Economy of Pakistan

Pakistan’s economic recovery after the COVID-19 crisis indicates that the
country has enormous potential to overcome challenging economic situations,”
“However, sustaining the economic recovery requires addressing long-standing
structural weaknesses of the economy and boosting private sector investment,
exports and productivity.” said Najy Benhassine, World Bank Country Director
for Pakistan.

Introduction
Healthy economy is very important for the economic, political and social development of a
country. It contributes to sustained economic development, national security and social welfare
and minimizes economic, political and social disparity. Although Pakistani economic indicators
are improving now-a-days, yet the overall situation in Pakistan relating to economy is not very
much encouraging. Pakistan economy is suffering from various problems such as balance of
payment crisis and soaring debt. The country’s deep structural problems and weak
macroeconomic policies and the pandemic have further more exacerbated the situation.
Although government has taken various steps yet further effective steps for overcoming these
economic must be taken to tackle these challenges being faced by Pakistan and to turn Pakistan
into a developed country.

Overview of the Economy (2020-2021-22)

In the initial period of Pakistan, it had the highest GDP per capita as compared with India,
Bangladesh, and Vietnam. Twenty years later, it is at the bottom of the group. Political
upheaval, a violent insurgency fed by the war in Afghanistan, and the inability of successive
governments to carry out reforms are to be blamed for this decline. The COVID-19 pandemic
has further sharpened the challenge.
When Prime Minister Imran khan assumed the office, the country was facing major economic
problems. The economic upheaval in in early months of Khan’s government led to declining
economic growth, devaluation of currency, double digit inflation, and sky-high interests rates.
Less than a year later, the COVID-19 pandemic dealt a heavy blow to Pakistan’s economy.
Lockdowns in response to health crisis turned economic growth negative, a first in decades
bring a plethora of challenges for Pakistan’s overall economic development

Current scenario
The rupee has so far lost 16 per cent value against the US dollar since the beginning of this
fiscal year on July 1. The outgoing government added $20 billion to the stock of the external
debt. As Pakistan imports a large number of industrial raw materials and finished consumer
goods. on top of the rising global fuel, food and fertilizer prices poses great challenges for
Pakistan. Imports are growing double the pace of exports growth. And, the trade deficit is
ballooning

Improvements so far
Recently SBP’s foreign exchange reserves rose to $10.866 billion. Keeping in view the significant
performance pertaining to FATF conditions, Pakistan has been added into the Amazon’s seller
list. FBR tax collection has witnessed a significant growth. Federal Board of Revenue (FBR) has
collected Rs.443 billion which has exceeded its assigned target of Rs.441 billion for the months
July to February of current Financial Year 2021-22, owing to the revival of domestic economic
activity and ongoing comprehensive tax policy and administrative reforms such as digitization,
transparency, and taxpayers' facilitation

Economic challenges of Pakistan

1. Fiscal Deficit (govt expenditure increases than revenue)
The fiscal deficit has reached 3.5 percent of GDP (RS 1.603 trillion) in first eight months
(july-february) of current fiscal year. Net revenues were above 2 trillion while total
expenditure was Rs 4 trillion during July-Feb FY2021. Continuing large fiscal deficits year
after year may plunge the country into debt trap again. Due to the current scenario,
Pakistan’s fiscal deficit is expected to touch almost $24 billion, the highest ever on
record. (THE DIPLOMAT)
2. Trade Deficit (imports increases than exports)
The deficit is resulted by more growth in the imports and comparatively slow growth in
exports. (The import rises mainly due to the increase imports of petroleum, wheat,
sugar, raw materials, chemicals, machinery, mobiles, fertilizers, medicines etc.). In eight
months of FY22 (July 2021 to Feb 2022), Pakistan’s trade deficit swelled 82pc to about
$32bn from $17.5bn in the same period of FY21, according to the Pakistan Bureau of
Statistics (PBS)
3. Current account deficit

The major driver of this rising current account deficit is an expanding trade deficit, which is
mostly due to the rising imports and low exports in general. 47pc increase in imports compared
to 26pc growth in exports, which has expanded the trade imbalance by 82pc. During Jul-Feb
FY2022, the current account deficit was recorded at $ 12.1 billion. r. The current account deficit
widened due to the constantly growing import volume of energy and non-energy commodities,
along with a rising trend in the global prices of oil, COVID-19 vaccines, food and metals. E
(Ministry of Finance)

4. Inflation
 On average inflation was recorded at 8.3pc in the first eight months of the current fiscal
year driven by surging global commodity prices and a weaker exchange rate consumer
price index (CPI) based inflation stood at 12.72 per cent in March,
5. External debt

Pakistan External Debt reached 116.3 USD bn in Mar 2021, compared with 117.1 USD bn
in the previous quarter. Almost 30.7 percent of Pakistan’s budget earmarked for debt
servicing. We are now among the world’s ten most indebted nations and our external debt
exceeds the gross national income.

6. Depreciation of Rupee and deteriorating Exchange rate

The rupee is expected to depreciate by 5.3 percent during the fiscal year 21-22. Weak
currency makes imports costly. An overvalued exchange rate has led to a very high level
of imports and low level of exports.

