CIVIL SERVICES ACADEMY

FRAIL ECONOMIC
CONDITION OF
PAKISTAN
REPORT
Muhammad Adeel Akbar
CSID - 4706135
12/17/2019

The economic situation of Pakistan has been a cause of worry since many decades. It has been in
a constant cycle of boom and bust that has made it fragile and prone to external and internal
pressures.
 Contents
Contents ........................................................................................................................................................ 1
Introduction .................................................................................................................................................. 1
Currency of the Topic .................................................................................................................................... 1
Causes of the Frail Economic Condition of Pakistan ..................................................................................... 3
1. Macroeconomic Issues...................................................................................................................... 3
2. Low Tax Base ..................................................................................................................................... 3
3. Low Export Base ................................................................................................................................ 3
4. Population Explosion......................................................................................................................... 4
5. High Defense Expenditure ................................................................................................................ 4
6. Energy Crisis ...................................................................................................................................... 4
History of Short Termed Economic Policies .................................................................................................. 4
1. The Flat Fifties, 1947 to 1958............................................................................................................ 5
2. The Golden Sixties, 1958 to 1969 ..................................................................................................... 5
3. The Socialist Seventies, 1971 to 1977 ............................................................................................... 6
4. The Revivalist Eighties, 1978 to 1988 ............................................................................................... 6
5. The Democratic Interlude, 1988 to 1999 .......................................................................................... 6
6. The Echoes of History, 1999 to 2007 ................................................................................................ 7
7. The Democratic Revival, 2008 to 2013 ............................................................................................. 7
8. The Economic Revival, 2013 to 2018 ................................................................................................ 7
9. The Current Regime, 2018 onwards ................................................................................................. 8
Pakistan’s GDP Growth Rate ......................................................................................................................... 9
Comparison of Pakistan’s Economic Growth Rate...................................................................................... 10
India ........................................................................................................................................................ 10
Bangladesh .............................................................................................................................................. 10
Effects of Frail Economic Condition of Pakistan ......................................................................................... 11
Conclusion ................................................................................................................................................... 11
Recommendations ...................................................................................................................................... 11
Bibliography ................................................................................................................................................ 13
 Introduction
The economic situation of Pakistan has been a cause of worry since many decades. It has been in
a constant cycle of boom and bust that has made it fragile and prone to external and internal
pressures. The lack of sustainability in the economic structure dates back to the time of
independence and the improbability has increased over the due course of time majorly owing to
the short termed economic policies.

Currently, Pakistan’s GDP has a growth rate of 3.26% with a dwindling foreign exchange
reserves which stand at 9,641.8 Million USD. The exports all together generate revenue of
around 2024.4 Million USD. The inflation has risen in the past year or so to the double digit
figure of 12.30 %. Fiscal Deficit and Current Account Deficits, which stand at PKR 3.445
Trillion and 12.57 Billion USD, continue to stress the Pakistan’s economy.

Currency of the Topic

The Economic Crisis and its Frailty has been the most talked about issue over the last year or so.
All the National and International Newspapers and Economic Think Tanks including the World
Bank have written about the Economic Issues and probable future of it. Following are few of the
clippings that establish the fact that how pertinent and significant the issue is in this hour of time.

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Page 2 of 13
 Causes of the Frail Economic Condition of Pakistan
Pakistani Rupee has lost more than 35% of its value in the last year and half owing to the balance
of payments quagmire. However, the fault lines and causes behind the Frail Economic
Conditions of Pakistan are more complex than one can think about. Following are few of the
major causes that have been impeding the sustainable economic growth of Pakistan.

1. Macroeconomic Issues

The major macroeconomic issues of Pakistan are well known to even the common citizens and
majorly emanate from one core issue which is that of poor-governance, which gives way to the
mismanagement of public finances which in turn becomes the mother of all ills. Pakistan’s
macroeconomic issues include; low and erratic economic growth, persistently high inflation,
extreme poverty of the bulk of the population coexisting with prosperity of a few, deep and
rising debt burden, and huge budget deficit.

2. Low Tax Base

Pakistan’s Tax-to-GDP ratio stands at an alarming low percentage of 11.6 %. There are two
major factors that are behind the low tax to GDP ratio. Firstly, it is the non-compliance of tax
laws on the part of the citizens of Pakistan due to non-constringent direct taxation laws over the
due course of history. Secondly, the tax authorities have not been able to perform up to the
expectations despite numerous measures that have been taken over by the governments over the
last decade.

