On April 10, cricketer-turned-politician Imran Khan stepped down as Pakistan’s prime minister. Khan, who assumed office in 2018, tried to blame an American plot for his fall – an accusation which was promptly denied by the Americans. While conspiracy theories and Pakistani politics have a long history, the current crisis in Pakistan also comes in the backdrop of worsening economic conditions. Here are four charts which explain this in detail.
Economic growth fell sharply after Imran Khan took over as prime minister
Data from IMF shows that the Pakistani economy was actually gaining growth momentum when Imran Khan assumed office. After a relatively rapid growth performance in the 10 years ending 2015 – compound annual growth rate (CAGR) of GDP growth was 3.8% in the period between 2005 and 2015 – GDP growth rate increased every year between 2015 and 2018. Annual growth rate of GDP was 5.5% in 2018, the year Imran Khan assumed office. However, this fell sharply to just over 2% in 2019. The pandemic’s shock made things worse, leading to an annual contraction of 0.5% in 2020. While the economy jumped above pre-pandemic levels in 2021 with a growth rate of 3.9%, The estimated growth rate in 2022 is also expected to be 3.9%, suggesting that the economy is not going to retain the pre-2019 growth momentum.
See Chart 1: GDP growth rate in Pakistan
Per capita incomes have stagnated under Imran Khan’s government
Per capita income data, which is a better measure of living standards than GDP growth rate, paints a poor picture of Pakistan’s economic performance. IMF data on real per capita GDP shows that there has been a stagnation on this front in the last few years. This number was 355,994 in 2015, increased to 361,426 in 2018 and fell marginally to 361,352 in 2021. It is Rs.62,605 in 2022.
See Chart 2: Per Capita GDP of Pakistan
A recent surge in inflation might have added to the economic pain
To control the growing anger against rising food prices, the Imran Khan government slashed prices of diesel, petrol and electricity, Reuters reported on February 28 (https://reut.rs/3KHRd0J). But this did little to control prices in the economy. Data from the State Bank of Pakistan shows that retail inflation, as measured by the general Consumer Price Index has been increasing since September 2021. The annual growth in inflation was 9.2% in October 2021, then increased to reach 12.7% in March 2022. Core Inflation, which excludes volatile food and energy items, increased from 18.9% in October 2021 to 21.7% in March. The Pakistani Rupee has depreciated in value by 45% since Imran Khan came to power. The US dollar- Pakistani Rupee exchange rate was Rs.179.6 per dollar in March, from Rs.124 per dollar in August 2018.
See Chart 3: Monthly trend in CPI and CPI core
What explains these problems in the Pakistani economy?
Ironical as it may sound, Imran Khan actually wanted to build a team of credible economists when he assumed power in 2018. However, the entrenched fundamentalism in Pakistani polity prevented this from happening. Princeton economist Atif Mian was forced to resign from the Economic Advisory Council (EAC) led by Prime Minister Imran Khan due to pressure from religious hardliners because Mian was an Ahmadi. While Mian said that he resigned from EAC for “the sake of the stability” of the government, which was “facing a lot of adverse pressure regarding my appointment from the Mullahs… and their supporters”, Asim Ijaz Khawaja, a Sunni Muslim economist who teaches at Harvard Kennedy School, also quit EAC in protest against Mian’s ouster, HT reported in September 2018 (https://bit.ly/3vjV7X7).
“He (Imran Khan) inherited a bad economy, but leaves it in even worse shape”, Mian said in a Twitter thread after Imran Khan’s government left office (https://bit.ly/3M3yxJk). “The larger failure was an incapacity to understand Pakistan’s macro challenges. Pakistan Tehreek-e-Insaf (PTI, Khan’s party) inherited a currency crisis that was already months in motion Yet the new government had done no planning. Precious time & reserves were wasted with silly schemes… because government policy went for the usual short cuts: open capital account for speculative portfolio investment, encourage unproductive real estate investment, continue to subsidize an elite-favoring rentier economy, go on foreign begging trips etc . ”, Mian added.
One of the biggest problems facing the Pakistani economy has been a low investment rate, which basically means that the fruits of present growth are diverted instead of supporting future growth. “The combined effect of extremism and an unproductive rent-seeking elite is that Pakistan has one of the lowest investment rates in the world. Pakistan invests only 15% of its output compared with 30% for the rest of South Asia. This has led to diminished productivity. Pakistan’s total volume of exports has not risen since 2005. It has become a nation of consumers with limited capacity to produce and innovate “, Mian wrote in a 2019 New York Times article (https://nyti.ms/37gZE4E).
See Chart 4: Investment as share of GDP in Pakistan and other South Asian countries (take all SAARC)