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Thursday, February 15, 2024

Analyzing Pakistan’s poor economic engine

Over the past few years, Pakistan's economy is in a consistent nose-dive, and it seems nothing is going to hinder its possible collapse. In the last days of the PML-N government, the trajectory of economic downslide was evident, exports were easily offset by soaring imports, swelling the trade deficit to a staggering $33.9 billion during July-May fiscal year.

Pakistan, home to 220 million people, has never witnessed its economy taking off. Pakistan’s economy has largely remained in deep waters, however, the period between 1960 and 1970 is an exception. In the 60s and 70s, Pakistan’s economy was flourishing with an exceptional average annual GDP of 6.8 and 4.8 respectively. Sadly, the economic growth of Pakistan has never remained stable from its inception to the current date. It’s rightfully claimed that Pakistan’s economy was higher in the 60s and 70s, lower in 1990, partially consistent in 2000, and collapsed in 2020.

Pakistan has definitely seen short periods of growth, however that growth lacked development, paving the way for only a tiny elite to fill their bags, while the poor have mainly remained illiterate and impoverished. After Pakistan gained independence it was a poor state; had little to offer to its people; it was fighting for its survival. Feeding a country of 30 million people was no less than a challenge, particularly when Pakistan only had 200 million worth of foreign reserves. In 1950, under General Ayub’s regime, Pakistan took its first-ever aid worth 500 million in the face of challenges it was facing.

Read more: Pakistan economy in long term ICU – Editorial

Many believe it was taken to increase military spending in a bid to defend its borders

Pakistan’s reliance on loans and aid started in the 1950s and the legacy still continues to date. Pakistan, a proud nuclear-armed state, took the first International Monetary Fund (IMF) loan in 1958, still, it’s trying, perhaps aimlessly, to get rid of IMF’s loan grip, however to no avail. Time and again Pakistan falls into a macroeconomic crisis, each time it resorts to loans. Undoubtedly, every country faces economic challenges one time or another and in times of hardship seek loans, yet they stand on their feet thereafter and never again fall prey to the tempting loans. How Pakistani leaders have handled and now handling the economy is heart-throbbing. No country deserves such brutal treatment as Pakistan has to confront.

Over the past few years, Pakistan’s economy is in a consistent nose-dive, and it seems nothing is going to hinder its possible collapse. In the last days of the PML-N government, the trajectory of economic downslide was evident, exports were easily offset by soaring imports, swelling the trade deficit to a staggering $33.9 billion during July-May fiscal year. The incoming government, PTI, under the leadership of the then-premier Imran Khan, therefore, had to rush to friendly countries namely, China and Gulf states to rescue its dwindling economy.

Thankfully with friends’ assistance coupled with the IMF bailout package, probable economic collapse was curtailed. When Imran Khan came into power, the country’s economic situation badly deteriorated and was accompanied by FATF, it just got worse for a country already battling an economic crisis.

The current account deficit of Pakistan when Imran khan assumed the charge was at an alarming $18 billion, while the depleting foreign reserves were hanging at an astounding rate of $10.03 billion. The then Prime minister had to turn to IMF, albeit reluctantly, as he attempted to keep the country’s economy afloat. Signing a $6bn bailout package helped to avert the severe economic crisis, stabilized the economy and created certainty in markets. Not long after PTI came into power it had to encounter myriad socio-economic challenges. The major challenge was Covid-19, which raised alarms not only for Pakistan but for the International community at large.

PTI cautiously navigated through the challenge posed by Covid-19, managing to provide a stimulus package amounting to Rs 1.2 trillion for vulnerable groups of society, accommodated with smart lockdowns. However, the policies undertaken were directed toward resolving the problem at hand and were therefore aimed for the short-term, barring the government from taking any concrete steps necessary to improve the overall position of the economy. Once the Corona spread, the international growth prospect declined, certainly this put a dent in Pakistan’s position as well. As the World was grappling and recovering from Corona, Russia invaded Ukraine, shunning hope of any recovery, let alone growth. Russia’s special operation did not put a hold on the world’s growth, but in fact, it put them in reverse gears.

Read more: Did Pakistan economy really progress under PM Khan?

For Pakistan, it was apocalyptic, no less than a nightmare. In a country whose large proportion of imports is of oil, accelerating oil prices pressured its reserves. Amid rising oil prices, Imran khan gave subsidies on petrol and diesel of Rs 10/liter, putting additional pressure on the country’s foreign reserves and compromising on much-needed revenue as well. Imports of wheat account for about 45%, and this too, caused supply shortages, resulting in subsequent price hikes. Major economies were unable to wean off the impact Russian war, for developing economies it was even worse. Srilanka had to undergo a severe politico-economic crisis, leading to its default. Pakistan too had to encounter political unrest in the backdrop of an economic downslide.