3. Low Export Base

Pakistan’s Exports stand at a meager value of 2024.4 Million USD. According to a report
submitted to the Ministry of commerce, Pakistan’s exports reveal that its base is quite narrow,
highly concentrated in a few commodities namely, textile and clothing, leather, rice, chemicals,
pharmaceuticals, and sports goods. Similarly Pakistan’s export destinations have also been
limited. Moreover, inflation, high cost of doing business and artificially maintained overvalued
exchange rates have all been the reasons behind the low export base of Pakistan.

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4. Population Explosion

Pakistan’s Population explosion has been one of the major factors behind the stressed and
unsustainable economic growth. The population growth rate of Pakistan has been over 2.0% on
average over the last ten years. With population growing exponentially and resources growing
arithmetically, as per the Malthusian concept, the economy has surely faced a severe strain from
it.

5. High Defense Expenditure

Pakistan was born with the security risk as it faced hostility from India on its Eastern border. The
issue of Kashmir became the major bone of contention between the two neighbors as they went
to war with each other on three occasions. Given the historical context, rise in terrorism (Global
Terrorism Index- 4th worst hit out of 163 states) and the porous western border, the Defense
Expenditure of Pakistan has always been high. Currently it is about 4% of the Total GDP of
Pakistan.

6. Energy Crisis
Energy Crisis has been a hurdle in Pakistan’s growing economy, especially with the start of 21 st
century. With the rise of population and increase in the demand of the energy, Pakistan’s energy
sector has not been able to meet up with the needs as a result of which the industries and their
production have been drastically affected. Pakistan needs to produce low cost energy through
renewable sources of energy, to fulfill the needs of the industrialists and also decrease the cost of
production to compete in international market for its exports.

History of Short Termed Economic Policies

Pakistan’s economic history and record on the macroeconomics management has been mixed. In
the face of variety of internal and external shocks, Pakistan has been able to avoid
macroeconomic shocks. However, the short term and misgoverned policies lead to the
emergence of economic structure that on one hand constrains the achievement of a high GDP
growth on a sustainable basis and on the other constrains the capacity of poverty reduction for
given GDP growth rates.

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1. The Flat Fifties, 1947 to 1958

Pakistan began life as an independent state in 1947 with the balance of payment crisis along with
the growing challenge of wide spread poverty and inadequate infrastructure. The first Five Year
plan was introduced by then the Prime Minister of Pakistan, Liaquat Ali Khan. The policy of
import-substitute industrialization was followed under the plan. Along with that an import on
cotton textiles and luxury goods was imposed. Following the Korean Boom and under the
government policies, Pakistan’s public and nascent private sector thrived on spectacular profits,
which were transformed into industrial capital that accelerated industrialization. Pakistan joined
the elite group of rapidly growing economies during that time. But the Anti-agricultural policy
Biases and Anti-Agriculture terms of trade led to a drastic decline in the annual growth of
agriculture from 2.6% to 1.9% which affected the economy adversely. Moreover, in the latter
half of 1950s, Pakistan received foreign aid of about 500 Million USD under the auspice of
SEATO and CENTO. The decrease in agriculture growth rate and reception of foreign aid, made
the Pakistan a foreign-aid dependent economic state.

2. The Golden Sixties, 1958 to 1969

The decade of 1960s is seen by many as the ‘Golden Age’ in terms of high growth rates achieved
primarily through the provision of subsidies, tariff protection to the industry and elite farmer
strategy in the agriculture. But, it was also a period when the mould was set for the emergence of
an economic structure that was to lock Pakistan’s economy into increasing income inequality, a
narrow and inefficient industrial base, and increasing loan dependence, for the decades to come.
The government followed the policy of national incomes in the hands of upper income groups.
The rationale behind it was that the rich save a larger portion of their income and hence a higher
national saving rate could be achieved. But to its contrary, the policy allowed an exclusive and
highly monopolistic class to amass the wealth. As a result interpersonal and interregional
inequalities grew drastically. Due to these inequalities, there was a seven-fold increase in the
requirement of foreign aid which drastically increased the debt servicing (Akmal Hussain, 2012).
The inequalities also bred explosive political tensions between the East and West Wings of
Pakistan. A mass movement emerged in the West Pakistan as a result of it, against the Former
President General Ayub Khan, which latter lead to dismemberment of Pakistan in 1971.

