This is a two part article focusing on Economic Challenges faced by Pakistan and way forward for dealing with them. Economy of Pakistan is a major topic in CSS Exams- both Current Affairs and Pakistan Affairs.
Since inception, Pakistan has been facing lingering Economic Challenges. Dearth of political stability has fed into economic instability in the country as well. Numerous reasons can be cited as the cause of the economic turmoil the country is embroiled in. For starters, Pakistan's economic model is highly flawed. Our national growth is directly linked with import consumption, this import led- consumption based economic model has resulted in poor domestic industrial growth, weak exports and high imports. With over emphasis on imports, Pakistan has developed an overreliance on foreign creditors to meet its external financing needs. This has resulted in sky rocketing foreign debts and created an exclusionary economic space where only the elites benefit, but the poor suffer. This import fueled economic model in not sustainable and hence, the reason why Pakistan time and again finds itself facing a balance of payment crisis.
Economic Challenges of Pakistan can be broadly categorized into the following:
1. Low GDP growth rate
GDP refers to the total amount of goods and services produced in a country in a single fiscal year. Unfortunately for Pakistan, maintaining a high GDP growth rate has always been a problem. Pakistan frequently witnesses boom and bust cycles of growth- a short period of economic growth followed by a period growth decline. This is because our import consumption based economic model only results in periods of high growth when we have more foreign exchange reserves, but as soon as the forex starts declining so does Pakistan's domestic growth. The graph below depicts fluctuating GDP of Pakistan and the inability to maintain a sustainable growth.
Pakistan's economy has also been facing a twin deficit crisis- fiscal deficit and current account deficit.
2. Current Account Deficit
Current Account Deficit = Exports + Remittances - Imports
What this simply means is that the imports of Pakistan outweigh its exports and the resultant trade deficit is not balanced by the remittances sent by overseas Pakistanis, creating a current account deficit. Pakistan had a CAD of $13.8 billion at the end of Fiscal year 2021-22. This crisis of CAD is not new in the economy of Pakistan, apart from the FY21, Pakistan's economy has been riddled with a current account deficit. To expand on this, Pakistan has narrow export base, it exports mostly raw materials and rarely any value added finished goods which fetch less foreign exchange in the in the international markets and imports high valued items. Further, Pakistan has now been gripping with a food security challenge as well, despite being an agrarian country Pakistan has become net importer of food in the recent years. Add to this high volume of oil imports which constitute a major portion of our import bill. Henceforth, current account deficit erodes Pakistan's foreign exchange reserves creating a balance of payment crisis and posing a need to go to IMF for a bailout package.
3. Fiscal Deficit
Fiscal deficit refers to the gap between government's earnings and expenditures. In the case of Pakistan, there is a huge gap in what the government of Pakistan earns and what it spends, which results in a fiscal deficit. This is because sources of earning of Pakistan's federal government are very few, there is a regressive system of taxation in place and tax net is also very narrow. Practice of giving tax exemptions and subsidies also curtails the revenue. Further, state owned enterprises are bleeding elephants, often operating in loss. In 2019, PIA reported a loss of Rs. 56 billion. Federal government has to spend excessively to do debt servicing and on current expenditure. Thus, low revenues and excessive expenditures result in a fiscal deficit in the economy of Pakistan.
4. Informal economy
97% SMEs are unregistered in Pakistan - International Financial Cooperation
Another very potent challenge of Pakistan's economy is the informal economy of the country. Informal economy is the undocumented part of Pakistan's economy that does not show up in official GDP figures. According to some modest estimates, Pakistan's informal economy constitutes 50% of the country's total gdp. Informal economy is also sometimes referred to as black economy since it is undocumented and unregulated. This is because Pakistan has cumbersome registration processes of SMEs. People starting a business often face bureaucratic hurdles in registration of their businesses which seriously undermines ease of doing business in the country. Also majority of SMEs in Pakistan prefer to do business on cash transactions instead of using official banking channels which results in the economic actitvity not being documented. Informal economy of Pakistan includes, but not restricted to, SMEs, street hawkers, smugglers and small shop owners etc.
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