Fahd Rehman is an independent economist who has authored Pakistan's Structural Economic Problems in the Era of Financial Globalization and previously taught at LUMS.
I had a chance to discuss his book and to get his take on Pakistan’s economic fundamentals.
Ahmad Faruqui: Why did you write the book?
Fahd Rehman: I wanted to inform and hopefully educate Pakistanis about the structural economic problems facing the country and suggest some solutions for their consideration. My hope was that they would then become active participants in economic policy debates. I also hoped to trigger a debate among journalists, media commentators and economists about the challenges facing the country and lead to creative solutions tailored to Pakistan’s unique circumstances.
AF: What is the current state of the economy, both in terms of macroeconomic indicators, such as GDP growth, international indebtedness, and trade balances, and microeconomic indicators such as the prices of groceries, electricity, and housing, and socioeconomic indicators such as the literacy rate, health care and nutritious diet?
FR: The country has been passing through a macroeconomic stabilization phase in the last couple of years. At present, GDP growth rate is hovering around 2.5 % along with 7-8 % inflation rate while the external debt to nominal GDP ratio is around 30 %. The country has been experiencing a trade deficit since the late 1980s as imports have grown faster than exports.
While these macroeconomic indicators may appear to portray a normal picture of the economy to some, the reality is quite different and comes through in the microeconomic indicators.
People in the lower-middle income and low-income categories, who represent a large share of the population, have been hit quite hard with rising grocery prices and electricity rates. The housing shortage has been getting worse since the early 2000s, when land was turned into an asset class and the object of speculation in the real estate segment of the economy.
Pakistan is a lower-middle income country, yet the average cost of electricity is around 21 cents/kWh, higher than the average price in the US, whose per capita income is 60 times higher
The social indicators portray a grim picture where education and health care could not get the desired amount of funding from the successive regimes. After the 18th Amendment to the Constitution was passed, spending on education and health care was devolved to the provinces, but the allocation and disbursement of funds could not be brought to the desired level. In addition, nutritious diet has become a real challenge owing to low purchasing power of the above-mentioned groups. A nutritious diet plays an important role in human capital development, as evidenced by British history.
AF: Pakistan’s electricity sector continues to be in turmoil. Prices are sky high and reliability is low. A solar revolution is underway, but the utilities are warning about a death spiral. What can be done to improve the situation?
FR: This is the most significant question as far as the economy is concerned. The problem started with the disintegration of WAPDA around the middle of 1990s. In economic jargon, this is called a microeconomic reform where a compact monopoly has been unbundled in the spirit of perfect competition. Since then, microeconomic reforms are unabated and now the people of Pakistan have become quite anxious about the affordability and reliability of electricity.
Pakistan is a lower-middle income country, yet the average cost of electricity is around 21 cents/kWh, higher than the average price in the US, whose per capita income is 60 times higher. These exorbitantly high prices have affected the ordinary people of Pakistan a great deal. Regarding the solar revolution, it is beneficial for the middle and upper-middle class as they have started to get the benefit out of it. Since solar adoption has proceeded at a fast pace, the grid has become overburdened. The solar supply along with the existing supply demand imbalance has created an oversupply situation in the country which would be difficult to grapple with. This is one of the unintended consequences of the solar revolution. I have suggested a cure to improve the situation in my book.
AF: I understand the rich are getting richer and buying luxury goods, most of which are being imported, and the poor are getting poorer, unable to put bread on the table, let alone put a roof over their head. What is being done to address this disturbing trend?
FR: You are describing inequality of wealth and or income, in simple words. In Pakistan, there is hardly any dataset which could be employed to measure it. Even Pakistan's Social and Living Standards Measurement (PSLM) Survey could not capture this trend as the expenditures of upper-middle class and above are not available. One way to guess this trend is through the sales of Sports Utility Vehicles (SUVs).
SUVs fall into a luxury goods category. Car assemblers have been introducing new designs and styles of SUVs which are mostly imported while a small percentage is being assembled in the country. The car assemblers have introduced electronic or hybrid vehicles keeping in view the emerging demand. The estimated size of the market for SUVs is around $ 1.5 billion, which is consistently growing and is quite stable. In addition, incentives are being given through auto and other related policies to further this segment of the market.
AF: Pakistan continues to rely on loans from the World Bank and the IMF and remittances by expatriates. Is that a sustainable path to the future?
FR: The IMF provides international finance to developing economies as they face Balance of Payment (BOP) or liquidity crises, and the World Bank provides development loans under various programs. Since there is a scarcity of dollars in developing economies, these dollars provide short-term relief to economically depressed countries. In Pakistan, these loans continue to support luxury consumption. Similarly, remittances by the expatriates are the source of dollars. A large part of these remittances ends up either in real estate or in perpetuating luxury consumption. Hence, these dollars end up promoting an import-led economy, instead of an export-led economy. This is clearly not sustainable.