Some analysts also claimed that Pakistan could become the next Srilanka. Post Imran Khan’s ouster the incumbent PM Shehbaz Sharif came into power impromptu. The situation of Pakistan’s economy was similar to the one when the PML-N left back in 2018. Shehbaz Sharif, the incumbent PM, akin to his predecessor, had to rush to friendly countries in an effort to safeguard Pakistan from going into default.

When Shehbaz Sharif took charge, the economic environment was similar, if not worse, than when his party left in 2018. Imran Khan left foreign reserves hovering at $22Bn, though it’s contested. Some also claim it to be the highest reserve any government has ever left in the treasury. It is an impertinent proposition as the leaders have to rush for loans anyway. The primary task of every incoming government is nothing but to knock on the doors of the IMF for its bailout package, such as in the case of Pakistan’s economy.

Why Pakistan, a 73-year-old state, after so many years is still impuissant to get rid of loans? Despite the fact that there are various reasons, one of the prevailing factors considered important is, low exports. Pakistan’s manufactured exports in the 1960s were higher than those of the Philippines, Malaysia, Thailand, and Indonesia. Due to a lack of economic wisdom and vision, Pakistan has fallen far behind its neighbors and the world as a whole. Just in the month of may, Pakistan’s current account deficit reached a startling $1.4bn, totaling to $15.2bn. Constantly soaring deficits pressured the exchange rate, fanned currency depreciation, and derailed the country’s economy.

If exports aren’t increased, the economic outlook will remain static and economically stagnant. The exports in 9MFY22 ballooned 25% to 23.2bn, yet it was easily outweighed by imports which clocked at $62.13bn, growing faster than exports. Imports grew unstoppably in midst of depreciating rupee value. To suggest reducing the level of imports through restrictive measures would be absurd. This may provide breathing space, but that would be short-lived and in the long run, it would be counter-productive. Rather focus should be designed towards increasing level of exports, which will be far more effective, cementing Pakistan’s long-term growth. A low level of exports leaves the whole economy in jeopardy. Not only does it pressurizes the exchange rate but also burdens countries to compensate for the trade deficit. Due to this very reason, most economies seek loans, hence becoming indebted.

Read more: Matiari-Lahore transmission line to boost Pakistan economy: China

Irrational policies maintained by complex incentives offered to the industry have handicapped the export market. One of the possible ways to push exports should be through I.T and software. Pakistan can exploit the market potential of this industry, which is easy as there’s no complex procedure, and inexpensive too. Pakistan’s I.T export increased by 44% during FY2020. Surely, it can grow more. With minimal effort and government support, I.T can do wonders in the export market, leading to a better financial position of Pakistan.

Similarly, SMEs are the backbone of any country’s economy, and Pakistan is no exception. Pakistan’s economy comprises around 3.3 million SMEs, making over 30% of Pakistan’s GDP and approximately generating 25% of exports. Undoubtedly, SMEs have buttressed Pakistan’s economy, with right policies they have the capability to take our exports to another level.

The way forward

Only if economic success was dependent upon exports, things for Pakistan might have gotten better a time long back. However, this isn’t the scenario. There Are other factors that are equally, if not more relevant than exports, these include; lack of good governance, inconsistent policies, and political instability, to name a few. The lack of good governance is an important impediment in viable economic growth. Apart from contributing to institutional inefficiency, due to this, scores of aspiring investors remain discontent. Pakistan should have a holistic approach with regard to improving the economy, failure to do so would have an inimical impact on the country’s future.

Pakistan faces extreme challenges both internally and externally, prominent among them is that of extremism and terrorism. Therefore, it’s highly essential to have a sound economy. It’s self-evident that poor economic condition harbours extremist elements as well as terrorists. It’s the need of the hour that all the concerned authorities and all the stakeholders should sit together and decide what and how to take progressive measures to ensure economic success. Pakistan, once the fastest growing Asian country now lags far behind its neighbouring countries. Almost all economies have surpassed us. It should come as no surprise that Pakistan can’t even compete with Bangladesh, which was a part of Pakistan once, let alone compete with India.

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This very reason has given India the leverage over Pakistan on international stage, which it exercises to further its ends every now and then. Pakistan has to step up and stand on its own feet, repeatedly and thankfully friendly countries have come to aid amid deepening economic turmoil, yet we must not be ignorant of the fact: every country has its national interests and unlike Pakistan, they’ll hardly compromise on them. We’re living in the world of rapidly changing social and political dynamics. Taking this into account Pakistan may soon become a liability for its friends, who then may become reluctant in sharing Pakistan’s burden, fanning Pakistan’s eventual default.

 

The writer is currently pursuing a degree in Politics and Economics. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.