Revisiting Balance-of-Payments-Constrained Growth in Pakistan

The balance-of-payments (BOP)-constrained growth rate is the maximum gross domestic product (GDP) growth rate above which unsustainable current account deficits emerge, forcing policymakers to implement contractionary measures that ultimately reduce GDP growth. We estimate Pakistan’s BOP-constrained annual growth rate to be 3.71 percent for the period 1996–2023, which is significantly lower than the estimate of 4.41 percent for the period 1980–2017. The BOP-constrained growth rate is most sensitive to changes in import income elasticity. If the import income elasticity value decreases from 1.47 to 1, the BOP-constrained growth rate increases from 3.71 percent to 5.45 percent. If remittance growth increases from 11.43 percent to 14 percent annually, the BOP-constrained growth rate increases from 3.71 percent to 4.09 percent. Similarly, if the real effective exchange rate (REER) grows at -1.5 percent annually instead of -0.83 percent, the BOP-constrained growth rate only increases to 4.02 percent. Finally, the impact of an increase in capital inflows from 13.18 percent to 15 percent annually only increases the BOP-constrained
growth rate to 3.78 percent. Our analysis also reveals how Pakistan’s low total factor productivity (TFP) growth has weakened export competitiveness while increasing import dependence, exacerbating these BOP constraints. A coherent and holistic strategy of structural reforms is essential to boost the BOP-constrained growth rate.