Thirlwall Law: Why Hasn't Pakistan's GDP Grown Faster Than 5% Average Since 1960s?

Pakistan's economy has grown at a compounded annual growth rate (CAGR) of about 5% since the 1960s. While Pakistan's average 5% annual economic growth rate is faster than the global average, it falls significantly short of its peer group in Asia. The key reason is that, unlike Pakistan's, the East Asian nation's growth has been fueled by rapid rise in exports. History shows that Pakistan has run into balance of payments (BOP) crises whenever its growth has accelerated above 5%. These crises have forced Pakistan to seek IMF bailouts 13 times in its 73 year history. Pakistan's current account deficits would be a lot worse without 23X growth in remittances from overseas Pakistanis since year 2000.  What Pakistan has experienced is BOP-constrained growth as explained in 1979 by Thirlwall Law, a law of economics named after British economist Anthony Philip Thirlwall.  Another reason why Pakistan has lagged its Asian peers in terms of economic growth is its lower savings and investment rates. Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period pf multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now.  This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018. The best way for Pakistan to accelerate its growth beyond 5% in a sustainable manner is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments. 

History of Pakistan's IMF Bailouts

Economic Growth Since 1960: 

The World Bank report released in June, 2018 shows that Pakistan's GDP has grown from $3.7 billion in 1960 to $305 billion in 2017, or 82.4 times. In the same period,  India's GDP grew from $37 billion in 1960 to $2,597 billion in 2017 or 71.15 times. Both South Asian nations have outpaced the world GDP growth of 60 times from 1960 to 2017.

While Pakistan's GDP growth of 82X from 1960 to 2017 is faster than India's 71X and it appears impressive, it pales in comparison to Malaysia's 157X, China's 205X and South Korea's 382X during the same period.

Thrilwall's Model: 

Thrilwall's BOP-constrained growth model says that no country can sustain long-term growth rates faster than the rate consistent with its current account balance, unless it can finance its growing deficits. Indeed, if imports grow faster than exports, the current account deficit has to be financed by borrowing from abroad, i.e., by the growth of capital inflows. But this cannot continue indefinitely. Here's how Jesus Felipe, J. S. L. McCombie, and Kaukab Naqvi describe it in their May 2009 paper titled "Is Pakistan’s Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth"  published by Asian Development Bank: 

"The reason is straightforward. If the growth of financial flows is greater than the growth of GDP, then the net overseas debt to GDP ratio will rise inextricably. There is a limit to the size of this ratio before international financial markets become distinctly nervous about the risk of private and, especially in less developed countries, public default. If much of the borrowing is short-term, then there is danger of capital flight, precipitating the collapse of the exchange rate. Not only will this cause capital loses in terms of foreign currency (notably United States [US] dollars) of domestic assets owned by foreigners (the lenders), but it will also cause severe domestic liquidity problems. This is especially true of many developing countries as overseas borrowing by banks and firms is predominantly denominated in a foreign currency, normally US dollars. As the exchange rate plummets, so domestic firms have difficulty finding domestic funds to finance their debt and day-today operations, often with disastrous consequences."

Investment as Percentage of GDP Source: State Bank of Pakistan 

Pakistan's Rising Current Account Deficit:

Pakistan's external debt has been rising rapidly in recent years to fund its ballooning twin deficits of domestic budget and external accounts. It pushed the external debt service cost to $12 billion in fiscal 2019-20, and added to the trade deficit of nearly $24 billion. Remittances of $21 billion from Pakistani diaspora reduced the current account deficit to $11 billion, but still forced the new PTI government to seek yet another IMF bailout with its stringent conditions to control both fiscal and current account deficits. These conditions resulted in dramatic slow-down in the country's GDP growth. 

Pakistan's External Debt. Source: Wall Street Journal

Pakistan's Exports: 

Pakistan’s exports have continued to lag behind that of its South Asian competitors since the early 1990s. Bangladesh’s exports have increased by 6.2 times compared to Pakistan’s, measured in terms of exports per capita, and that of India by 6.8 times, according to Princeton's Pakistani-American economist Atif Mian. 

Exports Per Capita in South Asia. Source: Dawn 

Balance of Payments Crises:

Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period of multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now.  This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018. 

Export Growth in South Asia. Source: WSJ

Savings and Investment: 

The second reason why Pakistan lagged its Asian peers in terms of economic growth is its lower savings and investment rates. There's a strong relationship between investment levels and gross domestic product. The more a country saves and invests, the higher its economic growth.  A State Bank of Pakistan report explains it as below:

"National savings (in Pakistan) as percent of GDP were around 10 percent during 1960s, which increased to above 15 percent in 2000s, but declined afterward. Pakistan’s saving rate also compares unfavorably with that in neighboring countries: last five years average saving rate in India was 31.9 percent, Bangladesh 29.7 percent, and Sri Lanka 24.5 percent..... Similarly, domestic savings (measured as national savings less net factor income from abroad) also declined from about 15 percent of GDP in 2000s, to less than 9 percent in recent years. Domestic savings are imperative for sustainable growth, because inflow of income from abroad (remittances and other factor income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks".

Net Foreign Direct Investment Source: State Bank of Pakistan

21X Remittance Growth Since Year 2000:

Remittance inflows from Pakistani diaspora have jumped 21-fold from about $1 billion in year 2000 to $24 billion in 2020, according to the World Bank. In terms of GDP, these inflows have soared nearly 7X from about 1% in year 2000 to 6.9% of GDP in 2018.

