Sikandar Ali

Pakistan is facing a dire macroeconomic crisis which is manifested by rising inflation, depreciating value of currency, dwindling foreign exchange reserves, growing fiscal and current account deficits. The troubled economy of Pakistan is in dire straits and is in the grip of recession. GDP growth of Pakistan had plummeted from the 5.2% for FY18 to 3.4% for FY19.

Short term and impetuous economic policies by the successive governments have brought the economy to stagnation.  Pakistan had no long term fiscal and monetary policies which serve as prerequisite for sustainable development of an economy. In the last financial year alone, RS 1300 billion of government spending were financed by printing money. This further aggravated the country’s fiscal deficit (government expenditure increasing from the government income) to 6.6% .

While looking at the monetary policies, during the rule of previous government, Real Exchange Rate (the buying power of currency in comparison to other currencies) was appreciated without the reduction of gap in the trade deficit. This further wrecked the export sector of the country. Overvalued exchange rate led to the very high levels of imports and low levels of exports.

In the last financial year alone, RS 1300 billion of government spending were financed by printing money.

Pakistan’s formula for the growth is inappropriate with what is required for the sustainable economic development. Pakistan borrows foreign currency loans and builds large scale infrastructural projects and as a result gets the minor growth spurt that fades in a short span of time and the process of acquiring loans is repeated. 30% of Pakistan’s government expenditure is earmarked for the servicing of the debt.

There are certain structural problems that hamper the growth of economy, like the pervasive tax evasion. Taxes garnered hardly form the 20% of Pakistan’s GDP. Pakistan is one of the countries in the world with lowest tax to GDP ratio. Because of structural constraints, Pakistan imposes regressive taxes on the people. Regressive taxation system puts more burden on the low income earner people than on the high income earner people.

During the rule of previous government, Real Exchange Rate was appreciated without the reduction of gap in the trade deficit, which wrecked export sector.

GDP denotes the total income produced within a country. This indicator of economic growth presents the alarming situation of the economy. The government pledged to create 10 million new jobs and 5 million houses that does not seem possible with the current pace of economic growth which will be around 4% at the end of the year. For the the pledge to be fulfilled, the country requires the economic growth to be at somewhere around 9-9.5%.

Pakistan borrows foreign currency loans and builds large scale infrastructural projects and as a result gets the minor growth spurt

There are certain remedial measures that can steer the country out of this economic turmoil. Tax base of the country is very limited and also there is an immense tax evasion in the informal sector of the economy. Only 1% of the population pays income tax. Structural reforms are needed for the enlargement of tax net. Broadening of tax base requires more beyond than trimming the government spending and uprooting of corruption. While extending the tax base, things deleterious to the health be levied higher taxes. Smoking and its complication kills over 108,000 Pakistanis annually. According to Mark Gallagher, a well-known economist, there are certain ways by which tax base of the country can be enhanced. One of the foremost way is to bring those people and companies under the tax system by registering them who have been outside of it. Second, reduce the number of goods and services that are not taxed or lower taxed.

Government must make a push to promote sustainable business development. Industries and business that can improve the export of the country must be boosted. This will help in plugging the gap in trade deficit. Economy of Pakistan is dependent on the consumption led growth that is sustained through the imports. As a consequence, the trade deficit of the country is widening with the rising imports and plunging exports. Export-led growth can put the economy on sustainable track of development.

To Broaden the tax base, Pakistan needs to bring those people and companies under the tax system by registering them, who have been outside of it

State owned enterprises like the railway, energy sector burdening the economy with losses must be revamped. By turning the state owned enterprises into profitable institutions will help the economy in its improvement. RS 400 billion loss is incurred on the national exchequer by the energy sector alone.

Keeping Interest Rate low can be one of the factors in stimulating the economic growth. Borrowing at low interest rate increases investment in business activity in the country. Increased business activity enhances the demand of labor force for meeting the high production level and Pakistan is among the countries whose labor force is dominated by the youth. As a result, gross domestic product (GDP) and living standard of people will start to improve.

On the whole, there are countries which had similar state of economy in the past which are now having a robust economy. Malaysia serves as a good example for a rapid and sustainable economic development and has lessons for Pakistan which desperately needs macroeconomic reforms to improve its struggling economy. The Implementation of such reforms requires the will of political leaders holding the reins of power in the country.

About The Author
Sikandar Ali hails from Larkana, Sindh. He is currently studying International Relations at Quaid-i-Azam University, Islamabad. He is Interested in history Pakistan’s domes issues and global politics. He tweets @Sikandar11211.

The views expressed in this article are solely those of the original author and do not necessarily reflect or represent the views of Rationale-47.


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