ECONOMY OF PAKISTAN

NAME : MALEEHA D/O ABDUL AZIZ AFRIDI

COLLEGE: NORTH WEST INSTITUTE OF HEALTH SCIENCES

Roll No. 12
 ECONOMY OF PAKISTAN

INTRODUCTION:

Pakistan is a developing country and like many other developing countries,

Pakistan has a semi industrialized economy and basically comprises of textiles,
chemicals, food processing, the agricultural sector and various other industries.
Pakistan’s economy is the 27th largest growing economy in the world when
measured in terms of Purchasing Power Parity (PPP). The economy has suffered
from political instability, rising population growth rate and over reliance on
imported fuel. Over 40% of workers are employed in agriculture which has at least
two detrimental consequences. First, this labour force remains unskilled and
second, agriculture substantially depends on weather and commodity world prices.
Besides, health, agricultural and educational deficiencies are present. This makes
the contribution of agriculture in the Pakistani economy quite low. Pakistan’s
economy is still teetering on the brink of crisis — the country faces record inflation
that is pushing the price of daily commodities higher as threats of unrest loom.
However, in recent years, prudent measures have been taken by the policymakers
such as broadening the tax net, encouraging local made products and vocational
training for young graduates.

PROBLEM STATEMENT:

Pakistan’s economy has been plagued by serious macroeconomic issues. It is in a

precarious situation. Pakistan remains dependent on imported petroleum products.
Pakistan’s agriculture sector continues to be plagued with serious problems of low
cropping intensity and low productivity…because of existing policy constraints.
Taxes in Pakistan comprise less than 10 percent of GDP a far cry from the 35
percent of countries that are part of the Organization for Economic Co-operation
and Development (OECD) (Iqbal,2016). The expenditures are 12 percent of GDP.
The void is filled by foreign loans, thus pushing the country further into the abyss.
Grappling with a crippling situation, the policymakers need to tread carefully in the
murky waters of international economy. Pakistan also suffers from impediments in
the energy sector through frequent and widespread power outages that hurt its
competitiveness. Pakistan frequently knocks on the doors of International
Monetary Fund to regain its macroeconomic stability but that is not sustainable.
Pakistan needs to get its house in order and remedy many of its domestic economic
issues. 18 out of Pakistan’s 21 IMF programs over the last 60 years have not been
completed despite obtaining over $30 billion in financial support across those
programs.

QUESTIONS:

What is the Current Situation of Pakistan Economy?

The economy is in a vulnerable position. As predicted, the trade deficit is widening

with economic activity in certain sectors pulling in a greater quantity of imports.
Increase in imports is outstripping exports two-to-one (2:1) so far this fiscal year.
International commodity prices across the board remain elevated, from oil to
industrial and food categories. While pressure is building up in the external current
account, the financial account remains highly vulnerable too. Inward foreign direct
investment remains well below one per cent of GDP. In the backdrop of these
challenges, the present government focused on an economic vision of getting
sustainable economic growth through improving efficiency, reducing cost of doing
business, improving regulatory environment, enhancing productivity and
increasing investment. The government is monitoring the country's situation
actively and is taking necessary measures to facilitate agriculture and industry
sectors to avoid the downside risk and to further accelerate the economic recovery.

Why is the Economy in Such a Dire Situation?

Pakistan's economy already had volatile growth pattern over the years, with regular
boom and bust cycles facing challenges in achieving long-term and inclusive
growth. Unsustainable economic growth was caused by unaddressed long-standing
structural issues for example, loss-making State-Owned Enterprises (SOEs), weak
external position due to insufficient export capacity and low FDI, under-reformed
energy sector, low savings and investment. The principal causes of Pakistan’s
crisis are deep-rooted and structural—namely, Pakistan’s weak export base and an
imbalance between public spending and income. Exports are a much smaller share
of the Pakistani economy than other countries of relative economic standing—8%
of GDP in 2017, compared to 20% in Turkey and 52% in Thailand. Corruption is
another major obstacle to Pakistan’s economic development, harming both
domestic and foreign investment rates and public confidence, as well as eliciting
skepticism among international aid donors.