Meanwhile, Pakistan's exports have declined from 13.5% of GDP in year 2000 to 8.24% of GDP in 2017.  At the same time, the country's import bill has increased from 14.69% in year 2000 to 17.55% of GDP in 2017.  This growing trade imbalance has forced Pakistan to seek IMF bailouts four times since the year 2000.  It is further complicated by external debt service cost of over $6 billion (about 2% of GDP) in 2017. Foreign investment in the country has declined from a peak of $5.59 billion (about 4% of GDP) in 2007 to a mere $2.82 billion (less than 1% of GDP) in 2017. While the current account imbalance situation is bad, it would be far worse if Pakistani diaspora did not come to the rescue.


Pakistan's average economic growth of 5% a year has been faster than the global average since the 1960s, it has been slower than that that of its peers in East Asia. It has essentially been constrained by Pakistan recurring balance of payment (BOP) crises as explained by Thirlwall's Law. Pakistan has been forced to seek IMF bailouts 13 times in the last 70 years to deal with its BOP crises. This has happened in spite of the fact that remittances from overseas Pakistanis have grown 24X since year 2000. Every time Pakistan has faced a balance of payments crisis, the result has been massive currency devaluation, high inflation and slower growth for a period pf multiple years. This is is exactly what Pakistan's current government led by Prime Minister Imran Khan is dealing with right now.  This pain is the result of years of flat exports, soaring imports and excessive debt taken on during former Prime Minister Nawaz Sharif's PMLN government from 2013 to 2018.   The best way for Pakistan to accelerate its growth beyond 5% is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments. 

Related Links:

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Pakistan's Debt Crisis

Declining Investment Hurting Pakistan's Economic Growth

Brief History of Pakistan Economy 

Can Pakistan Avoid Recurring IMF Bailouts?

Pakistan is the 3rd Fastest Growing Trillion Dollar Economy

CPEC Financing: Is China Ripping Off Pakistan?

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Riaz Haq said…
How to fix Pakistan’s economy
Yousuf NazarUpdated 14 Sep 2020

Pakistan has gone through this boom and bust cycles many times before: an import-driven boom, balance of payments crisis, International Monetary Fund (IMF) bailout, stabilisation, a period of growth and then back to a crisis. This time is no different.


These facts suggest that the reasons for Pakistan’s poor export performance are deep and structural. The 2019-20 improvement in the current account deficit has been largely the result of more than a $5bn fall in energy imports and (possibly one-off) record rise in the worker’s remittances as overseas Pakistanis return following the huge surge in unemployment across the globe including in the Middle East.

It is wrong to focus on just the so-called twin deficits: current account and fiscal. These are just symptoms of much wider and deeper issues including Pakistan’s chronically low savings and investments rate compared to its GDP. I would call them intellectual and capacity deficits. We need a growth model.

An exports-led growth model has lifted hundreds of millions out of poverty in countries like China, South Korea, Taiwan and Singapore. China invested heavily in education, particularly science and technology, as well as in heavy engineering and other capital-intensive industries. Foreign investors looking for trained and low-cost workers found no shortage of human talent as the ‘communist’ China had invested heavily in basic education and its Special Economic Zones (SEZs) jump-started the labour-intensive exports-led industrial revolution that has transformed China.

Tax concessions and government-guaranteed yields may have succeeded in attracting investments in the energy sector but this is an unsustainable model. Economic progress cannot be imported or borrowed. It has to come from long term pursuit of appropriate strategies through policies implemented consistently through competent governance. A successful national growth plan must have a 3D strategy: deregulate, devolve, and digitise.

Deregulation is essential to harness the energies of the private sector (especially medium-size businesses) severely constrained by bureaucratic hurdles and rent-seeking. Without devolution, it is impossible to provide basic services in a country with one of the fastest urbanisation rates, and without digitalisation, Pakistan cannot compete in a world defined by the digital divide as Bill Gates has put it. Imran Khan has three more years to change course. His success or failure would depend on how correctly he identifies the challenges and what resources and people he employs to meet those.

Anonymous said…
Many economists suggest that the government has achieved its first goal, maintaining economic stability in Pakistan. In this article, I will argue that the economy is still in turmoil and stability is far away.

Stabilisation is achieved when all key macroeconomic indicators start performing at their optimum – growth-facilitating – level. One significant measure is the rate of inflation and the other is the interest rate.

Both are connected. When inflation is high, the interest rate should also rise to compensate for the time value of money and maintaining monetary discipline in the economy. In Pakistan, the Consumer Price Index (CPI) was recorded at 8.2% in August 2020. Although it is the lowest in the last three months, expectations are high that the CPI will rise in the coming months.

The key interest rate is at 7%, which is arbitrary since the State Bank of Pakistan (SBP) is keeping it at a low level to facilitate post-Covid recovery in the market. This negative interest rate is, in fact, a signal that the monetary policy is still not disciplined and sooner or later the SBP will revise its monetary policy goals.

Another indicator of stabilisation is the fiscal policy, which deals with spending and taxing accounts of the state. The fiscal deficit in the last two years was more than 8% of gross domestic product (GDP), the highest in the last four decades, even though the government is maintaining the lowest public spending.

I do not think the PTI government will keep retaining this lowest level of spending since this policy is hurting its popularity in public.

Current account

The fourth major proxy of economic stability is the current account balance. At present, Pakistan’s current account balance is in surplus. But two main factors are responsible for manipulating its present level.

One is the low level of imports due to the uncertain economic situation caused by Covid-19, volatile exchange rate and ambiguous economic policies of the present government since 2018.

