Consumption rate in Pakistan is one of the highest in the world – both of households and the government which accounts for low domestic savings whose identity with investment has compelled successive Pakistani governments to rely on foreign savings (borrowing) to meet its budgetary needs.
Critics however maintain that the bulk of borrowing, domestic and external, is to fund current expenditure as opposed to investment in physical and social infrastructure that would have led to healthy dividends in years to come.
Total household consumption at current prices rose from 20,391,214 million rupees in 2013-14 to 31,547,687 million rupees in 2018-19 and then again to 38,501,127 million rupees in 2020-21 (the year of the pandemic) – a rise of 16.85 percent in 2020-21 against 4.44 percent the year before – the prime factor behind the GDP growth of 4 percent last year. In other words, like in other countries of the world, consumption in Pakistan rose dramatically last year as lockdowns (smart/micro) were lifted and the public went on a shopping spree.
Government consumption in Pakistan was 2,708,918 million rupees in 2013-14, rose to 4,054,823 million rupees in 2018-19 and was 7,255,379 in 2020-21. Thus it rose by 13.91 percent last year in comparison to the year before, with higher pandemic related expenses, and by 6.97 percent in 2019-20 over 2018-19.
Two observations are critical. First, household consumption was almost 81 percent of total GDP in 2020-21 against 79 percent rise in 2019-20 (over 2018-19) and 81 percent of total GDP in 2013-14 (over the year before) – a percentage that has remained stable plus minus one percent. Thus while there has been no change in percentage of household consumption as a percentage of GDP in 2020-21 from previous years yet it rose by 16.85 percent in 2020-21 against a considerably lower rate of growth in previous years.
The question is why? Could it be: (i) because growth was mainly consumption driven as reflected in the massive rise in car/motorbike sales sourced mainly to inventories rather than output driven; and/or (ii) the rise in prices sourced to supply side issues evident in other countries as well due to the pandemic may have been understated in the calculation of GDP at market prices.
There is of course the possibility that inflation may continue to be understated subsequent to the recent successful completion of the International Monetary Fund (IMF) sixth review which would imply a rise in administered prices of electricity, with the government having yet again failed to improve sector performance by reducing transmission and line losses or increasing receivables and instead, like in the past 22 Fund programmes, meeting the Fund’s condition to achieve full cost recovery by passing it on to the consumers. In addition, the petroleum levy will be raised at the rate of 4 additional rupees per litre per month, till the 30 rupee per litre ceiling is reached, which implies a massive rise of this component in the kitchen budget.
In other words, households’ ability to save would be further compromised and the recent decision of the National Savings Centres to raise rates to encourage savings, a source of borrowing for the government, may not bear fruit.
Data indicates that the United States, with the highest consumption of domestic and imported items amongst developed economies, registered consumption as a percentage of GDP of 68.8 percent, while other developed countries registered lower levels with Euro area at 46.88 percent, and the UK at 58.8 percent.
Emerging markets too had much lower consumption as a percent of GDP relative to Pakistan with India registering 55.78, Indonesia 53.09 percent, Brazil 58.47 percent and Saudi Arabia 43.80 percent. Those countries that reported (China and Russia did not report) Pakistan’s high rate competed with three countries - Egypt at 89.9 percent, Montenegro at 78.8 percent and Palestine at 89 percent. Pakistan today thus has one of the highest inflation rates relative to other regional countries as well as our major trading partners in the European Union and the USA.
Second, government consumption as a percentage of GDP, a contributory factor to the persistent rise in inflation, registered 10 percent in 2013-14, rose to 11.7 percent in election year 2018-19 and then again to 12.4 percent in 2020-21. In India with a GDP four times higher it was 12.6 percent, Sri Lanka 10.4 percent, Bangladesh’s 6.1 percent. However, in Pakistan the bulk of this consumption – around 89 percent in the current year is budgeted for current expenditure.
High household and government consumption accounts for low savings of the former and negative savings for the latter which in turn compelled Pakistan to increasingly rely on external and domestic borrowing to fund its expenditure – a fact which accounts for a massive rise in indebtedness.
In 2021 Pakistan’s debt as a percent of GDP was 87.2 percent, against Bangladesh’s 31.68 percent and the UAE and Turkey’s 39 percent. Pakistan during the past three years has upped its reliance on foreign borrowing from 95 billion dollars in 2018 to over 1266 billion dollars today and domestic borrowing from 16.5 trillion rupees in 2018 to over 26 trillion rupees today.
Disturbing economic factors sadly persist in our country. The Prime Minister correctly continues to argue that to achieve general public well-being requires a government to be effective, and ensures the rule of law (violent strike action be dealt with effectively and not by capitulation) and accountability (flawed decisions must be punishable).
In this context, it is relevant to note Pakistan’s ranking by the IMF: (i) Pakistan is ranked at 130 out of 192 countries in the government effectiveness index with India ranked at 59, Bhutan at 61, Sri Lanka at 93, and Bangladesh lower at 153; (ii) in the rule of law ranking Bangladesh ranked 131 – higher than Pakistan’s 141, Nepal ranked at 125, India at 84 and Sri Lanka at 86 against; and (iii) in the voice and accountability index Pakistan ranked the lowest in the region at 147 with Bangladesh at 140, Sri Lanka at 105, India at 87 Bhutan at 85 and Nepal at 109.
Copyright Business Recorder, 2021