7. Low level of Investments

Pakistan Investment accounted for 15.2 % of its Nominal GDP in Jun 2021, compared
with a ratio of 15.3 % in the previous year. Total consumption expenditures were 90 %
of GDP. This investment too was financed by the FDI and loans.
8. Energy crisis
The energy sector is the backbone and life blood of economy. Pakistan currently face
severe shortfall of 6500 MW. The energy sector is plagued by debt, lack of investment,
and heavy dependency on imports and its inability to exploit natural resources is leading
to energy crises.
9. Low GDP growth rate
Pakistan’s economy is set to keep on recovering in fiscal year 2022, with real GDP
growth projected at 4 percent The International Monetary Fund

10. Capital flight

Capital flight from Pakistanis a regular occurrence. The existing regulations in Pakistan
have failed to stop the capital flight
11. Dependence on agricultural sector
Pakistan still depends too much on agriculture. For instance, agriculture
constitutes20.9% share in GDP and 43.5% of employment. It also provides various crops
like cotton, wheat, rice, sugarcane, maize, and gram for exports. It also includes
livestock, fisheries and forestry. Since agriculture is mostly dependent on favorable
environmental conditions, our most of the economy is at mercy of the nature.
12. Lack of infrastructure
 Although Pakistan has transport system in place including roads highways, motorways,
expressways and railways locomotives, airways(PIA)and sea ways and Ports
(Gawadar,BinQasim,andKarachi) yet there is a dire need to develop more for supporting
and enhancing the economic development. Similarly, Pakistan also needs effective and
speedy communication system in place. Although3G/4G is introduced in many big cities,
yet much more needs to be done to make Pakistan fully digitized.
13. Low production growth

Declining levels of investment appear to be the most important causes of the low productivity
growth which is a major hinderance in economic growth of Pakistan.

14. Circular debt

According to media reports, the power sector circular debt has increased by Rs 196 billion
to a record high of Rs 2,476 billion during the first six months (July-December) of the Fiscal
Year 2021-22

15. Political instability

For a robust economy we should have political stability, law and order and security. If
we do not get of political instability, poor law and order situation, the investors from all
over the world will hesitate to come to Pakistan to invest and we will not be able to
make any progress in this country.
16. Inappropriate use of Natural Resources
Sometimes many natural resources are available in various countries but they remain
unutilized or mis-utilized. Pakistan also has redundant natural resources yet it fails to
utilize them
17. Tax Evasion

Tax evasion is a big problem in Pakistan. It has led to deterioration of economic situation
and lack of public service delivery.

18. Good Governance Crisis

From the past, effective economic policies could not be evolved and implemented because
of the absence of good governance. In the last 63 years, the country has seen regression,
and not progression in this area, and no hopeful signs are seen on the horizon. There can be
no real breakthrough in economic management of the country without solidification of
good governance and stable institutions

19. Exploding population

The country is currently stuck at population growth rate 2.5 pc per annum. We are we are
producing a lot more mouths to feed or hands to employ than our collective national
 income. We are counted 220 million but certain maybe 250 million, which has led us to
further external dependence for our staples and dietary foods.

Impacts of economic crisis

Inflation
The annual inflation rate in Pakistan increased to 10.7% in March of 2022 ( Pakistan Bureau
of statistics) owning to weak macroeconomic policies of the government and surging oil and
gas prices globally
Increasing Unemployment rate
Unemployment Rate in Pakistan is expected to reach 4.70 percent by the end of 2022,
according to Trading Economics global macro models and analysts expectations.
Growing poverty: The World Bank (WB) has estimated that poverty in Pakistan has
increased from 4.4 per cent to 5.4 per cent. More than two million people have fallen below
the poverty line in Pakistan.
Dwindling Foreign Exchange reserves: State Bank data shows that Pakistan’s total liquid
foreign exchange reserves stood at $18.5 billion on March 24, 2022, with the SBP’s reserves
recorded at $12.1 billion, despite the $2bn received through the purchase of debt through
Sukuk and from the IMF.

Loss of investor’s confidence: Pakistan Foreign Direct Investment (FDI) registered a growth
equal to 0.5 % of the country's Nominal GDP in Jun 2021, compared with a growth equal to
0.9 % in the previous year owning to the ongoing security issues, political instability and
tight taxation policies.