The second is remittances which are increasing not due to any efficiency of the present government. Mainly, migrants send more money to their families when they find them in more financial difficulties or they decide to return to their home countries.

Dependence on remittances is like reliance on foreign markets and not on the domestic economy. It is evident that in the last two decades the more Pakistan relies on remittances, the more decline we see in exports. The reason is that the remittances are providing key support to the current account balance.

This reduces incentive for the government to remove those policy barriers which hurt productivity, innovation and competence in the domestic market. Without a strong competent market, Pakistan cannot boost its exports and sustain its growth rate at a more than 5% level.

One major barrier is the import-restricting protectionist policies. The economic literature is very clear in explaining that free trade policies boost exports and economic activities in a country.
Riaz Haq said…
#UK increases #Export Finance country limit for #Pakistan to £1.5 billion. UK is Pakistan’s 3rd largest export partner, accounting for 7% of Pak's total exports to the UK. Increase in #credit #financing limit will help turbo-charge trade between the two.

This announcement will boost trade partnerships between the two countries and unleash Pakistan’s growth potential. UKEF helps secure large contracts by providing attractive financing terms to buyers and supporting working capital loans.

The British High Commissioner to Pakistan, Dr Christian Turner met with the Federal Minister of Commerce for Pakistan Razaq Dawood today to discuss trade ties and business potential between the two countries. The Commerce Minister welcomed the UKEF’s announcement of an increase of £500 million in the credit limit for business investment in Pakistan, especially at a time when Pakistan is looking to expand its trade potential to mitigate the impacts of COVID19.

The British High Commissioner, Dr Christian Turner said;

UK credit financing for Pakistan has tripled in the last two years, and is key to achieving my ambition to double the trade between the UK and Pakistan. It is a sign of our confidence in Pakistan and the strength of the unique relationship between the two countries. I encourage all Pakistan businesses to look for opportunities to partner with the UK on their journey towards economic prosperity.

The UK is Pakistan’s third largest export partner. Between July 2019 and March 2020 Pakistan exported 7% of its total exports to the UK, and the increase in the credit financing limit will help turbo-charge trade relations between the two countries.

Notes to the Editors:
UK Export Finance (UKEF) is the UK’s official Export Credit Agency (ECA) working closely with the Department for International Trade (DIT).
Its mission is to ensure that no viable UK export fails for lack of finance or insurance, while operating at no net cost to the taxpayer.
In 2019/20, UKEF provided £4.4 billion of support for UK exports globally.
UKEF recently completed a comprehensive review of its Country Limits, resulting in increases in over 100 markets including Pakistan
The Export Financing offered is quite attractive if comparing to a commercial bank
There is a baseline requirement for 20% of the whole deal to come back to the UK, but that doesn’t necessarily mean –for example –the whole construction on the ground or the production of a specific product. It looks at the whole supply chain. The 20% can come from a UK company that looks after the procurement of services as part of a bigger deal. This makes UKEF very attractive for multinational consortiums.
Riaz Haq said…
In the outgoing FY (2019-20), Pakistani expatriates remitted a record of $23.12 billion with more than 6% year-on-year (YoY) growth compared to $21.74 of FY 2018-19.

The momentum has not only persisted but amplified in on-going FY 21 with a whopping $2.77 billion remittance in July, followed by an inflow of $2.095 billion in August. This unprecedented surge is bemusing, and what has baffled many is the fact that this escalation has occurred during the pandemic. So, what could the potential triggers to this mammoth inflow be?
The extraordinary leap can be primarily due to the tightening of informal money markets, which has augmented the inflow through formal banking channels. In the budget for FY 2020-21, the incumbents allocated Rs25 billion to formalise foreign remittances, which would aid in stockpiling foreign exchange reserves to service colossal national debt obligations.
Pakistanis typically used to carry cash in their luggage physically. But due to flight reduction and sparse international travels, they would have been compelled to access official banking channels for money transfers. Also, remittances might have incremented on account of significant job losses in the Gulf region due to the Covid-related recession. Hence the spiral may demonstrate high one-time repatriation of money back to Pakistan.
On the other hand, the State Bank of Pakistan (SBP) has emphasised an orderly ‘market-based’ exchange rate management and sound policymaking under the Pakistan Remittance Initiative. The SBP sheds the spotlight on the reduction of the threshold for eligible transactions from $200 to $100 under the Reimbursement of Telegraphic Transfer (TT) Charges Scheme. It also stressed on adoption of digital channels and targeted marketing campaigns to promote formal routes. Similarly, IT-related freelance services’ payment limits have increased from $5,000 to $25,000 per individual per month. The SBP believes that it has facilitated to enhance home remittances through formal banking channels in Pakistan.
The crux of the matter is remittances will upslope further in the future due to effectuated compliance of formal banking channels. Still, the recent abnormal increment will ease down in the coming months when the western economies recuperate from the ramifications of the Covid-related slump.
Riaz Haq said…
#Pakistan earns $1.44 billion in #IT #exports, up 20.72% from $1.19 billion from last year. #computer services exports grew 23.44% as it surged to $1,106 million from US $ 895.990 million last year. #technology #economy #trade$1438-million-from-IT-services-export-during-FY2019-20

Pakistan earned US $ 1438.827 million by providing different information technology (IT) services in various countries during July-June (2019-20).

This shows growth of 20.72 percent when compared to US $ 1191.864 million earned through provision of services during the corresponding period of fiscal year 2018-19, Pakistan Bureau of Statistics (PBS) reported.

