February 04, 2022
Pakistan’s Economy Rebased
Last week Pakistan finally released a badly needed update to its economic statistics. This update, called “GDP Rebasing” has been delayed for 10 years, resulting in a dramatically shriveled view of the economy and its performance. GDP, which stands for gross domestic product, is a statistical calculation of the size of an economy. The basic method was developed in the US in the 1930’s, and those initial concepts are still in use today. One of the key elements to accurately measuring GDP is having a complete census of the industries and services that make up an economy.
As all economies change over time, and developing economies in particular are often adding new sectors, this census or “base” needs frequent updating. Advanced economies rebase their GDP calculations every year. The World Bank recommends that developing economies rebase no less than every five years. Pakistan has fallen way behind that schedule. Pakistan rebased its GDP in 1980, then didn’t do so again till 2001 under General Musharraf. That rebasing increased the GDP by 30%, and that was followed by another rebasing in 2006. Since then, nothing has happened. This has resulted in a reported GDP for Pakistan that is much smaller than it actually was. This also resulted in Pakistan’s numbers looking much worse relative to India and Bangladesh than was really the case.
The current rebasing moves the base year not to 2021 but merely to 2016. That move alone increased the GDP reported for end of fiscal 2021 (the year ending in June 2021) from 47 trillion rupees to 60 trillion, an increase of 28%. It also increased GDP per capita to 1,660 dollars based on the exchange rate in June 2021. If one adjusts for cost of living in Pakistan, per capita income is roughly now 6,600 dollars. This puts it on par with India and well above Bangladesh, contrary to previous reporting that Bangladesh now has a higher standard of living. If one adds another 10% given that the base year is still 5 years behind the present, which is a reasonable assumption, per capita income by June 2022 should reach about 7,600 dollars at purchasing power parity (PPP) as the economy is growing strongly.
Meanwhile, final numbers were released for fiscal 2021 showing GDP growth had accelerated to 5.7% for the full year, the second highest value in the last 14 years. The only better year was 2018, the last year of PMLN rule, where the government was doing everything it could to boost growth and win votes for the 2018 election. The new numbers show growth reached 6.1% that year. However, because even the present rebasing is only up to 2016, it leaves out the growth impact of the smart phone assembly industry, which has taken off in Pakistan just in the last three years. If that was included, growth would actually be measured at 6.1% for fiscal 2021.
Overall, Pakistan has done reasonably well since 1950. Growth has averaged a bit over 5% per year, raising living standards from less than 1,000 dollars to the present 7,600 dollars. This slow climb out of extreme poverty and pre-modern living conditions has now set the stage for dramatic modernization that will occur in the next thirty years. Pakistan has doubled living standards three times since 1950. The next doubling will take Pakistan to about 15,000 dollars in per capita income, about the same as Brazil and a bit less than China at present. The subsequent doubling will raise GDP to 30,000 per capita, which would be a living standard of some of the poorer European nations like Greece, Poland, and Portugal. A third doubling would take Pakistan to the level of the present-day US.
If Pakistan can accelerate growth to 7-8% per year, even after accounting for the rising population, it could achieve the next doubling by 2035 and the following one by 2045 or 2050. As nations reach higher income levels it becomes more difficult to sustain rapid growth, a process we now see in China, where growth has been slowing for the last decade. But Pakistan has a couple of decades before that happens. A government that follows sound policies, avoids corruption, and invests in society, can achieve these goals.
Pakistan has three main challenges it needs to address in the short- to medium-term to enable stronger growth. First, it must do a much better job in educating its massive population of young people. Children should attend 12 years of mandatory schooling, and university education needs to be massively expanded. Second, the government needs to do a better job controlling inflation. Inflation doesn’t need to be zero, but should be kept under 5%. The State Bank of Pakistan plays the biggest role in achieving this, but the government needs to avoid excessive deficit spending that adds too much demand to the economy. Finally, exports need to be boosted so that the trade deficit is reduced and Pakistan can meet its balance of payment needs without having to go to the IMF. The balance of exports plus remittances against the import bill has improved since 2018. Not counting oil imports, the current account deficit has come down sharply in the last 18 months compared with the last 18 months of the PMLN government. It is basically now in rough balance, only the high cost of oil is putting Pakistan in a current account deficit.
I expect this coming decade to be one of the best in Pakistan’s economic history. Strong growth will make society much more stable. It will allow the civilian government to earn the credibility it needs to assert civilian control over the military, as a normal country would have. It will also stunningly transform the landscape of the nation. Pakistan will be a very different place in 2031 than it was in 2021. India and Pakistan are currently about the same in terms of living standards, though Pakistan has less extreme poverty while India has much worse income inequality. It will be very interesting to watch the performance of these two nations in the 2020’s.