Latest world bank report

According to the World Bank’s Pakistan Development Update, released today, During the
current fiscal year high demand pressures and rising global commodity prices led to double-
digit inflation and a sharp rise in the import bill during this period. These developments have
had an adverse impact on the rupee. Moreover, long-standing structural weaknesses of the
economy including low investment, low exports, and low productivity growth pose risks to a
sustained recovery. (worldbank.org)

IMF extended facility programme

This new government has indicated reaching out to the IMF. Still, these negotiations will be
thorny and require the services of the best experts and negotiators. Negotiations will have to
be conducted very skillfully so that Pakistan can revive the presently suspended
programme. The IMF seems reluctant to approve the seventh review of its $6bn funding
programme. IMF is not satisfied with the government’s decision to give another blanket tax
amnesty — the third under its rule — along with a four-month freeze on petrol and electricity
prices last month. particularly the relief package, announced by Prime Minister Imran Khan last
month, reversing a major impact of the mini budget under IMF prior actions

REASONS THAT LEAD TO CURRENT ACCOUNT DEFICIT/ FINANCIAL

CRISIS
1) Exorbitant imports
2) Less inflows (export revenues and remittances)
3) Tax evasion
4) low level of domestic resource mobilization
5) Energy sector crisis
CPEC and Pakistan’s economy
In Western media, Chinese investment is often cited as the main driver of Pakistan’s debt crisis.
This is somewhat true as China’s BRI makes Pakistan a key partner through CPEC. The CPEC is a
$60 billion program of infrastructure, energy and communication projects that aims to improve
connectivity in the region. CPEC infrastructure costs have certainly placed a greater debt
burden on Pakistan, but the current structural problems are homegrown energy shortages and
fiscal management of the power sector.

CAUSES OF ECONOMIC CRISIS IN PAKISTAN

NATURAL CALAMITIES
One of the reasons for exploitation of the economic potential of the country have been the
natural disasters, like earthquake and flood which added to the economic misery of Pakistan.
However, it can be argued that flooding was directly linked with lack of long term economic
planning and inability of the top leadership of the country to develop a consensus for water
resource management, in particular building of dams.

MACRO ECONOMIC PROBLEMS OF PAKISTAN

The main macro-economic problems of Pakistan are well known to even ordinary citizens and
these are: slow economic growth, high inflation, extreme poverty, rising debt burden, and huge
budget deficit. And these are mainly the product of one factor, and that is poor governance
paving way for mismanagement of public finances.

Steps taken by the government to overcome these challenges

Following are the steps taken by the government to overcome the challenges being faced by
Pakistan economy.
1. Pakistani government has signed MoUs with China for energy project sand CPEC in
Pakistan.
2. Government has also made arrangements for the import of LNG from Qatar, Gas
from Iran and Turkmenistan.
3. The government has also undertaken various education, health, skill, business
development projects like:
✓ Hunarmand Pakistan Program
✓ Merit and need based scholarship programs
✓ Healthy programs for Malaria, polio, TB, AIDS AND Food nutrition
✓ PM’s small business loan programes
✓ Apna Rozgar Scheme
✓ Metro-Bus Systems in Lahore Islamabad-Rawalpindi and Peshawar
✓ Introduction of 3G/4G technology in Pakistan.

Further Recommendations to improve the situation

All the policies devised by the new government should be execution of long term economic reforms as
quick fix won’t work in taking Pakistan out of the current economic crisis

1. Government should give more importance to manufacturing industry and services

sectors. EXPORT LED GROWTH
2. Government should control expenditures and increase its revenue by increasing its tax.
TAX REFORMS ARE MUST
3. Governments should try to minimize and get rid of all the debt. It should adopt the policy
of self-reliance and self-dependence.
4. Tackling inflation should be the top priority of the incumbent government. The online
price control and monitoring system can also be used to monitor artificial price hikes
5. Skills and training should be provided to the youth along with creation of jobs
6. Reduce dependency on imported oil and gas.
7. Energy crisis are causing frequent interruptions in electricity and gas supplies to
businesses and households. So energy crisis should be resolved. Focus should be given on
creation of energy from renewable sources of energy like solar, wind, tidal, water, and
biomass.
8. ‘Education for All’ should be practically implemented with due diligence and will.
9. Law and order situation should be improved
10. Corruption should be discouraged and gotten rid of.
11. Political stability, true democracy and good governance should be ensured.
 12. Using technology particularly the information/ communication technology for the
betterment of social and economic problems of Pakistan.
13. Devolution of power: Power and authority should be devolved and delegated to the
local/district governments so that they can take effective decisions on their own.
14. Pakistan needs to ensure an investment-friendly environment that attracts more foreign
direct investment (FDI), instead of relying so heavily on foreign aid
15. It should also encourage domestic investment through more flexible tax policies,
particularly targeting small and medium-sized enterprises (SMEs).
16. Pakistan also needs to focus on building its domestic industry to expand its export
portfolio and enhance its competitiveness in the international market.
17.Continue existing social programes that benefit people: the government must continue
its predecessor's beneficial programmes. The vulnerable population must be provided
social protection in a more effective way. For example, cash payments to poor
households may be made monthly, instead of quarterly
18.Last but not the least It may be an unpopular decision but exiting the IMF programme at
this point will further exacerbate economic woes. The country will find it very difficult to
borrow from the international market

CONCLUSION
The government should adopt a long-term approach in tackling the economic challenges Even if
the government is able to stabilize the economy in the short term, the brewing political storm
may transform into full-scale social unrest, thereby reversing the gains made by the
government. In other words, economic stabilization in Pakistan will not be sustainable unless
supported by a wider political dialogue. The policies need to be put in place immediately in a
way that the burden is not shifted to an already vulnerable population.