During the period under review, the computer services grew by 23.44 percent as it surged from US $ 895.990 million last year to US $ 1106.027 million during July-June (2019-20).

Among the computer services, the exports of software consultancy services witnessed increase of 14.98 percent, from US $ 354.397 million to US $ 407.492 million while the export and import of computer software related services also rose by 11.62 percent, from US $ 285.235 million to US $ 318.368 million.

The exports of hardware consultancy services decreased by 16.55 from, US$ 2.345 million to US$ 1.957 million whereas the exports of other computer services rose by 51.91 percent from US$ 247.976 million to US $ 376.699 million. In addition the export of repair and maintenance services however witness decline of 74.97 percent from $6.037 million to $1.511 million.

Meanwhile, the export of information services during the period under review increased by 61.39 percent by going up from US $ 1.580 million to US $ 2.550 million.

Among the information services, the exports of news agency services increased by 100.89 percent, from US $ 0.677 million to US $ 1.360 million whereas the exports of other information services also increased by 31.78 percent, from US $ 0.903 million to US $ 1.190 million.

The export of telecommunication services also witness increase of 12.22 percent as these went up from US $ 294.294 million to 330.250 million during the fiscal year under review, the data revealed.

Among the telecommunication services, the export of call centre services increased by 26.17 percent during the period as its exports increased from US $ 98.858 million to US $ 124.730 million whereas the export of other telecommunication services also increased by 5.16 percent, from US $ 195.436 million to US $205.520 million during the period under review, the PBS data revealed.

It is pertinent to mention here that the services trade deficit of the country during the fiscal year (2019-20) decreased by 42.96 percent as compared to the corresponding period of last year.

During the period from July-June, 2019-20, services exports decreased by 8.66 percent, whereas imports reduced by 24.25 percent, according the data released by Pakistan Bureau of Statistics.

The services worth US $ 5.449 billion exported during the period under review as compared the exports of US $ 5.966 billion in same period of last year, whereas imports of services into the country was recorded at US $ 8.284 billion as against the imports of US $ 10.936 billion, the data revealed.
Riaz Haq said…
China’s export machine comes roaring back to life as #COVID threat wanes. While overall volumes have fallen, #China’s share of global #exports leapt to more than 18% in April, before falling back slightly to 15.9% in July. #economy via @financialtimes

The same coronavirus that hammered global trade has increased the appetite for goods made in China, such as electronics products and medical equipment. That boom in exports is supporting the country’s early recovery as other big economies flounder, raising the question of whether China’s recent trade advantage will outlive the pandemic.

Data from Oxford Economics and Haver Analytics show that while overall volumes have fallen, China’s share of global exports compared with other large exporters leapt to more than 18 per cent in April, before falling back slightly to 15.9 per cent in July.

“It is too early to write off China’s role in global supply chains,” said Louis Kuijs from Oxford Economics, who pointed to the “fundamental competitiveness” of Asian economies.

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He added that the market share effect was in part temporary but suggested that “there will be some permanent shift . . . and that should benefit certain countries".

Partly a function of declining activity elsewhere, China’s recent success is also a result of a wider resilience of exports in east Asia, fuelled by a shift in global demand towards products suited to a world working from home.

Taiwan’s exports, the majority of which are electronics components and IT and communications products, reached their highest ever monthly level in August. In South Korea, exports of information and communications technology products rose year on year in each of the past three months after a sharp fall in April. 

Such economies have benefited from much lower reported coronavirus infections since the second quarter. Lockdown restrictions in China were already being eased in April, when other countries were plunged into chaos from the spread of the pandemic. New cases have remained lower in China, Taiwan and South Korea than in the US and Europe. 

That paved the way for enough manufacturing activity to take advantage of a shift in global consumption patterns. In addition to the kind of soaring exports of electronics also seen in Taiwan and South Korea, Chinese exports of medical equipment leapt in the first seven months of the year. China’s trade surplus with the US in August reached $34.2bn, its highest level since November 2018.

Trinh Nguyen, senior economist at Natixis, points to a “bifurcation of performance globally”. That is reflected in South Korea, where electronics and medical consumer products have performed well but “heavy industries” such as shipping and autos have struggled. In Japan, exports fell year on year for the sixth straight month in August.

Trade Secrets
Medical equipment boost for Chinese exports could be shortlived Premium

In China, the state has provided support for manufacturing in a way that Mr Kuijs said was “unimaginable” in the US. But he added that the export response in China was also down to “entrepreneurial and agile” companies. “Virtually none of these companies is state owned,” he said.

While overall exports have been able to adapt to changing demand, the mood in its manufacturing hubs is mixed.

Kexin Chen, a sales manager of a toy factory in Guangdong, said export orders from Europe were improving but admitted that her business was still struggling. “We are counting on [orders for] Black Friday and Christmas,” she said.

Elsewhere, there are signs that aspects of the east Asian export boom may be driven by short-term fears over supply chains. Taiwan Semiconductor Manufacturing Corporation, the world’s largest contract chipmaker, told investors last month that technology companies were building larger stockpiles because they were worried new Covid-19 infection waves could disrupt supply chains again.

Riaz Haq said…
Workers' #remittances to #Pakistan above $2 billion for 4th consecutive month in September, increasing to $2.3 billion, 31.2% up from last year, and 9% higher than in August. Remittances rose to a record $ 7.1 billion in Q1-FY21, 31.1% up over last year.


