Pakistan is classified as a lower middle income country with lower real growth than its peers. It follows 10 year consumption based growth cycles, with periods of low growth as the economy slows down. Investment and savings levels are not high enough, relying too much on foreign inflows. Productivity has remained largely unchanged across sectors, and most new jobs will be low-wage and low-skilled. To improve growth, policy focus should be on increasing investment, human development, and addressing constraints like limited access to financing for the private sector.

1. 18th April 2021
Growth Basics and Economic
Policy Making in Pakistan

2. 2
Upper middle income
$3,996 – 12,375
Low income
Below $1,026
Lower middle income
$1,026 – 3,995
High income
Above $12,375
Important to define Pakistan’s comparison set of countries
It is a lower middle income country with lower real growth than peers
Source: World Development Indicators

3. 3
Pakistan follows 10 year consumption based growth cycles
This is why, even before the pandemic, Pakistan’s economy was slowing down
Source: Pakistan Bureau of Statistics; International Monetary Fund
Forecast
~10 years
Took 10 years to recover
from previous period of
low growth (not recession)
and grow at the same level
as before

4. 4
As a country, we don’t save and invest enough, relying on foreign inflows
Stagnating investment levels lead to lack of productivity growth
Source: Pakistan Bureau of Statistics, Economist Intelligence Unit
Kashmir
earthquake
October 2005
Global
Financial
Crisis 2008-9

5. 5
Productivity across almost all sectors has remained unchanged
Most new jobs in the economy will be for low-wage, low-skilled labor
Average labor productivity
Includes less labor intensive
GDP contributors such as
finance, government and
housing services
Marginal improvement in
productivity of Pakistan’s
largest employer
Note: Real output at 2005-06 prices
Source: Pakistan Bureau of Statistics; MP Analysis
Given labor force is
expected to increase by
4-5%, any real economic
growth below that level
represents further
diminishing productivity
(at full employment)

6. 6
Growth basics in Pakistan are not in place when compared to other economies
Focus of policy making should be on investment and human development
as of 2019 Pakistan South Asia Low-middle income Bangladesh
Investment (%
of GDP)
14% 29% 26% 32%
Gross savings
(% of GDP)
12% 28% 26% 36%
Exports (% of
GDP)
10% 18% 25% 15%
Literacy rates
(% 15 yrs+)
59% 73% 76% 75%
Institutional
quality (/141)
107 88 - 109
Ease of Doing
Business (/190)
108 118 - 168
Source: World Development Indicators; World Economic Forum; Ease of Doing Business

7. 7
Government spending in the past 40 years has been constrained
Falling revenues, consistent fiscal deficits and rising interest payments
Government
revenue
Government
expenditure
Fiscal deficit
Note: 2020 budget figures shown
Source PES 2019-20; Annual budget statement 2020-21
-
=

8. 8
Deficits are financed through borrowing from commercial banks
Crowds out private sector investment by limiting financing options
Source: EIU

9. 9
This has left Pakistan with low levels of private leverage as a country
Direct impact of lack of financing on long-term fixed investments
Source: WDI

10. 10
Private sector dominates investing in Pakistan
Stagnation of private investment primarily due to limited access to finance
Source: PBS

11. 11
Government also used to borrow directly from the Central Bank
Monetary policy left ineffective with lack of SBP autonomy in the past
Source: SBP; IMF

12. 12
Increase in share of budgetary borrowing directly from SBP is inflationary
Demand-pull inflation comes in play as actual output exceeds potential
Source: State Bank of Pakistan; MP Analysis

13. 13
Pakistan’s exchange rate policy has also been politically managed
Last government restricted the rate to around 100 PKR/USD for 5 years
Source: SBP
June ‘01 – Aug ‘09 = ~60 PKR/USD Sep ‘09 – May ‘13 = ~89 PKR/USD June ‘13 – Aug ‘18 = ~105 PKR/USD …

14. 14
Fixed exchange rate led to uncompetitive exports and external imbalances
While nominal exchange rate was fixed, real effective exchange rate was rising
Note: Includes both goods and services
Source: SBP
REER index increasing is
appreciating vs. NER depreciating
Inflation made goods more
expensive relative to
competing countries