METHODOLOGY:

I have selected this topic to highlight the various impediments in the growth of the
economy. Pakistan’s economy is facing a multitude of problems including rigid tax
structure, narrow export base, lagging behind in textile exports and manufacturing
of low value added products. Marred by political stability, it is hard to speak about
sustainable economic growth when there is no clear vision of the country’s future
perspectives. The share of imports is much greater than exports in Pakistan. As the
Figure below illustrates, the IMF forecasts faster growth for imports than exports
through at least 2023. In recent years, security concerns and energy supply
problems have prevented Pakistan from diversifying its export base from low-
value added products such as cotton, rice, and leather, to higher value products and
services.
The rates of real economic growth during the last four decades have been around
5%. Along with that, it is necessary to underline a high average inflation rate
which is shown in the Figure.
One of the main sources of inflation is the rigid structure of taxes, with 39% being
direct taxes and 61% being indirect ones.

As for other key macroeconomic indicators, they are presented in the figure below.
LITRATURE REVIEW:

Since its inception, Pakistan has experienced various boom and bust cycles over
the years. The economy has been oscillating between various extremes due to
which the performance of different sectors remained lackluster. Currently, prudent
measures are adopted by the policymakers to keep the economy on an upward
trajectory. Despite myriad of challenges, Pakistan’s economy is moving
progressively on higher inclusive and sustainable growth path on the back of
various measures and achievements during 2021.

The economy of Pakistan rebounded strongly in FY2021 and posted growth of

3.94 percent which is not only substantially higher than the previous two years (-
0.47 and 2.08 percent in FY2020 and FY2019 respectively) but also surpassed the
target (2.1 percent for FY2021). Despite strict fiscal constraints, timely and
appropriate policy measures taken by the government resulted in a V-Shaped
economic recovery. The agriculture sector’s performance during 2020-21 broadly
stands encouraging as it grows by 2.77 percent against the target of 2.8 percent.
The growth of important crops Pakistan Economic Survey 2020-21 x (wheat, rice,
sugarcane, maize and cotton) during the year is 4.65 percent.

The Large-Scale Manufacturing (LSM) performance has been much favorable

during July-March FY2021 and witnessed 8.99 percent growth as compared to 5.1
percent decline during the same period last year. The government’s thoughtful
decision to resume the business activities and adoption of smart lockdown boosted
the business sentiments and the economy gained traction after witnessing a hefty
decline in FY2020.

The FBR tax collection witnessed a significant rise in ten months. During July-
April, FY2021 the total collection grew by 14.4 percent to stand at Rs 3,780.3
billion against Rs 3,303.4 billion in the same period of FY2020. (Iqbal,2016).
Encouragingly, the tax collection surpassed the target by more than Rs 100 billion
during the period under review. The revenue performance is not only a reflection
of growing economic activities without any disruption even in the wake of the third
wave of COVID-19, but it also suggests that the efforts to improve the tax
collection through various policy and administrative reforms are bearing the fruits.

The Consumer Price Index (CPI) inflation for the period July-May FY2021 was
recorded at 8.8 percent against 10.9 percent during the same period last year. At
the beginning of FY2021, a major contribution to increase in inflation in both
urban and rural baskets came from food groups mainly due to the extended
monsoon season. The government realizing the significance of supply disruption
started establishing Sahulat/Bachat Bazar in all parts of the country. The rise in the
prices of global agrarian products and other commodities especially oil contributed
to domestic inflation as well. As far as oil prices are concerned, the government
did not pass on the burden of price increase to the general public proportionately in
order to maintain price stability.

