Consumerism, government borrowing fuelling demand

As the country battled rising unemployment, dwindling investor confidence and sluggish global economic growth; aggregate demand posted a YoY growth of 3.7 percent, which is a pleasant surprise.
However, the fundamentals of demand structure paint a murky picture as the mainstream growth is coming from elevated fiscal borrowings and swelling informal economy, which in turn raises a red flag on the performance of the economy in the long run.
External demand was battered by the bearish global economy and domestic competitiveness issues; investments also fell for the fourth straight year in a row. Resultantly, during FY12 the investment-to-GDP ratio fell to 12.5 percent - lowest amongst major Asian countries, which is also explained by low investment rates in the Country.
Heightened government spending is buttressing the aggregate demand, however, at the expense of swelling fiscal deficit and crowding out private investments. Non-developmental expenses by the government have increased unabated in recent years, including higher spending on untargeted subsidies, income support programmes, increase in pensions and public salaries, and duty cuts on consumer items.
Whats more, UNCTAD World Investment Report 2012 shows that while FDI has rebounded in many emerging and transition economies to beat the pre-crisis level; in Pakistan, it continues to fade for the fourth consecutive year. This is also attributable to weak governance and policy uncertainty in the country.
The only upbeat factor is strong workers remittances channeling into private consumption, which is essentially the largest component of aggregate demand. However, in the case of Pakistan, its contribution has increased alarmingly to 90 percent in FY12.
During the year, real consumption grew by 11.1 percent as against 3.9 percent in FY11. Looking beyond the numbers, real consumption growth is also evident from factors such as stimulation in construction industry; higher production and import of consumer goods, increase in sales tax collection, strong public interest in retail exhibitions; new shopping malls and restaurants; increase in overseas travelling; and leading global brands opening their outlets in the country. The striking performance of FMCGs also propped up this trend.
But the growth of the shadow economy is also symptomatic of the deterioration of the social contract between the government and governed. Growing fortunes of select few, without a subsequent improvement in government revenues is a disturbing trend which must be rectified by collective efforts of provincial and federal governments.