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3. The Socialist Seventies, 1971 to 1977

The era of 1971 to 1977 was marked by the principles of distributive justice and equity. For the
first time, the lower strata of the society began to feel that they mattered too in history. First
wave of Nationalization took place in 1972 in which 43 large unit industries were nationalized.
Three years later the government nationalized the cooking oil industry and then flour milling,
cotton ginning and rice husking mills. The first wave of Nationalization had a positive impact as
it impact the ‘Monopoly Capitalists’ but the second set of Nationalization affected the medium
and small scale Entrepreneurs. Because of this, the budget deficit increased and that in turn put a
double burden on the people. Firstly, there was a reduction in the development expenditure,
which slowed down employment and secondly, the inflation increased drastically. Expenditures
on defense and administration also increased sharply which further added to the fiscal burden.

4. The Revivalist Eighties, 1978 to 1988

The rapidly growing debt servicing burden together with a slowdown of GDP growth and
government revenues that had occurred at the end of the Bhutto period would have placed
crippling fiscal and political pressures on the Zia’s regime but two factors helped the
Government of that time. Generous financial support was received from the West due to ongoing
Afghan War. At the same time remittances from the Middle East increased which also eased the
fiscal burden on the government. Because of this the GDP growth rate increased to 6.6 % in
during the Eighties. However, the debt burden continued to grow because of the low saving rates,
low export base, balance of payment deficits and poor infrastructure.

5. The Democratic Interlude, 1988 to 1999

During the 1990s, there were three key elements of the crisis that was faced by Pakistan; A
collapsing economy, rampant crime and emergence of extremist militant groups and erosion of
the institution of effective governance. These factors sharply slowed down the growth rate to 3 to
4% on average. The instability also caused an adverse effect on private investment and GDP
growth. Structural Adjustment Plan was adopted under the IMF Plan for the revival of Economy
but it further deteriorated the situation. There was reduction in the development expenditure.
Poverty, unemployment and inflation rose significantly.

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6. The Echoes of History, 1999 to 2007

Economic policies combined with the changed international environment following 9/11, had
enabled a substantial improvement in macroeconomic indicators. The GDP growth rate
accelerated to 7% on average. The debt servicing burden became tolerable, the budget deficit
was brought down and the State Bank reserves have reached record levels. However, the
exchange rate was kept fixed which didn’t help the exports of the country to build up.

7. The Democratic Revival, 2008 to 2013

The Economic Conditions during the Democratic Regime began to deteriorate due to the
changing security conditions of Pakistan. The macroeconomic indicators fell drastically due the
adverse security developments. Large exogenous price shocks (oil and food), Global financial
turmoil of 2008 and Policy inaction during the political transition to the new government also
played their role in bringing down the economy of the State.

8. The Economic Revival, 2013 to 2018

The economy of Pakistan which was under stress during the past five years, started to show signs
of recovery due to the positive outlook and gradual signs of improvement in the world economy.
This along with the oil price crash (which is a major chunk of our import bill) was a breath of
fresh air for the economy. Under the Government’s policies of economic liberalization and
massive amount of developmental spending under CPEC gave Pakistan a GDP growth averaging
around 5% which was higher than the regional average. However, the Government’s policy of
opening up the economy had the adverse effect of straining the current account deficit as our
import bill shot to 14 Billion USD far outstripping our export revenues of about 2 Billion USD.
Furthermore, the Government keeping the exchange rate fixed caused massive stress on the
foreign exchange reserves and in turn subsidized imports further exacerbating Pakistan’s
economic woes. The final straw for the Government was the completion of extended fund
facility from IMF in 2016. After which the Government and its economic policies came under
extreme criticism.

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9. The Current Regime, 2018 onwards

The Current Regime’s economic policies can be summarized as classical economic policies of
protectionism and fiscal conservatism. On one hand, the Government is curtailing imports by
utilizing quotas and custom duties. At the same time, exports are being subsidized to help the
local industry grow. Furthermore, there is an austerity drive in which the government is
curtailing its fiscal responsibilities. The current government also utilized the IMF loan to
stabilize the economy in the short run. As of now, the economic policies have had a depressive
effect on the market and have reduced the consumer optimism which has in turn hit the GDP
growth rate to 2.8% which is lowest in the region.

