Pakistan’s Economy: long term direction?

Pakistan has been lauded internationally for its effective management of the Covid-19 crisis, the economy which took a significant hit recovered surprisingly well. But to continue on a growth path it needs reforms to deregulate, industrialize and digitize the economy.


Pakistan’s economy: Maintaining the economic growth momentum

They say numbers do not lie. Understanding them in the context of the situation adds even more meaning to them. The government is celebrating the pleasant surprise of recording nearly 4 percent growth in the outgoing fiscal year, but its detractors dismiss the figures as being fudged.

However, the upbeat economic activity shows that Pakistan has handled COVID-induced shocks better than many regional peers. To counter the pandemic, the government had announced a well-calibrated and targeted Rs. 2 trillion stimulus package that revived business and investment activity, prevented mass layoffs, and supported the most vulnerable segments of society.

As a result, the 9-month current account is in a surplus for the first time in 17 years, while foreign exchange reserves are 4-year high. Nonetheless, the big question for Pakistan is how to sustain this economic momentum and trickle down its benefits to the everyday person while avoiding the all too familiar boom-bust cycles?

We need new solutions to our complex, age-old problems. To achieve sustainable and export-led growth, the government must deregulate, industrialize and digitize the economy.

During the last three decades, Pakistan’s economy has only twice witnessed a growth of over 5 percent for two or more successive years. The new Finance Minister Shaukat Tarin has set ambitious growth targets of 5 percent by the end of next year and 6 percent the following year.

However, the IMF projections show Pakistan will not record 5 percent growth before 2026 as it faces challenges in implementing reforms and the inability to generate investment and savings to bolster GDP at a sustainable level.

The country’s investment to GDP ratio has declined from 15.5 percent to 15.2 percent, which is much lower than China (43.1 percent), India (29.5 percent), and Bangladesh (31.8 percent).

Read More: Pakistan’s housing market is leading the economy: What has changed?

Resultantly, the economy relies on higher import-led consumption and external financing for growth, which eventually becomes stalled after a brief uptick due to the emergence of the current account and balance of payment crisis.

Catching the investors eye

For inclusive and sustained growth, Pakistan needs to break free from the low investment trap. Besides maintaining macroeconomic stability, the government seems to be aware that it must tackle structural and regulatory constraints to encourage investments. In recent years, CPEC has remained the principal foreign investment in Pakistan.

Other investors have stayed away from the market or made investments only in consumer-oriented products instead of export-oriented sectors. Local investors have also pointed out that the manufacturing industry is presently contributing taxes disproportionate to its share of GDP, which hampers job creation, value-added exports, and import substitution.

There is a dire need to reform the taxation regime to make it more straightforward, more predictable and encourage formalization of the economy by broadening the tax base.

According to Pakistan Business Council, a business advocacy group, “With disproportionate burden of taxes, a long period of unrealistic exchange rate, unsupportive import tariffs, poorly negotiated free trade agreement with China, power outages and now uncompetitive energy cost, smuggling, under-invoicing, illicit trade and the crowding out of private sector from borrowing, the role of manufacturing in the economy has declined,” PBC said.

Excessive regulations and government interference in the free market economy are another reason that keeps investment at bay in Pakistan. These arbitrary government interventions actively discourage investors to forego innovation and efficiency while pushing the economy towards informalization and hurting consumer interests.

Read More: Hammad says Pak economy to grow at 5%

Overregulation of critical sectors, such as power and energy, has led to operational and commercial inefficiencies, governance issues, ineffective planning, and high cost for consumers.

Pakistan's Economy
Source: USDA-FAS Global Agricultural Trade System (GATS) – WTO Definition

It is not surprising then that Pakistan has one of the highest electricity tariffs in the region at around 12 cents/kWh (versus a regional average of 7.5 cents/kWh), which makes them more competitive globally and reap the benefits export-led growth.

Therefore, deregulation of the economy is vital to invite greater participation and investment from the private sector that otherwise is constrained by bureaucratic hurdles and rent-seeking behavior.

Utilizing our agriculture

In agriculture, the government has developed a comprehensive Agriculture Transformation Plan, but it will only yield the desired results when the farmer can control factors that impact his income and productivity.

With excessive government intervention in procurement, fixing support prices, and across-the-board subsidies, stakeholders lack incentives to boost their productivity and quality. The government’s aim to modernize agriculture by promoting corporate farming can only be fulfilled if the sector is deregulated so that private investors can focus on, for example, higher productivity per animal rather than more animals.

Deregulation in the agriculture sector will create room for more budgetary allocations in the public sector by targeting subsidies towards subsistence farmers, enhancing the delivery of agricultural services and research in the sector.

In this regard, initiatives such as Kisan Card should be implemented by all provinces to reduce inefficiencies and corruption in subsidy disbursement of agricultural inputs, improve farmers’ financial inclusion, and digitize the rural economy.

Read More: PML-N drained $20b from Pakistani economy: Finance Minister

Further, deregulation of the fertilizer sector allows the industry to export 0.7 million tons of surplus urea while the government ensures strategic reserves for domestic consumption can help Pakistan earn around USD 250 million without any additional investment.

The post-COVID world has highlighted the need to accelerate the digitization of the economy through documentation of the informal economy, higher penetration of internet and communication technologies, and upskilling the workforce for the future economy.

The digital economy in Pakistan was bolstered by the deregulation of the telecommunications sector in 2003. Since the advent of the pandemic, new opportunities have opened in e-commerce, internet finance, and digital products and services related to education, healthcare, and workspaces.

According to one estimate, digital platforms and business models will create 70 percent of new value in the economy over the next decade, with digital payments and e-commerce adding $45 billion over the next five years to the country’s GDP.

The government’s Digital Pakistan initiative is a welcome step, but the country needs to make giant leaps to upgrade its digital infrastructure, expand the share of IT exports, focus on youth skill development, and introducing key policy and regulatory framework decisions after multi-stakeholder deliberations to promote access and affordability of digital tools.

With the PTI government set to present its fourth budget, the time is ripe to undertake the much-promised yet challenging reforms to deregulate, industrialize and digitize the economy.

Read More: Pakistan on-track to become 23rd biggest economy, US intelligence

Having experienced a sharp recovery in the last year, the momentum is on Pakistan’s side – let us hope this is not another opportunity lost to populism and myopic policy measures that lead to the characteristic boom-bust cycles.

HOLD ON! BEFORE YOU CONTINUE with your routine, ponder this: How probable is it that the article you've just finished would have been created by another news agency if Global Village Space hadn't taken the initiative?

Imagine a media landscape devoid of Global Village Space. Who would keep the political elite in check, upholding the values they claim to embrace? How many hidden covert operations, injustices, and dystopian technologies would stay concealed if our journalists weren't actively pursuing the truth?

The type of journalism we conduct is crucial to a functioning democracy, but it's neither simple, inexpensive, nor profitable. Global Village Space operates as an independent nonprofit news outlet.

We stand free from corporate influences. Would you support us?

Latest news