9124/2020 Pakistan's Economic Woes: The Way Forward — The Diplomat
THE| DIPLOMAT
THE PULSE
Pakistan's
Economic Woes:
The Way Forward
Pakistan's economic crisis
cannot be resolved
overnight.
By Shahroo Malik
April 18, 2019
htps:thediplomal.comi2018/04/pakstans-economic-woes-the-way:forwardit~text~Pakista's economic woes — dwindling orsign wil be its 22nd loan. 79124/2020
Pakistan's Economic Woes: The Way Forward — The Diplomat
Credit: CCO Image via MaxPixel
Pakistan’s economic woes - dwindling foreign
exchange reserves, low exports, high inflation,
growing fiscal deficit, and current account
deficit - are nothing new, and once again, the
country finds itself knocking on the doors of the
International Monetary Fund (IME) for what
will be its 22nd loan. While the exact amount of
this package has not been determined,
Pakistan already owes the IMF billions from
previous programs. Indeed, 30.7 percent of
Pakistan’s government expenditure
is earmarked for debt servicing, which cannot
be supported by its decreasing revenues.
Already on the Financial Action Task Force’s
(FATF) grey list, and with the current Pakistan
Tehreek-e-Insaaf (PTI) government enjoying
internal institutional consensus on the national
agenda, Pakistan must focus its attention on
resolving its economic woes before it finds itself
on the shores of bankruptcy.
Current State of the Economy
In 2019, Pakistan finds itself facing a dire
macroeconomic crisis. It is spending more on
imports than it receives on exports, with its
current account deficit having risen from $2.7
billion in 2015 to $18.2 billion in 2018. The
major driver of this rising current account
deficit is an expanding trade deficit, which is
mostly due to the rising imports under new
China-Pakistan Economic Corridor (CPEC)
projects and low exports in general. The
previous government focused more on import:
led growth strategy to finance large scale
projects under CPEC. By the end of June 2018,
the gross public debt of Pakistan reached USD
$179.8 billion, showing an increase of $25.2
billion within a year. More than half of this
hitpstneiplomal.com!2019/04/pakstans-economic-woes-he-way-forwardit~text=Pakistan's economic woes - dwindling foreign. be its 22né loan, 217,9124/2020
Pakistan's Economie Woes: The Way Forward The Diplomat
increase in gross public debt was due to an
increase in public external debt, which grew by
30.1 percent, In 2018, the depreciation of the
Pakistani rupee against the U.S. dollar alone was
responsible for an excessive USD $7.9 billion
increase in public external debt.
Despite the massive depreciation in the rupee,
Pakistani exports have remained almost the
same, Meanwhile, the government's external
debt has also increased from $64.1 billion in
June 2018 to $65.8 billion in January 2019.
The inflation rate is now touching 9.4 percent,
which is a record level high over the last five
years mostly due to rupee depreciation and
rising energy prices. In addition, increased
defense spending and its ongoing fight against
extremism only further burden the economy.
Along with a depreciating rupee that has made
imports costlier, low foreign investment due to
Pakistan’s security and political challenges has
also severely hit its foreign exchange reserves.
Despite rising deficits, Pakistan's tax
revenue was only 13 percent of its GDP in 2018.
During the current fiscal year, the country has
seen a decline in its revenues while
expenditures have increased, resulting in a half-
year fiscal deficit of 2.7 percent of GDP, the
highest since 2010-11. According to the State
Bank of Pakistan, the sharp decline in revenue
can be attributed to a fall in development
spending, reductions in income and corporate
taxes, and taxes on petroleum products, as
announced by the previous Pakistan Muslim
League-Nawaz (PML-N) government.
Enjoying this article? Click here to subscribe
for full access. Just $5 a month.
similarly, the previous government failed to
make any significant progress in enhancing
htpstneiplomal.com!2019/04/pakistans-economic-woes-he-way-forwardit~taxt=Pakistan's economic woes - dwindling foreign. be its 22né loan, 3179124/2020
Pakistan's Economie Woes: The Way Forward The Diplomat
exports: in fact, Pakistan’s total exports fell in
real terms during the PML-N’s tenure. In its
recent report “Pakistan @100: Shaping the
Future,” the World Bank held weak governance
responsible for the fiscal deficit.
Pakistan’s poorly regulated financial
system facilitates tax evasion, which contributes
significantly to the growth of the fiscal deficit.
Having inherited this economic crisis from the
previous government, the PTI government, led
by Prime Minister Imran Khan, has an
enormous task ahead: steer Pakistan’s
struggling economy out of a macroeconomic
crisis by fostering economic development.