October 12, 2020

Trend of Strong Workers' Remittances Continues in September

Workers' remittances remained above $2 billion for the fourth consecutive month in September. They increased to $2.3 billion, 31.2 percent higher than the same month last year and 9 percent higher than in August.
On a cumulative basis, remittances rose to a record $ 7.1 billion in Q1-FY21, 31.1 higher than the same period last year.
The level of remittances in September was slightly higher than SBP's projections of $ 2 billion. Efforts under the Pakistan Remittances Initiative (PRI) and the gradual re-opening of major host destinations such as Middle East, Europe and United States contributed to the sustained increase in workers' remittances.
Riaz Haq said…
‘Exports to increase up to $28 bn by end of current fiscal’, says Razzak Dawood. “Though we need to do a lot on various conventions, but the progress on many issues mentioned in the detailed report will help continue the GSP Plus facility for Pakistan.”

Razzak Dawood Tweet:I happy to share the good news that more and more brands are shifting to Pakistan. We just heard that Hanes, Guess, Hugo Boss & Target have shifted orders from China to Pakistan.

Riaz Haq said…
October #remittances to #Pakistan grow 14% to $2.3 billion, the 5th consecutive month above $2 billion. Remittances up 26.5% to $9.4 billion during the first 4 months of FY21, compared with July-Oct FY20. #economy #ImranKhan #PTI- Profit by Pakistan Today

Workers’ remittances amounted to $2.3 billion during October 2020, showing an increase of 14.1 per cent when compared with October 2019.

This is for the fifth consecutive month that workers’ remittances remained above $2 billion, according to latest figures released by the State Bank of Pakistan (SBP) on Thursday.

A large part of the year-on-year (YoY) increase in October this year, 30pc, was sourced from Saudi Arabia, 16pc from the United States of America and 14.6pc from the United Kingdom (UK).

“Improvements in Pakistan’s FX market structure and its dynamics, efforts under the Pakistan Remittances Initiative (PRI) to formalise the flows and limited cross-border travelling contributed to the growth in remittances,” the SBP stated.

Meanwhile, on a cumulative basis, workers’ remittances rose 26.5pc to $9.4bn during the first four months of FY21, when compared with July-Oct FY20.

“These numbers were expected. The whole South Asia region is getting above-average inward remittances due to lockdown and reduction in flights and movement of unofficial funds,” said Muhammad Sohail of Topline Securities.

“In the short-run, this [the increase in remittances] will support local currency,” he added.

Earlier, a World Bank report had projected that remittances to Pakistan to grow at about 9pc in 2020, totalling about $24bn.

The World Bank attributed this increase to the diversion of remittances from informal to formal channels due to the difficulty of carrying money by hand under travel restrictions.

Riaz Haq said…
#Pakistan's public #debt stands at 78% of #GDP. Annual interest payments to use up one-third of the Rs. 8.5 trillion ($54 billion) 2021 federal budget....90% of debt payments are for domestic debt & 10% for foreign debt servicing. #economy #Budget2021

Interest payments consume one-third of Pakistan's budget
Over-reliance on loans bodes ill for fiscal sustainability and domestic needs

Fiscal sustainability has become a major issue among political and economic analysts after Pakistan revealed early this month that servicing debt accounts for more than one-third of its federal budget.

Finance Minister Shaukat Tareen in the National Assembly on June 12 announced the fiscal 2021 federal budget of 8.48 trillion rupees ($54 billion). Interest payments on debt, which are expected to grow by 3.9% from the ongoing fiscal year, account for 3.06 trillion rupees, or 36% of budget expenditures. In contrast, the government is only spending 600 billion rupees on subsidies and 100 billion rupees for COVID-19 vaccinations and emergencies.

The budget also reveals a deficit of 3.99 trillion rupees. The federal government plans to borrow 3.74 trillion rupees to finance this deficit, which makes up 94% of the deficit.

Pakistan's reliance on debt is a violation of the country's Fiscal Responsibility and Debt Limitation Act 2005, which states that the government must limit debt to 60% of gross domestic product. Currently, the ratio stands at 78% of Pakistan's $303 billion GDP.

Hasaan Khawar, a public policy analyst based in Islamabad, says Pakistan borrows heavily not only to finance current expenditures but also to service existing debt. "Pakistan is a having a primary fiscal deficit. That's why the [International Monetary Fund] has been demanding a primary budget surplus so that it starts reducing debt."

"Resources that could have been spent on essential sectors like health, education or public investment are now being dedicated to interest payments," said Naafey Sardar, a senior research associate at Texas A&M University in the U.S., emphasizing that increased debt financing presents a trade-off for Pakistan. "Since increased public investment and expenditures on education and health are associated with improvements in economic growth, higher debt financing expenditures reflect a missed opportunity," he said.

Of the 3.06 trillion rupees earmarked for interest payments on debt, 2.76 trillion rupees, or 90%, will go toward servicing domestic debt.

A senior official involved with the government's development planning told Nikkei on condition of anonymity that domestic borrowing is unsustainable. "Domestic borrowing is always at high commercial rates and external borrowing is mostly at concessional rates. That's why domestic borrowing costs the economy more," the official said.


Experts believe that a combination of reduced government spending and a tax increase is the solution.

Sardar believes that the way out is to increase tax revenue. "Higher tax receipts can be earned by increasing the corporate tax rate from 29% to 35%," he said. Sardar added that at a time when corporate profits are surging, increasing corporate taxes could be a viable option.

Khawar believes that Pakistan can accrue surpluses by controlling fiscal waste. He says there is a multipronged strategy to deal with the problem. "Government needs to widen the tax base using technology for tax enforcement while reducing expenditures in loss-making state-owned enterprises," he said. "There is no quick fix to this. That's the bottom line."