The inflow of workers’ remittances in Pakistan has been rising consistently since
FY2018 and the trend continued in FY2021 with a meritorious growth of 29.0
percent and reached $ 24.2 billion during July-April FY2021. Export of goods
grew by 6.5 percent during July-April FY2021 and stood at $ 21 billion as
compared to $ 19.7 billion in the same period last year. Import of goods grew by
13.5 percent to $ 42.3 billion as compared to $ 37.3 billion last year. Consequently,
the trade deficit increased by 21.3 percent to $ 21.3 billion as compared to $ 17.6
billion last year. Pakistan’s total liquid foreign exchange reserves increased to $
22.7 billion by the end of April 2021, up by $ 3.8 billion, indicating a growth of
20.1 percent over the end-June 2020.

There has been a consistent growth in IT & IT-enabled services (ITeS) remittances
over the last 5 years, with a compound annual growth rate (CAGR) of 18.85
percent, the highest growth rate in comparison with all other industries and the
highest in the region. Micro enterprises, independent consultants and freelancers
have contributed an estimated $ 500 million in IT & ITeS exports. The annual
domestic revenue exceeds $ 1 billion. IT export remittances, including
telecommunication, computer and information services have surged to $ 1.298
billion at a growth rate of 41.39 percent during July- February FY2021, in
comparison to $ 918 million during the corresponding period of FY2020.

Pakistan’s reliance on thermal which includes imported coal, local coal, RLNG and
natural gas has been decreasing over the last few years. Pakistan’s dependence on
natural gas in the overall energy mix is on the decline and the reduction of its share
in the energy mix may be attributed to declining natural gas reserves as well as to
the introduction of LNG since 2015. Pakistan is shifting towards renewable energy
like solar energy and hydropower.

ANALYSIS:

Despite a plethora of Challenges that the country is facing, it is still not too late to
revive the country’s economy. For instance, South East Asian countries have
shown remarkable improvements in the past few decades. Many of the region’s
best-performing nations started at a low point and were able to embark on a path of
sustainable economic growth after enacting the necessary reforms. The economy of
Vietnam is one such success tale. Vietnam’s economy was crippled by poverty,
and per capita income was stuck between $200 and $300 by the mid-1980s.
(Kamal, 2022). Vietnam’s transformation from a poverty-stricken economy to one
of prosperity commenced in 1986 when the government launched “Ði Mi”, a series
of political and economic reforms aimed at strengthening the private sector’s role
and opening the country to foreign investors.

Under this initiative, Vietnam’s GDP per capita increased 12 times between 1985
and 2020, reaching over US$2,800. Over the same period, poverty rates
(US$1.90/day) fell sharply from over 70 per cent to under 2pc. (Kamal,2022) The
rise of Vietnam’s economy can be attributed to three main initiatives according to
World Bank; firstly, it has enthusiastically incorporated trade liberalization. The
signing of many free trade agreements (FTA) with both Asian and Western
countries signaled the gradual liberalization of trade. Vietnam has benefited from
the “open-door” policy, and the country has developed into a manufacturing hub
over the previous three decades, with significant foreign businesses such as Intel,
Samsung, Adidas and Nike already having established bases there. With one out of
every ten cellphones produced in Vietnam, the country has already established
itself as a significant exporter of textiles, electronic goods, and footwear, among
other goods.

Pakistan can achieve its goal of sustainable economic growth by following

Vietnam’s model. Pakistan must concentrate on growth-oriented reforms and
sound policymaking to achieve this goal. Following in the footsteps of Vietnam,
Pakistan should liberalize trade and sign free-trade agreements with potential
trading partners. Incremental efforts are required to stabilize the country’s entire
social, economic, and political environment so that much-needed foreign direct
investment not only be attracted but in desired sectors such as manufacturing and
agriculture. Pakistan is a cotton producing country but its textile exports are
meagre $5 billion compared to Bangladesh’s $30 billion. (Iqbal, 2022).

Furthermore, improvements in the export sector must be accomplished by

enhancing domestic industrial production and productivity. To make the labour
force more productive, it is essential to invest in human capital.

 It is Indispensable that we start thinking about the drivers that can create structural
change within Pakistan. Some of them are as follows:
 Address the energy crisis: The most significant challenge is the energy/power
crisis. According to some estimates the growth in Pakistan is 1/3rd off to the
on-going power shortage.

