If history is any guide, this is only going to increase in due course as the government refinances its debt. In the absence of any cuts in expenditure, or any expansion of the tax net, the government will increasingly rely on debt to fund it’s expenditures. Such funding will come at a very high cost, considering the government’s unsatisfied desire to take on more debt, and scarcity of capital in the formal economy.

The government needs to fix its macro-position first, before it can enable delivery of base-level human rights, such as nutrition, education, and healthcare. The macro-position over the last five years has continued to deteriorate, leading to accelerated deterioration in the delivery of basic necessities. The government can buy maybe another few years of a debt-fueled cycle for sustenance, since even growth isn’t possible through more debt at this stage. Eventually a time may come where things may implode, and it will get increasingly more difficult to fix things

The government and its policymakers need to decide whether we want a prosperous country for everyone, or a rentier state that benefits a few thousand households at the cost of hundreds of millions of people. If it’s the latter, then even that cannot be sustained under the current structure, with an economic pie that continues to shrink.

The state has been flirting with various modes of hybrid theories for too long now. Maybe it is time for a government to actually care about the people, because that will enable broad-based growth for everyone. A state that just exists for rentiers cannot survive for too long, and will eventually implode under the burden of unsustainable debt and an unproductive and unskilled workforce.

The destruction has already begun as can be seen with flat real incomes over the last five years. If things do not change, we will see erosion of real incomes on an aggregate level, leading to accelerated increase in poverty. The country and its people do not have a lot of time left at this stage – any more experiments will only make things worse.

The writer is an independent macroeconomist.