Riaz Haq said…
Speaking at a Karachi Chamber of Commerce and Industry webinar in December, Adviser to the Prime Minister on Institutional Reforms Dr Ishrat Husain stressed the importance of looking beyond the textile sector and diversifying Pakistan’s exports. Otherwise, he warned, we will remain “stuck” at 25 to 30 billion dollars in exports per year.

“If we can capture just one percent of the Chinese market by providing components, raw materials [and] intermediate goods to the Chinese supply chain,” he had said, “we can get 23 billion dollars in exports to China, which is very favourably inclined towards Pakistan...”

From the looks of it, others were on the same page as Husain. Last month, it was reported by China Economic Net (CEN) that China will import dairy products from Pakistan. The Commercial Counsellor at the Pakistan Embassy in Beijing, Badar uz Zaman, told CEN that Pakistan got this opportunity due to its high quality dairy products, available at a low price.

Pakistan is the fourth largest milk producer globally, Zaman pointed out.

Indeed, the country’s dairy industry has great potential and can prove to be ‘white gold’ for Pakistan. Unfortunately, the sector is currently struggling due to various reasons but, if its export potential is realised, it can transform not only the sector itself but Pakistan’s economy as well.

According to the Food and Agriculture Organisation at the United Nations, in the last three decades, global milk production has increased by more than 59 percent, from 530 million tonnes in 1998 to 843 million tonnes in 2018.

This rise in global milk consumption is an opportunity for countries such as Pakistan to earn foreign exchange by exporting milk and dairy products to countries which have insufficient milk production. According to a Pakistan Dairy Association estimate, with support from the government, Pakistan can earn up to 30 billion dollars from exports of only dairy products and milk.

Unfortunately, this potential is being wasted. As per statistics provided by the Pakistan Dairy Association, livestock and dairy currently make up approximately only 3.1 percent of Pakistan’s total exports; which would mean about a mere 0.68 billion dollars in FY2020.

Riaz Haq said…
Atif Mian

I tried. My take on what it would take to change Pakistan's economic trajectory - which hasn't been good for a while now.


Riaz Haq

Replying to
I agree with you. #Pakistan needs to dramatically boost #exports to get out of the #IMF trap and achieve sustainable #gdp growth

Atif Mian

I tried. My take on what it would take to change Pakistan's economic trajectory - which hasn't been good for a while now.


Riaz Haq

Replying to
I agree with you. #Pakistan needs to dramatically boost #exports to get out of the #IMF trap and achieve sustainable #gdp growth

Riaz Haq said…
#Pakistan #GDP growth rate of over 5.5% to hurt economy: Finance Minister Shaukat Tarin. "I’d not like to see 6% (growth) this year. That’s going to be damaging for our economy". High #economic growth makes twin (fiscal & current account) deficits grow.

Folks may not realise it, but the economy is growing fast. It’s growing so fast that the country’s finance tsar is afraid he may have to cap it at 5.5 per cent this year. A higher economic growth rate will hurt the country, according to Shaukat Tarin, adviser to the prime minister on finance and revenue.

Speaking at the annual dinner of CFA Society Pakistan on Friday, Mr Tarin said he and the International Monetary Fund (IMF) want the GDP growth rate to stay in the range of 5pc and 5.5pc for 2021-22. “But I’d not like to see 6pc (growth) this year. That’s going to be damaging for our economy,” he told the annual meeting of finance professionals.

In response to a question, Mr Tarin said the IMF programme is not going to impede the targeted 5pc growth rate. “Our growth is not slowing down,” he said, adding that he’s held a “very healthy kind of discussion” with the Fund about which people will “find out pretty soon”.

He took pains to emphasise that the IMF programme won’t kill growth — a claim that’s in contrast to the typical IMF prescription involving reduced government spending and higher interest rates that slow down GDP growth.

“Let me tell you that we’re not very far away from what the IMF wants us to do,” he said while noting that IMF-prescribed policy actions include ending tax exemptions, higher revenue generation and reforming income and other taxes. “We told them we don’t believe in pyramiding. We believe in broadening... They also want us to grow but they don’t want us to grow in an unsustainable manner,” he said.

As evidence of the higher-than-targeted growth rate of 5pc for 2021-22, the finance adviser said motorbike sales are at a record-high level, large-scale manufacturing growth is in double digits and tax collection is Rs230 billion above its target. “At this speed, we’ll cross Rs6 trillion. It’s not because of imports. Income tax is also up 32pc. It’s all-around growth. The use of electricity is up 13pc.”

As for the rising current account deficit, Mr Tarin said its numbers are “balanced as of now”. He said the government will clamp down on imports if the current account deficit keeps growing because it doesn’t want unsustainable growth.

“The export coverage of imports has to go up. In three to four years, the export cover must go up to 70-80pc. We’re giving incentives to IT sector so that it can grow 100pc.”

He criticised the financial sector for not being responsive to the needs of the economy. About 85pc credit is disbursed in nine cities while three-quarters of it goes to the corporate sector, he said. “It’s dysfunctional. We’ve got to fix it.”

He said it takes 10 to 20 years of consistent growth for trickle-down economics to work. “Trickle-down doesn’t follow four-year growth (spurts). That’s why we’re adopting a bottom-up approach,” he said, adding that the government will provide poor 4m households with interest-free loans for agriculture, business and housing purposes, besides ensuring healthcare and technical education for them at a cost of Rs1.4tr.

