Pakistan’s $3 trillion dream

Planning Minister Ahsan Iqbal, recently made a bold declaration: Pakistan aims to become a $3 trillion economy by 2047, driven by a targeted 9.0 per cent growth rate. As someone who has witnessed numerous grandiose economic pronouncements by previous governments come to nothing, I view this aspiration with deep scepticism.

The fundamental issue lies in generating sufficient domestic savings for investment. Both physical infrastructure and industrial capacity – essential elements for sustained economic growth – require substantial investment. High-growth economies invariably maintain high investment-to-GDP ratios.

Consider China and India, frequently cited as models of economic success. China’s gross investment-to-GDP ratio stood at an impressive 43 per cent in 2022, according to World Bank data. India maintained a robust 33 per cent. These figures reflect consistent investment patterns spanning at least a decade.

Pakistan’s reality stands in stark contrast. We remain a consumption-driven economy, heavily dependent on imports. Our persistent trade imbalance stems from insufficient savings and investment to develop our domestic productive capacity in line with consumption needs.

Over the past four decades, Pakistan’s gross investment has never exceeded 20 per cent of GDP. Expecting this to suddenly surge beyond 35 per cent – the minimum threshold needed for 9.0 per cent growth – defies the economic ethos prevalent in the country. Moreover, such growth would require foreign exchange reserves equivalent to at least 12 months of imports to maintain exchange rate stability even before growth ramps up to above its trend rate of around 4.0 per cent.

The population challenge compounds the economic hurdles on the road to achieving a high per capita income. While Pakistan’s total fertility rate (the average number of children born to a woman over her lifetime) has declined from over six in the 1990s to 3.6 today, it remains well above the population replacement rate of 2.1. Our current annual population growth rate of around 2.0 per cent ranks among the world’s highest, exceeded only by several African nations.

This demographic pressure creates cascading problems. Environmental degradation intensifies as larger populations generate more waste and pollution. Major cities already suffer from toxic air quality, leading to increased rates of lung cancer, asthma, and reduced life expectancy. Our healthcare system, already stretched thin, faces mounting pressure.

Housing demand has led to agricultural land encroachment, threatening food security. Water scarcity looms, potentially triggering increased rural-to-urban migration and further food production challenges.

The fiscal situation is equally concerning. In FY2024, interest payments on domestic debt consumed Rs7.1 trillion – over 70 per cent of total tax revenues. This leaves minimal resources for development, particularly in crucial areas like health and education. The inevitable outcome: a population increasingly stunted, malnourished, and illiterate, with emigration becoming the primary survival strategy.

The lack of investment in human capital also translates into a low productivity labor force and high levels of poverty. Innovation and application of new ideas come with an educated and productive labour force so technological change that drives economic growth should be slow and halting.

Government spending patterns reflect the misplaced priorities. Recent examples highlight this disconnect.

The Sindh government’s aircraft controversy exemplifies wasteful expenditure. Two officers faced suspension for unauthorised use of the chief minister’s aircraft during a test flight – an absurd response when official vehicles are routinely misused for personal purposes. The more pertinent question: why does a province struggling with poverty need such an aircraft?

A team of officials was dispatched to Morocco to investigate the tragic drowning of Pakistani migrants, a performative gesture designed to placate European countries that added little value beyond what local embassies and Moroccan authorities could provide. These resources would have been better spent supporting bereaved families and investigating human trafficking networks within Pakistan.

The government’s decision to hire McKinsey for tax system digitalisation raises questions. Why spend millions in foreign currency when capable local software houses exist? This seems particularly ironic given Pakistan’s ambitions to boost software exports.

Regarding recent expenditure decisions, consider the contrast between two proposals. The Federal Board of Revenue’s (FBR) request for Rs5.1 billion for vehicles faced criticism, while legislators unanimously approved their own pay increase. Analysis reveals the legislators’ raise will cost taxpayers between Rs8.3 billion and Rs12.4 billion in present value terms (using discount rates of 10-15 per cent), with Rs10.4 billion as the best estimate. (Basic finance theory relating to the after-tax cost of a monthly perpetuity was used to derive the cost of the incremental pay package to lawmakers).

The FBR’s vehicle proposal, including maintenance costs over ten years, amounts to Rs8 billion – 30 per cent less than the legislators’ pay increase. (The present value of the outflows pertaining to the car purchase assumed, apart from the initial capital cost of Rs5.1 billion, a ten-year life of the asset with annual cash outflows due to maintenance, insurance, fuel, etc of 10 per cent of the initial capital cost, all discounted at 12 per cent.)

Which is the more appropriate expenditure if the government had the opportunity to make the choice again and could only choose one of the two proposals? Easy to answer if you recognise where the government derives most of its revenue from.

To make conditions conducive for competent and honest professionals to join the FBR, the allocation of funds for car purchase is a valuable perk as a car as part of the total compensation package can incentivise recruitment of talented candidates. There are likely to be high achievers in any organisation and even a few superior performers with the right technical skills and improved motivation could help recoup the entire amount spent on behalf of the FBR within a few years.

As for legislators in parliament, their desire for better pay is understandable given the fall in purchasing power of the salaries they receive. But this is true for anybody on a fixed income so their claim does not deserve higher priority at a time when the vast majority of people – their constituents – are suffering the effects of stagflation. The perks and benefits they receive as members of parliament ( subsidised meals, residential facilities at concessional rates) should have sufficed at a time when the country is trying to climb out of a fiscal hole. Besides, has anybody seen or heard of a lawmaker who does not ride in or drive a luxury car, usually a SUV?

According to the government of Pakistan’s 2023 ‘National Adaptation Plan’ in relation to climate change issues, between 1992 and 2021 Pakistan suffered climate-related economic losses of $29.3 billion when these losses are adjusted for inflation. Since climate change is having a decidedly major, non-linear, impact on countries like Pakistan, one can expect periods of prolonged drought, intense heatwaves, ’rain bombs’, floods, etc to adversely affect the country’s economy. However, any forecast of the cost of these to the country’s GDP would be guesswork and hence are not accounted for here.

Using a trend rate of growth of 4.0 per cent, Pakistan’s total GDP in 2047 should be $924 billion and the per capita GDP $2,581 – 63 per cent higher than per capita income in 2024. Not an eye watering increase by any means. And certainly not large enough to propel Pakistan to the ranks of the upper middle-income countries per the World Bank’s current classification scheme.

However there’s always reason for hope. As Augustine noted, “Hope has two beautiful daughters, anger and courage”. Perhaps righteous anger at our current trajectory, combined with the courage to implement real change, can yet chart a better course for Pakistan’s economic future.

The writer is a group director at the Jang Group. He can be reached at: iqbal.hussain@janggroup.com.pk