Where did Pakistan’s economy stand pre-COVID-19?

To answer where Pakistan’s economy stood pre-COVID-19, we should start by defining what some economic terms are:

We will discuss Gross Domestic Product or GDP a lot throughout this series so let’s start with that. Think of this as the expenditure made by everyone inside Pakistan on all possible finished goods and services in the country between July of one year and June of the next.

The first distinction of ‘inside Pakistan’ is important because there is another measure – Gross National Income or GNI – that includes the additional income from our residents abroad. The second distinction of ‘finished goods’ is also important because we don’t want to double count. The shirt you are wearing while reading this, could have made its way all the way from the farmer that grew the cotton (Agriculture) to the textile factory that procured and processed it (Industry) to finally the retail trader you bought it from (Services). GDP does not double count so, while it gives each sector its due share, it only counts the final market value of the finished goods sold.

We will not speak about GNI much except for the next few points since it is used by the World Bank to classify a country into income groups that helps the world decide if you get certain preferences, such as debt relief, during a pandemic. To be precise, they use national income per person in US dollar terms to compare across countries and consider their populations.

Pakistan is not a low income country

Global comparison of GNI per capita vs. GDP growth

WDI GNI vs. GDP
Source: World Development Indicators; PM Analysis

To clarify, when you look at the entire country’s expenditure in terms of GDP, it is also fair to consider it the income since one person’s expenditure is another’s income. Hence, we will be using both interchangeably. The graph above shows everything we have discussed so far.

The World Bank classifies low-income countries as those which have a GNI per capita of less than US$1,026, low-middle countries as those between US$1,026 and US$3,995, upper-middle income as those between US$3,996 and US$12,375, and finally, high income as those with anything over US$12,375 as their GNI per capita. You see this on the horizontal axis. This also makes evident that Pakistan, with GNI of US$1,590 per capita, is a lower middle income country like Bangladesh, India, Vietnam and Indonesia. Pakistan is, therefore, not a low income country like Afghanistan or Rwanda – whom our country’s leaders compare us to when asking for debt relief.

Next, the size of the bubble shows how large the nominal GDP is with Pakistan, the green one, at US$315 billion in 2018. To put that into context, the United States of America had the highest nominal GDP in the world at US$20,544 billion the same year – more than 65 times our economy. Pakistan, however, has been growing nominally at 6-7% in US dollar terms, as the vertical axis shows, compared to the US at 3-4%.

Let’s get real (not nominal)

I have been using the word ‘nominal’ sparingly so let’s try to understand what that means through some role play. I will take on the role of a buyer and you the seller.

You grow some cotton, manufacture one shirt and sell it to me for US$10 this year. Your income is US$10 and my expenditure is US$10. Next year, you sell me two shirts and because you are nice, you keep the price at US$10 again, so now your income is US$20 and my expenditure is US$20. But what if you weren’t so nice? What if you doubled your prices to US$20 and sold me only one shirt next year? Your income and my expenditure would again be US$20 but I will be very unhappy.

Hence, it is important to understand the difference between real growth, which is the change in volume, and nominal growth, which is the change in both volume and price collectively. Real growth rate (change in number of goods and services) and GDP deflator (change in price) are typically reported for countries. Another common indicator you must have heard of is inflation which also reflects changes in price but let’s ignore that for now.

Since global comparisons are typically done in US dollar terms, we also need to keep in mind the exchange rate. If the shirt you were selling was denominated in US dollars and I used to pay PKR 1,000 for it and all of a sudden my exchange rate rose from PKR 100 to PKR 150, I would again be very unhappy. Your income is still US$10 but my expenditure now has to be PKR 1,500. The price of your product has increased for me even though in real terms, nothing else has changed.

Lately, Pakistan has been taking it real slow

Let’s simplify and talk about Pakistan’s economy in its local currency pre-COVID-19 for a while. In PKR terms, the economy has grown nominally by around 9% every year between 2014 and 2020. Every time you see ‘CAGR’, understand that it is the Compound Annual Growth Rate between the years that are mentioned.

Components of Pakistan’s GDP (2014-18)

Note: Change in volume is the real GDP growth and change in price is the GDP Deflator at 2005-06 prices; Source: Pakistan Bureau of Statistics (PBS)

Notice at the bottom of the graph, change in volume (real growth) has been falling since 2018 and is actually forecasted to be negative in 2020 due, in part, to COVID-19. However, the country’s economy has still grown from PKR 34.6 trillion to PKR 38.0 trillion in 2019 and then to PKR 41.7 trillion in 2020. This makes me unhappy because change in price is what has caused this growth and not real change.

ABCs of Pakistan’s economy is a lie

The homepage is a bit misleading. When I say ABCs of Pakistan’s economy, I actually mean the CIGXM of Pakistan’s economy. In keeping the promise of making sure all of this is digestible, let me explain:

Let’s assume Pakistan has an income of PKR 100. What could it do with this money?

It could allow its citizens to Consume goods and services made in Pakistan. It could also allow its citizens to Invest in Pakistan. The Government would also need to consume and invest in Pakistan. It could also eXport its goods and services abroad which would be consumed by foreigners. These goods will not be counted in the foreign country’s GDP since the income goes to Pakistan. Similarly, anything Pakistani citizens consume that is not made in Pakistan will be iMported from other countries, and will not count towards Pakistan’s GDP.

In 2019 for example, Pakistan’s private households spent PKR 82.9 on domestic food and non-food items, ‘C’. Collectively, private households and the government invested PKR 15.6 in development works such as setting up a factory or building a road, ‘I’. The government spent another PKR 11.7 on providing basic services like healthcare or thoughtful contributions to sugar mill owners to keep their business going, ‘G’.

Notice that we were already out of the PKR 100 we started with, having spent PKR 110.2. Pakistan will have to borrow this money from somewhere. To make matters worse, private households and the government also consumed imported items worth PKR 20.3 from non-existent income, which had to be paid in US dollars, ‘M’. But don’t worry we got PKR 10.1 of additional income in dollars through exports and made up some of this deficit, ‘X’.

In the end, we only needed to borrow an additional PKR 10.2, which was the current account deficit, from the rest of the world. However, do not forget, we did the same thing last year and the year before, and have to pay back that money with interest too.

Numbers are not very nice

In case the sarcasm was not clear, these are not very nice numbers. Pakistan’s economic problems are actually simple to understand if you think of them in CIGXM terms. We will discuss the impact of the Great Lockdown on Pakistan’s economy in the next article to set the scene for the rest of the series, but it is important to understand where we stood right before. Interest rate hikes and rising inflation will make a lot more sense if you understand how a consumption driven economy functions.

Global comparison of Consumption as % of GDP

Source: Economist Intelligence Unit

In 1991, Bangladesh had roughly half the GDP of Pakistan. Today, it has surpassed us in economic terms and continues to grow at a faster pace. One key difference that you will notice is that in Bangladesh, consumption has grown slower than GDP and it has a lower consumption to GDP ratio of 69%.

Pakistan on the other hand, has been consuming faster than its income grows. If you spend most of your income on consumption, how will you save? If you cannot save, how will you invest for the future? If you cannot invest, how will your real output grow? If real output will not grow and the population keeps increasing, how will you provide for them? With rising demand, if there is a shortage of goods and services, how will you avoid price increases?

Pakistan had several structural issues that were in the process of being tackled pre-COVID-19. We will assess the impact of the pandemic then work backwards to identify the details of these problems in bite-sized pieces that everyone can digest.

8 thoughts on “Where did Pakistan’s economy stand pre-COVID-19?”

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