With its domestic industry in ruins, Pakistan has
not been able to rely on consistent foreign
investment for more than stopgap measures. It
did recently receive $2 billion from the United
Arab Emirates (UAE) through the Abu Dhabi
Fund for Development (ADFD), which provides
concessionary development loans. This inflow
has increased Pakistan’s foreign reserves from
$14.956 billion at the start of March 2019
to $17.398 billion, In February, the Crown Prince
of Saudi Arabia, Mohammad bin
Salman, signed seven Memorandums of
Understanding (MoUs) with Pakistan, pledging
up to $21 billion worth of investment over the
next six years. However, relying only on foreign
aid and friendly countries for loans is not
enough. If Pakistan is to tackle its current
account deficit in the long run, the government
must take substantial steps to improve the
macroeconomic conditions of the country and
modernize its industrial sector to become more
competitive in international markets
The Way Forward: Steps for the Pakistan
Government
htpstneiplomal.com!2019104/pakistans-economic-woes-hesway-forwardit~taxt=Pakistan's economic woes - dwindling foreign. be its 22né loan, 417,9124/2020
hitps:tediplomat.comi20 19/04pakistans-aconomic-woos-he-way-forwardit~lexi=Pakisian's economic woes ~ dwindling fosign.il be its 22nd loan
Pakistan's Economie Woes: The Way Forward The Diplomat
To make a significant impact on the current
account deficit, Pakistan needs to ensure an
investment-friendly environment that attracts
more foreign direct investment (FDD, instead of
relying so heavily on foreign aid, According to
the World Bank’s Ease of Doing Business report,
Pakistan ranks 136th out of 190 economies. To
improve this ranking and draw more
investment, Pakistan should ease customs laws
and regulations, improve the security of the
country, and rebrand and boost its international
image as a desirable destination for tourism and
industry alike —a goal the current government
is set to pursue as it eases its visa policies,
including its introduction of e-visas. It should
also encourage domestic investment through
more flexible tax policies, particularly targeting
small and medium-sized enterprises (SMEs).
Such measures would reposition Pakistan on
the international stage as stable, competitive
ground for foreign investment.
Pakistan also needs to focus on building its
domestic industry to expand its export portfolio
and enhance its competitiveness in the
international markets. In 2018, Pakistan ranked
107th out of 140 on the Global Competitiveness
Index (GCI), which measures the performance
of countries in indicators such as infrastructure,
ICT adoption, macroeconomic stability, labor
market, skills, financial stability, innovation
capacity, ete, The low ranking signifies that the
Pakistani government needs to take measures to
stimulate economic growth and provide
favorable business environment. The country’s
ongoing energy crisis, which has caused
significant losses in industry, has led factory
owners to increasingly relocate to countries
such as Bangladesh. Moreover, since its exports
currently lose out to low-priced, good-quality
products from countries like China and
579124/2020
Pakistan's Coonomle Woes: The Way Forward ~The Olona
Bangladesh, Pakistan needs to modernize its
industrial sector by establishing new plants and
equipment to enhance global integration. It can
do this by investing in research and
development (R&D) to encourage product
innovation and enhance labor productivity.
On top of these issues is the larger question of
Pakistan’s failure to expand its export portfolio
beyond a few low value-added products, such as
textiles, rice, surgical goods, carpets, sports
goods, and leather items, which is one of the
largest factors behind its balance of payments
deficit. Broadening the country’s export
portfolio and exploring new export destinations
such as Eastern European and Central Asian
countries could revitalize foreign exchange
earnings. As a security-oriented state, Pakistan’s
priority has never been the economy, but it now
needs to focus more on geoeconomics over
geostrategy.
Currently, Pakistan is not taxing its agriculture
sector and large businesses are often given big
tax breaks, Hence, Pakistan needs to broaden its,
tax base - by taxing the agricultural produce of
landlords with big land holdings and stop giving
tax amnesties to big businesses — instead of
overburdening current taxpayers, improve
fiscal transparency, and strengthen tax
collection coordination at the national and
provincial levels to ensure that revenue targets
are met. These steps would go a long way to
addressing the myriad financial and deficit
issues stemming from the country’s weak
governance.
Conclusion
The coming months are going to be tough for
the current government as the rupee is expected
to depreciate further, causing inflation to rise.
hitpstediplomal.com!2019104/pakstans-economic-woes-hesway-forwardit~taxt=Pakista's economic woes - dwindling foreign. be its 22né loan, 6i79124/2020
hitps:tediplomat.comi20 19/04pakistans-aconomic-woos-he-way-forwardit~lexi=Pakisian's economic woes ~ dwindling fosign.il be its 22nd loan
Pakistan's Coonomle Woes: The Way Forward ~The Olona
Pakistan’s economic crisis cannot be resolved
overnight. Support from the IMF and friendly
countries like Saudi Arabia, China, and the UAE
will only provide some breathing room in the
short term to its shattered economy. Promoting
manufacturing by creating a more investment-
friendly environment, broadening its tax base,
and encouraging innovation and modernization
in exported industries are just some of the
most urgent measures the government can take
to address the growing fiscal and current
account deficit. Pakistan must take advantage
of this moment of hard-won reprieve by
building a truly stable and sustainable economy
before it once again finds itself digging its own
economic grave - and that of its people.
Shahroo Malik is a Research Associate at the
Institute of Strategic Studies Islamabad (ISS1) in
Pakistan. A version of this piece originally
appeared at South Asian Voices, a platform for
strategic analysis and debated hosted by the
Stimson Center.
TAGS
ThePulse Imrankhan Pakistan economy Pakistani Polis
a
Critical Analysis Of The Role Of Majlis-E-Shoora (Advisory Legislative Council) In Hazrat Abu Bakar Siddique'S Era یﺪﯿﻘﻨﺗو ﺰﺋﺎﺟ ... ود ﯽﻘﯾﺪﺻ ﮐ ﯽﺋارﻮﺷ مﺎﻈﻧ ﺎﮐ ﯽﻘﯿﻘﺤﺗ