“We’ll have large banks wholesale finance to NBFIs (non-bank financial institutions) and microfinance NGOs... Now is the time to roll out loans,” he said.
Riaz Haq said…
Opinion by Khurram Husain:

The (Pakistan) government expects the GDP growth rate to rise to 6pc by the end of the fiscal year, while the Fund projects the same figure at 5.6pc. The difference is appreciable, but in both cases the trend is still upward, showing that the pace of activity in the economy is rising.

But the external sector, the traditional Achilles heel of Pakistan’s economy, is rapidly deteriorating. Foreign exchange reserves are falling fast, mainly on account of a growing trade deficit that the government is struggling to contain through ad hoc measures like regulatory duties and a slight depreciation in the exchange rate.

The Fund report estimates that net international reserves, the figure we get after deducting key short-term liabilities as well as money owed to the IMF from the gross foreign exchange reserves, is now negative $0.7bn. Back in 2016, when the last Fund programme ended, the same figure stood at $7.5bn.

This is a very large decline, even though the gross reserves are still sufficient to cover just over two months of imports, above critical levels but below the benchmark for sustainability, which is four months. The decline appears to be driven by a fall in the gross foreign exchange reserves since September 2016 as well as a doubling of the State Bank’s own short-term liabilities in the form of forwards and swaps.

An obvious question asserts itself regarding these two developments: rising GDP growth rate and falling foreign exchange reserves. The question is, which of these trumps the other? Will the GDP growth and the attendant investments that lie behind it become some sort of auto-correcting mechanism, in due course driving up exports, boosting competitiveness and thereby arresting and reversing the growing current account deficit?

Or will the continuously declining foreign exchange reserves eventually force an abrupt correction in the form of a large devaluation, hike in interest rates and collapse of domestic demand, as happened in 2008? Projected out into medium-term future, common sense says that eventually economic growth bows to economic fundamentals, and not the other way round.

The report shows that the Fund staff and the government did not see eye to eye when looking into the future in the medium term. The government’s projections of the state of inflows and outflows of foreign exchange were clearly more bullish that that of the Fund. According to the Fund’s projections, gross foreign exchange reserves will not hit the critical level of one month’s import cover for another three years.

There is still time for corrective action, but ad hoc measures, which include short-term borrowing and regulatory duties, do not seem to be doing the trick.
Riaz Haq said…
Pakistan needs to create export culture: Dawood
Emphasises all departments should facilitate exporters to boost exports

Although Pakistan’s exports are rising due to favourable government policies, the country needs to create an export culture to give it a further boost, said Adviser to Prime Minister on Commerce and Investment Abdul Razaq Dawood.

Speaking at a press conference on Wednesday, Dawood said that the creation of export culture was a major task for the Ministry of Commerce.

To achieve the desired objective, all departments like the Federal Board of Revenue (FBR), ports as well as the government should facilitate the exporters, he said.

“Again and again, we go to the IMF to get dollars as we are short of foreign exchange,” he lamented.

Last year, Pakistan’s exports increased 30% year-on-year while information technology exports registered a rise of 47%, Dawood said. This year, IT exports have surged 45% year-on-year so far.

Pakistan’s overall export target for FY22 is $38.7 billion including $20 billion in textile exports.

He voiced hope that the country would make $38 billion worth of exports, with $31 billion in goods shipments and $7 billion in services exports.

He underlined that under the diversification policy, Pakistan witnessed a 77% surge in exports of non-traditional products to the unconventional markets.

However, the increase was not phenomenal in the traditional markets, he said, adding that it would take up to five years to reap full benefits of the policy.

“We are exactly on target,” Dawood remarked and emphasised the need to instill export culture in every sector so “everybody should have export in their mind, right from the FBR to the people working in farms.”

Stressing the importance of export diversification, Dawood said that Pakistan was targeting new markets such as Central Asia, Kenya and Nigeria.

“We had been to Nairobi, but could not follow up due to Covid-19,” he said.

The adviser revealed that around 115 businessmen from textile, engineering, IT and other sectors would be visiting Nigeria, where a series of business-to-business meetings had been arranged along with a conference and an exhibition.

Pakistan needed regional connectivity like the European Union, where member countries had 80-90% regional trade, he said, adding that Pakistan’s regional trade stood at only 5%.

Dawood highlighted that currently cargo trucks went through numerous loading and unloading phases at the borders.

Quoting an example, he said that cargo trucks from Uzbekistan arrived in Afghanistan and from there the goods were loaded on to Pakistani trucks.

He was of the view that cargo trucks should travel directly to their destinations in order to save time and the hassle of loading/unloading.

“In the next five to six months, we will streamline this,” he remarked.

Recently, two cargo trucks travelled from Karachi to Turkey and Azerbaijan, while one truck reached Moscow directly, he revealed.

Around 40% of the raw material was being imported at zero duty “but it is less than what we need”, he said.

Dawood highlighted that Pakistan collected 47% of duties at ports, while Bangladesh and India collected 27% of duties at ports. “The more you collect duties at the import stage, the more there is a bias against export.”

Answering a question about the prevailing gas crisis, he said “no doubt gas is a big issue.”

The supply of gas to any industrial unit that had a captive power plant would not be discontinued, he said. “Those working purely on electricity may face gas load-shedding.”
Riaz Haq said…
#Pakistan to end reliance on #IMF by boosting #exports, cutting #deficits & tapping #capital markets. #Textile exports are poised to surge 40% to a record $21 billion this year & further to $26 billion next year. Pak also incentivizing #tech exports boom.