 Open up markets and encourage trade:  Pakistan can become a connector of

markets like it has historically been. The country is surrounded by resource rich
countries and it should take advantage of the complementarities that can arise in
through the labor market, or through trade. If India and Pakistan can break a lot
of economic and non-economic barriers, Pakistan will be put on India’s growth
rate. Regional trade can be a potential driver for growth.

 Improve service sectors such as Health and Education. While education

has been responding well to a lot of change, the health sector is gravely
under-performing. Even though human capital is there, but the organizations
are not leveraging this or adding value to the human capital that is present.
This has long-term implications on growth. Socio-economic growth means
better health and better education – these are outcomes beyond simple
economic growth and are essential for development.
 Improve the security situation:  The war on terror and other security issues
cost the economy roughly 9 percent of the GDP. Investment rates have
plummeted due to this as investment cannot be expected to take place unless
security issues are addressed.

 Reform State Owned Enterprises (SOEs): State Owned Enterprises are

also in a crisis. SOEs need to be reformed. For example, the railway sector
has virtually collapsed and witnessed an almost 60 percent decline in the
freight being carried. One way to reform state enterprises as suggested by
PTI itself is to bring them out of the ambit of line ministries, and divide
existing SOEs into three blocks, those that are ready for privatization, those
that require clear reforms before privatizations and those that cannot be
privatized at all such as national monopolies.
  Youth policy should be formulated: The youth bulge needs to be
addressed. As unemployment among the youth is rising, direct intervention
is warranted. Employment guarantee schemes like in India can be
implemented in Pakistan. However, that presupposes a functioning local
government. So focus on making local governments work which will also
improve local infrastructure.

 Mobilize the private sector: The state has to play a role to incentivize

private sector to grow as private sector savings need to be mobilized to bring
the economy back on track. At the moment private sector confidence is zero
due to the circular debt issue. Conditions don’t exist in Pakistan to allow the
private sector to lead infrastructure led-growth.

 Encourage female labor force participation: This is one of the hidden

drivers of Pakistan and cuts across all dimensions and is also being
documented empirically by Dr. Tahir Andrabi and his team. Female work
force is much more compliant and disciplined and this pool needs to be
tapped into. Private schools have been using that pool. Furthermore, the
wage differential between males and females also needs to be addressed if
economy is to move forward

CONCLUSION:

Pakistan is a country rich in resources but it is poorly managed. The country has
the potential to become an economic powerhouse of the region in the next few
years if prudent measures are taken. A shift towards Geo-Economics from Geo-
Strategic lens can further propel the country towards prosperity. The country can
enhance its economic potential by expanding trade with India and cash in on the
China Pakistan Economic Corridor(CPEC) project. However, to achieve, sustained
economic growth, prudent and transparent policies are the need of the hour.

To sum up, the perspectives of the Pakistani economy look vague in the long term.
On the one hand, its potential for growth is represented by the ongoing increase in
population and thus labour force as well as opportunities to increase its internal
market. On the other hand, the existing imbalances between government revenues
and expenditure, ineffective public spending, poor-balanced tax system, deficit of
power and water and persistent political instability that frightens potential foreign
investors, do not allow for gaining sustainable growth.

Political coalitions must be strengthened, as they are required to push reform. Any
reform that is passed must be accompanied by legislative reforms by provincial
governments. There must also be a clear political calculus on how to change and
bring reform. All of this needs to be strategically thought out by the parliament.
REFERENCES:

Kamal, A.(2022). Vietnam’s Economic Miracle: Insights For Pakistan. Retrieved

17th January, 2022, from

https://www.dawn.com/news/1669917/vietnams-economic-miracle-insights-for-
pakistan

Overview of Pakistan’s Economy. Retrieved from

https://www.finance.gov.pk/survey/chapters_21/Overview.pdf

Iqbal, A. (2015). Pakistan an Emerging Market Economy: IMF Retrieved 8th

November, 2015, from

https://www.dawn.com/news/1218182