Statistics released by the State Bank of Pakistan (SBP) show that the national economy posted a 3.9 percent growth in the Financial Year (FY) 2021. This seems to be an impressive recovery following a 0.5 percent contraction in FY 2020. The government apparently believes its performance to be remarkable considering the recovery was achieved despite multiple waves of the coronavirus pandemic.

It attributes its success to responding thoughtfully to the emerging challenges throughout the year. The SBP extended favourable policy rates and offered several refinance schemes at special rates intending to keep the economic momentum going. These measures proved instrumental in the economic recovery of FY 2021. However, the statistical supplement to SBP’s Annual Report states that the world economy grew at an average of 5.9 percent and that Pakistan has posted a growth of 3.3 percent.

Some experts have cast doubts on this performance report. It may be kept in mind that in FY 2019, the government had initially reported a GDP growth of 3.3 percent that was subsequently corrected to 2.1 percent.

Historical data shows that Pakistan has not been able to sustain growth for long periods. Rather, it has had short growth sprints followed by a nosedive. This is because disruptive economic policies are subject to change with the governments. Despite lofty claims by the prime minister and other members of his cabinet regarding revival of the economy, the current state of financial affairs is not contributing enough to the welfare of the common man.

The pandemic has taken a toll on the global economy. It has brought new challenges for the health system, disrupted economic activity and business connectivity and increased unemployment at the global level. For an average performing economy like Pakistan this was an uphill task, hence the government borrowed funds at home and from the international market in order to execute its plans. It also availed the debt relief offered under the G-20’s Debt Service Suspension Initiative (DSSI).

In FY 2021, compared to regional peers, Pakistan’s debt-servicing payments reached the highest level as a percentage of GDP. The report states that in FY2021 the ratio of interest payments-to-FBR tax revenues stood at 57.7 percent. As of September 2021, Pakistan’s External Debt and Liabilities have reached $127 billion. This represents a massive increase of 33 percent or $31.78 billion since this government took charge.

On the local front, total domestic debt has reached Rs 27,137 billion. Compared to June 2018 level, it has increased by more than Rs 10 trillion or 60 percent. The previous government had added Rs 121 billion per month to the pile; the current government is borrowing at a rate of Rs 260 billion per month, meaning thereby that more than half of the tax revenue collections are being utilised for debt-servicing. This ultimately squeezes the space for undertaking development expenditure. This compromise can adversely impact growth prospects which ultimately dampens debt repayment capacity.

This is also reflected in the statistical supplement to SBP’s report, which states that spending on education as a percentage of GDP has fallen. In FY 2018 it was 2.4 percent. It was reduced to 1.47 percent in FY 2020. The spending on health was 1.20 percent of GDP in FY 2018. It fell to 1.16 percent in FY 2020. (Data for FY 2021 is not available in the report).

Another factor impacting the economy is mismanagement on the part of the executives. In FY 2021, the cumulative circular debt rose to Rs 2.28 trillion which is 4.8 percent of GDP. This accumulation of arrears arises from administrative failures and delays in the adjustment of power tariffs, losses of electricity distribution companies (DISCOs), and unpaid subsidies.

Inefficiencies in public sector entities stem out from governance issues and administrative elements. As a whole, these state-owned white elephants are posting losses. The major state-owned entities are: the National Highways Authority, Pakistan Railways, Pakistan International Airline and the power sector DISCOs. In the last three years, the government has not introduced any policy to bring any serious reforms in these entities.

Constant investment inflows are very important for the economy. These help generate employment, contribute to GDP growth and boost forex reserves. However, during FY 2021, the net foreign direct investment (FDI) dropped by more than 28 percent. The major factor that impacted the FDI was uncertain government policies. Pakistan is also facing serious foreign policy issues.

China has heavily invested in the China Pakistan Economic Corridor (CPEC). Chinese investment in the power sector has enabled Pakistan to overcome loadshedding. We needed to persuade the Chinese to invest in the second phase of the CPEC but the investment is slowing down as Chinese are growing reluctant to make more investments. Additionally, our dealings with international lenders and watchdogs are also contributing towards a decrease in the FDI.

Massive devaluation of the rupee has failed to produce the desired results in the export sector. Meanwhile, now pressures are emerging from the import bill. The surge in imports is creating a current account imbalance eroding the foreign exchange reserves and will ultimately lead to massive borrowing. Pakistan has signed a $3 billion loan agreement on a 4 percent interest rate with the Saudi Fund for Development (SFD).

Pakistan is also in talks with other countries for similar loan facilities. All these efforts are adding to the debt burden on the economy. On the other hand, the coalition government is showing zero interest in improving revenue organically. The Federal Board of Revenue is trying to extract all it can from the current taxpayers.

The PTI government has failed to introduce economic reforms. There is no visible reduction in government spending. Pakistan has made commitments to the International Monetary Fund regarding privatisation of state-owned enterprises, however, despite a lapse of three years, the PTI government has not implemented its plan to privatise the loss-making entities. Media reports have indicated that the government has dropped its plan of privatisation till the next elections. Fluctuations in interest rates are also impacting the capacity of businesses and instability in the exchange rate is adding to our economic problems.

Regarding inflation, the report states that the Consumer Price Index (CPI) was 8.9 percent, almost double the global average of 4.3 percent. For FY 22 it estimates the CPI to remain within the 7.0 to 9.0 percent range. Keeping in view the pace of currency devaluation and increase in global commodity prices it seems that inflation can reach double digit highs. According to a report, “The inflation skyrocketed to 11.5 percent in November 2021—the fastest pace in 21 months—due to government’s administrative decisions coupled with steep currency depreciation, which was making food, electricity and transport unaffordable for the common man”.

The national economy is facing multi-dimensional challenges including hyperinflation, depleting forex reserves, alarmingly high levels of debt stock, budget deficit etcetera. These economic faultlines pose a constant threat. The cracks on the entablature of the economy are getting more visible. The infrastructure, being managed with the support of borrowed money, is facing the threat of collapse. With vaccinations rolling and opening up of economies, the long-awaited recovery is under way at the global level. However, developing economies and middle-income countries like Pakistan face the risk of falling further behind in their pursuit of progress.

Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in white collar crimes and sanctions compliance. Dr Ikramul Haq, an advocate of Supreme Court, is adjunct faculty at Lahore University of Management Sciences