Pakistan, which has sought almost 20 bailouts from the International Monetary Fund over half a century, wants to end its reliance on the multilateral lender by shrinking its deficits and tapping the capital markets.

Finance Minister Shaukat Tarin, who has negotiated the last leg of a current $6 billion IMF loan, plans to raise $1 billion via an ESG-compliant Eurobond in March after issuing a similar amount of Sukuk last week. He also targets to shrink the budget shortfall to 5%-5.25% of gross domestic product in the year starting July 1 from 6.1% the previous period and spur growth to 6% from 5%.

“I think this program should be enough,” Tarin, 68, said in an interview in Islamabad. “If we start generating 5%-6% balanced growth, which means sustainable growth, then I don’t think we need another IMF program.”

Prime Minister Imran Khan has been a vocal critic of IMF bailouts, saying “the begging bowl needed to be broken” if Pakistan must command respect in the world. He joins nations, including South Asian peer Sri Lanka, that prefer to maneuver with bilateral loans or commercial borrowings rather than adopt the austerity that accompanies an IMF agreement.

The first part of Tarin’s plan to halt Pakistan’s boom-bust cycle involves boosting exports. The central bank offered cheap loans to manufacturers and energy tariffs were brought in line with the region. Textile shipments -- more than half of total exports -- are poised to surge 40% to a record $21 billion in the year through June and further to $26 billion next year, according to Khan’s commerce adviser.

Pakistan also plans to extend similar incentives to the technology sector as it seeks to ride a wave of global venture-capital interest in startups. The policies could be unveiled in about a month, Tarin said.

Tarin was appointed in April 2021 and has since renegotiated some of the IMF’s financial conditions, including a smaller increase in utility prices and lower mop up in taxes than the lender had earlier insisted on.

He has adopted some of the structural conditions, which include increasing autonomy for the central bank and putting an end to deficit monetization. Like predecessors, he hasn’t been able to significantly broaden Pakistan’s tax base or sell loss-making state-run firms.

Previous governments accepted IMF conditions in the short term and, when the program ends, policy makers revert to profligate spending, Tarin said. Instead, he vowed to “control our expenses” in the upcoming budget.

“We are trying to now take those steps, which are going to put this economy on an inclusive and sustainable growth path,” said Tarin. “Once it gathers momentum and is sustainable, then I think we will probably see 20-30 years of growth.”
Riaz Haq said…
Arif Habib Limited
Current Account Balance Apr’22

CAB: $-623mn (+132% YoY, -39% MoM)
Remittances: $3.1bn (+12% YoY, +11% MoM)
Total imports: $7.0bn (+25% YoY, -3% MoM)
Total exports: $3.8bn (+35% YoY, +1% MoM)
Riaz Haq said…
Shafaat Hussain
Exports hit new milestone under PTI🥇

Record exports of goods worth $31.76bn achieved in FY22.

Well done team

Riaz Haq said…
Shafaat Hussain
Exports hit new milestone under PTI🥇

Record exports of goods worth $31.76bn achieved in FY22.

Well done team


Arif Habib Limited
Historic high trade deficit during FY22, up by 55% YoY

Exports: $ 31.76bn; +26% YoY
Imports: $ 80.02bn; +42% YoY
Trade Deficit: $ 48.26bn; +55% YoY



#PBS #Exports #Imports #TradeBalance #Economy
Riaz Haq said…


"Our growth model is based on import substitution. Richest ppl get loans to kickstart manufacturing at subsidized rates. This fuels import driven consumption from cars to machinery. It's not a competitive model. We fall in elite capture. 1/n


"When we slowdown the economy, the middle class & poor segments get hit the most. The protection amount is almost equal to value addition. No reason to become efficient.

We need to think abt exports, education & building the #Pakistan brand."


"We need to introspect what is wrong with us as an individual. Do the religious minorities feel safe in Pakistan or are ready to move to Canada on the first opportunity.We need to do 4 things

1) Focus on exports
2) Improve agri sector. We import $2b cotton,$1b pulses. Our agri..


productivity is lower than the world in everything yet we call ourselves agri country.

3) We need to live within our means.
4) Educate our children. Most important job is parenting. 2 schools Aitchison & KGS account for all Ministers etc. There's no social mobility in Pak.


"1/3 of #Pakistan is under water. Many have lost everything they had. Yet the nation moves on. We are resilient. But I don't want us to just be resilient. I want Pakistan to be richer, not be hungry & more educated."
Riaz Haq said…
Green investment on rise, Pakistan to get 30 % renewable energy - Pakistan Observer

Until now, renewable energy sources make up a very minor fraction of Pakistan’s overall power generation mix. According to a recent report of the National Electric Power Regulatovry Authority, the installed capacity for wind and solar accounts for roughly 4.2% (1,831 MW) and 1.4% (630 MW) of a total of 43,775 MW, respectively.

China is already the biggest investor in green energy in Pakistan. Currently, out of the $144 million in foreign investment in solar PV plants in Pakistan, $125 million is from China, accounting for nearly 87% of the total.

Thanks to Chinese investments, a few weeks ago Federal Power Minister Khurram Dastgir Khan inaugurated two new wind energy projects in Jhimpir, Thatta District, Sindh, with an aim to produce cheaper and clean electricity through indigenous energy sources. Wind projects in this region have been one of several renewable energy projects to have received Chinese investment in recent years. Around 90 kilometers from Karachi, Jhimpir is the heartland of the country’s largest ‘Wind corridor’, which has the potential to produce 11,000 megawatts (MW) of energy from green resources.

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