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Pakistan’s GDP Growth Rate

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 Comparison of Pakistan’s Economic Growth Rate
India

India signed the Charter of Economy which enabled them to keep their economic policies
consistent despite the change in governments. This helped them to achieve a rapid increase in
their GDP growth rates especially after the 90s. India also opened their markets for other
countries to invest in their huge economic market. It found new and diverse markets for their
exports and quickly followed and adopted the technological advancements.

Bangladesh

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 Bangladesh have achieved remarkable economic feat over the last decade. With a growth rate of
over 8% and increasing, Bangladesh has emerged as one of the fastest growing economies
around the world. Bangladesh through their consistent policies and by increasing their export
base has achieved significant economic growth rate over the due course of time.

Effects of Frail Economic Condition of Pakistan

The Fragile Economic Condition has impacted each and every aspect of Pakistan. It has
increased the unemployment to a great extent that it has led to frustration among the masses. The
inflation has increased drastically and consequently the purchasing power of the common man
has decreased. The frail economic condition has also put the Budgetary Constraints on the
Government of Pakistan and most of the Budget goes towards the debt servicing. The
unsustainable and inconsistent policies of the Government have withered the trust of Foreign
Investors. Overall, this unsustainability has led to Public unrest and dissatisfaction as has been
happening in the past.

Conclusion
Pakistan’s Economy has been following a continuous cycle of boom and bust. Amongst many
other reasons, inconsistent and short termed policies are the most significant causes that have led
to unsustainable and fragile economic growth throughout this time.

Recommendations
Following are few of the Recommendations that can bring sustainability to the Economy of
Pakistan;

 Pakistan needs to devise its own Charter of Economy on the lines of India to bring consistency in
its economic policies.
 Like Bangladesh, Pakistan needs to build its export base to generate revenue and increase its
foreign reserves. For this the government needs to incentivize its domestic industries and provide
them protectionism from the foreign markets in order to gain the maximum out of them.

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 Pakistan also needs to Invest in its Human Capital as it has the largest youth percentage (64%)
around the world. Pakistan needs to impart skills, education and knowledge into them or else
they may become a liability.
 164th among 195 states in terms of investment in Education and Health
 134th among 157 countries in World Bank’s Human Capital Index
 Pakistan needs to capitalize on the opportunity that has come in its way in the form of CPEC. For
that Pakistan needs to develop a consensus among its federating units and work as a single nation
to make its economic outcomes sustainable.
 Pakistan needs to fix its tax administration and focus on the direct taxation to increase the tax-to-
GDP ratio. Agriculture tax must be introduced in this regard.
 Pakistan has a huge potential in the field of Economic Tourism and therefore, Pakistan should
promote its tourism industry. Establishing peace and easing its visa regime are some of the steps
that can be taken in this regard.

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 Bibliography

1. Haq, R. (2010, September 27). A Brief History of Pakistani Economy 1947-2010.

2. Hussain, A. (2012). A PERSPECTIVE ON PAKISTAN’S ECONOMIC HISTORY:GROWTH,

ECONOMIC STRUCTURE AND GOVERNANCE. The Oxford Companion to Pakistani History,
Oxford University Press, Karachi.

3. Sgro, M. I. (2017). A brief history of Pakistan’s economic development. Real-world economics

review, issue no. 80.

4. Ziauddin, M. (2019, November 02). Bangladesh Booms in a Sluggish World Economy. The
Diplomat.

5. CSIS. (2019). Center for Strategic and International Studies. Retrieved 11 25, 2019, from CSIS:
https://www.csis.org/analysis/economic-crisis-pakistan-again-whats-different-time
6. Malik, S. (2019). Pakistan's Economic Woes: The Way Forward. Retrieved 11 26, 2019, from
https://thediplomat.com/2019/04/pakistans-economic-woes-the-way-forward/
7. Rana, S. (2019). Tax-to-GDP ratio sinks to lowest in five years at 9.9%. Retrieved 11 25, 2019, from
https://tribune.com.pk/story/2004148/2-tax-gdp-ratio-sinks-lowest-five-years-9-9/
8. Talpur, M. (2017). Nine Causes of Slow Economic Growth in Pakistan . Retrieved 11 24, 2019, from
https://dailytimes.com.pk/7932/9-causes-of-slow-economic-development-in-pakistan/
9. Yaqoob, M. (2011). The Causes of Economic Crisis in Pakistan and Its Remedial Measures. SBP
Research Bulletin.

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