Article by: Irum Fawad President/WPO.
KARACHI: Pakistan’s current economic challenges are enormous but they are not insurmountable. The first challenge facing Pakistan’s economy is its current account deficit, the second is a fiscal imbalance, the third is low agricultural productivity, the fourth is lower industrial output and the fifth is a flawed structure of the political economy. The current account deficit has already reached 5.3% of GDP, according to the State Bank of Pakistan (SBP). Fiscal imbalance is expected to rise to 8.2% of GDP, according to some estimates being presented by leading independent economists.
This twin deficit has become all the more troubling because unlike in the past there is no room for massive external borrowing as the country’s total external debt and liabilities have already reached 93.7% of GDP, shows the SBP statistics for the first quarter of the current fiscal year. A straight $3 billion Saudi Arabian loan obtained during the second quarter may further increase this mind-boggling debt-to-GDP ratio. Now, if the government doesn’t go for any substantial external borrowing, how on earth will it be able to meet its foreign exchange obligations?
Naturally, both the current account deficit and the overall balance of payments deficit will soar. In that case, the rupee will come under further pressure. This means a resurgence in imported inflation that the government and the central bank have recently tried to contain – the former through the imposition of higher duties on roughly 200 tariff lines and the latter through a 250-basis-point monetary policy tightening in less than a month. The situation is grim.
A fiscal deficit of 8.2% in the current fiscal year, up from 7.1% in the previous year, would further constrain development spending, thereby impeding the growth potential of the economy in the medium to long term. In the short term, it would compel the government to borrow more from commercial banks at the prevailing double-digit interest rates. This would further increase its domestic debt requirements, leading to further expansion in its fiscal balance in the next fiscal year.
The only way out of this quagmire is a meteoric rise in revenues. Tax revenues have shown a handsome growth of 36.5% in the first five months of the current fiscal year and that is a very welcome development. But this pace of growth would surely decelerate in the coming months due to the economic stabilization measures taken recently by the government and the central bank.
Much would depend on how fast the non-tax revenue of the government increases. There, too, not much reason could be found to become optimistic because most of the state-owned enterprises either continue to report losses or are just in the process of minimizing losses. Profit made by the central bank through its operations in the inter-bank money market and inter-bank forex market constitutes non-tax revenue of the government and that is where the only silver lining exists.
But one must remember that profit-making is not at all the primary objective of the central bank and as such banking on the profit earned by the SBP is not a wise thing to do.
Overcoming challenges: Pakistan’s economic challenges are enormous. Aren’t they?
Prime Minister Imran Khan’s government has adopted a “hybrid” approach – a combination of both traditional and non-traditional methods for overcoming economic challenges. But the problem is that most of the measures the government and the central bank have taken in the recent past or are taking now will take time to yield the desired results. And, by that time (only one and a half years from now) a new government will be formed.
What happens post-2023 elections cannot be predicted now. But going by Pakistan’s experience, fears about the discontinuation of some of these policies seem genuine. If such fears turn out to be true, then the ongoing documentation and digitalisation drive may be the first casualty. But if it is allowed to continue, one can expect Pakistan’s economy to become stronger. On the other hand, PM Khan’s traditional approaches to fix economic issues, like pampering builders and developers, over-reliance on remittances and doling out audit-free incentives to some business classes including exporters, will continue to create negative ripple effects in the economy.
Even during the remaining half of the current fiscal year and the entire new fiscal year, the economy is bound to suffer from short-termism and policy U-turns of the PTI government. Theoretically speaking, there are five key macroeconomic objectives a government seeks to achieve during its tenure – economic growth, job creation, redistribution of income, price stability and stability in the balance of payments. Even a cursory look at the official datasets reveals that the current rulers are yet to achieve any of these objectives to their satisfaction – let alone to the satisfaction of 220 million Pakistanis.
As we enter 2022, let’s hope the government at least gets some partial success in its remaining 18 months in power in creating jobs, pushing economic growth above 5%, bringing down inflation to the 7-9% range, minimizing the current account and overall balance of payments deficit. As for the targeted income redistribution in favour of the poor, building any hope during any government proves futile. The best we can have is the trickle-down effect of high growth, affording a better lifestyle to part of the middle class for a brief period.
What is the future of Pakistan’s economy?
ISLAMABAD, PAKISTAN (21 September 2022) — Pakistan’s economy is forecast to slow to 3.5% in fiscal year (FY) 2023 (ending 30 June 2023) amid devastating floods, policy tightening, and critical efforts to tackle sizable fiscal and external imbalances, even as growth in FY2022 is expected to have reached 6.0%, the Asian Pakistan is currently at this crossroads. The Pakistani economy is currently trapped in low growth, high inflation and unemployment, falling investment, excessive fiscal deficits, and a deteriorating external balance position. Is Pakistan’s economy improving?
The COVID-19 pandemic has also had serious impacts on human development outcomes and economic growth. In early FY23, Pakistan’s economy was undergoing an overdue adjustment, as it recovered from the impacts of COVID-19. Supported by accommodative macroeconomic policies, the economy expanded by 6.0 percent in FY22.
With a large population, the majority of which is young, Pakistan is a consumption-oriented economy. Consumption, investment and exports are the drivers of the country with exports being the biggest driver of economic growth. Agriculture is the backbone of Pakistan’s economy. About 68% of the population is engaged in farming directly or indirectly through the production, processing and distribution of major agricultural commodities.The government (1) provides the legal and social framework within which the economy operates, (2) maintains competition in the marketplace, (3) provides public goods and services, (4) redistributes income, (5) corrects for externalities, and (6) takes certain actions to stabilize the economy.
How can a country improve its economy?
Economic growth is driven oftentimes by consumer spending and business investment. Tax cuts and rebates are used to return money to consumers and boost spending. Deregulation relaxes the rules imposed on businesses and has been credited with creating growth but can lead to excessive risk-taking.
How can we control the economy?
Fiscal Policy: Both taxation and government spending can be used to reduce or increase the total supply of money in the economy—the total amount, in other words, that businesses and consumers have to spend.
How does the government solve economic problems?
To counter a recession, it will use an expansionary policy to increase the money supply and reduce interest rates. Fiscal policy uses the government’s power to spend and tax. When the country is in a recession, the government will increase spending, reduce taxes, or do both to expand the economy.
What are the economic problems in Pakistan and briefly explain their solution?
Pakistan’s economy is facing adverse conditions due to a lot of reasons. The reasons for the decline are overpopulation, terrorism, bad governance and low literacy level. Other problems include the neglected attitude of world powers towards our state. There is a lack of systematized infrastructure within the country.