What major Economic Challenges are being faced by Pakistan? What recommendations do you suggest to deal with these issues ?
Major Economic Challenges :
Pakistan has been facing different challenges regarding to its economy. The economic situation of Pakistan is very critical and people are looking towards the solution of these challenges faced by the economy of Pakistan. 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 (IMF) 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 govenment expenditure is earmarked for debt servicing, which cannot be supported by its decrcasing revenues. Already on the Financial Action Task Force's (FATF) grey list, and with the current 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 bankrupcy
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 S18.2 billion in 2018. The major driver of this rising curent 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 imports in general.
The previous govenment focused more on import-led growth strategy to finance large scale rojects 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 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.
Massive Depreciation in the Rupee :
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 ongoig fight against extremism only further burden the economy. Along with a depreciating rupee that has made imnorts costlier, low foreign investment due to Pakistan's security and political challenges has also severely hit its foreign exchange reserves.
Rising Deficit :
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 State Bank Of Pakistan the sharp decline in revenue can be attributed to a fall in development spending, reductions in income and coporate taxes, and taxes on petroleum products, as announced by the previous Pakistan Muslim League-Nawaz(PML-N) government.
Enhancing Exports :
Similarly, the previous government failed to make any significant progress in enhancing 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 Word 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 PTl 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 foreien 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. Thís inflow has increased Pakistan's foreign reserves from $I4.956 hillion 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 Çurrent 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 :
Pakistan has different opportunities which can help it to solve its economic problem. But without tackling long term challenges and problems decisively, country will no longer be able to take advantages of opportunities. Increase in debt, increase in import and decrease in export, low saving, lower investment, low tax collection, lack of policy implementation, excessive taxation are some of the challenges faced by the Pakistan's economy. Some of the solutions of these problems are offering low interest rate, collection of the taxes, proper use of young labor force, use of technology, governance and decentralization.
Decentralization is one of the factors which can help increase the economy of the country. An individual sitting in capital can't identify the needs of the different areas of country but the local people those are living there know exactly what they needed, what are their requirements. One has to transfer power to other, decentralize and delegate authority, provide resources to the local/district governments so that they can take decisions at their own at district level. District government will take decision according to the requirement and the needs of the areas. Local government should report to the provincial govenment about its activities and provincial government should report to federal government. If our government does so we can do more by same resources which are being wasted today. Economic growth rate can be raised from 6-7 percent average to &-9 percent annually.
Interest rate is one of the factors which can increase the economy of country. Government can offer low interest rate to the public so that it becomes easier for the investors to borrow money from the banks and invest it in their business. Return in the form of interest rate should be low so that people do invest their money. Borrowing at low interest rate and investing money will increase the level of demand in the economy. It will increase the demand of labor force to meet the high production level. GDP and living standard of people will improve.
Tax collection can play a vital role to improve the economy of Pakistan. For the past four years, Pakistan has twitnessed 81 percent rise in tax revenue, which is a big plus for Pakistan. There was 5.4% growth in GDP, which is highest and the first time in over a decade. Government should allow Federal BOard of Revenue (FBR) to work as impartially, independently and transparently which will make FBR an efficient and effective tax administration. This will increase the confidence of tax payer in FBR and increase tax collection in fair matter. This higher collection of tax can be used for the development of infrastructure. It will help to create jobs by reducing unemployment and generate income for the millions.
Pakistan is among those countries which has a young labor force which can be bound for its own and global economy. If we tool these young women and men accurately, we increase the female particiapation in labor force, give them knowledge and skills , they can become the labor force for the rest of the world. This will give immense boost to Pakistan's economy . In 2001, worker allowances were less than a billion dollars ; today we have almost 7-8 billion dollars. Currently this can be multiplied by three or four times i we have educated labor force i.e. skilled labor force going for foreing employment. This is the best mode to create employment opportunities because if you have younger people approaching to labor force and you don't have job opportunities for them and train them in the kind of skills which are not necessary only by the National economy but also by the international economy. Pakistan can put over 30 million plus population by drilling training training in various fields to meet the market needs in the age group of 25-35.
Technology has been spreading like a wild fire. 5years ago, not every individual had mobile phone but today 95 milion Pakistanis have mobile phones today. This technology can be used to provide individuals Banking services, information on climate/weather, agriculture extension, health , education etc. Technology particularly the information/communication technology can be used for the betterment of social and economic problems of Pakistan, Pakistan is making good progress on Business-to-Business (B2B) front as software industry
aims to achieve the goal of $5 billion export mark by year 2020 through software development and service out-sourcing which will help to improve economy of country.
While there is a crucial need to fix persistent challenges, more innate reforms are required to improve and attract talent to serve in the businesses and public sector. Instead of politicians, the academics, intellectuals and community leaders should come forward and play their role in social revolution.
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 infrastructe ICT adoption, macroeconomic stability, labor market, skills, financial stability, innovation capacity, etc. The low ranking signifies that the Pakistani government necds to take measures to stimulate economic growth and provide favorable business environment. The country's on going 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 Bangladesh. Pakistan needs to modernize its industrial sector by establishing new plants and equipment to enhance glolbal 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 it now needs to focus more on geoeconomics over geostrategy.
Currently, Pakistan is not taxing its agriculture sector and large businesses äre 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.
