8.Fundamental problems in the economy of Pakistan
Economy of Pakistan is unstable at best at the moment. Current account deficit had widened to staggering $18 billion (5.7% of GDP) at the end of FY 2017-18. It was largely due to soaring imports level and shrinking exports. Similarly, Country's fiscal deficit hit a five-year high or 6.6 percent of the Gross Domestic Product (GDP) as it was Rs 2,260 billion in absolute terms for the recently-concluded fiscal year of 2017-18 against the targeted 4.1 percent in the budget. Federal Board of Revenue collected revenue of 5228 billion. And total state expenditures stood at whooping $7488 billion. The biggest challenge to the country is the surging external debt which is about to cross the $100 billion mark in a few months.
It was more like a bolt from the blue for the citizens who were being assured by the previous government that the economy had been put on the path of a sustained growth and it had acquired the foundation to withstand any abrupt shock. To back their claims, they were pointing to the fact that the economy of Pakistan grew at the rate of more than 5% for two consecutive years. And projected growth rate for FY 2017-18 was also 5.5%. However, every tall claim proved to be a fiction. The incumbent government in Pakistan told the people that they needed a collective sum of $12 billion to stave off an impending economic disaster. In this regard, first, they had decided to approach the International Monetary Fund for loans to breathe life into the crippled economy. Going to the IMF for loans entails certain risks: give the United States an opportunity to intimidate Pakistan and bear the brunt of a set of stern conditions by the IMF which implies deviation from locally-devised economic reform agenda.
The question arises here;
Why the economy always plunges into perennial cycle of instability and volatility after posting a decent growth for a brief period of time?
Lets go back to the period when Pakistan came into being to find answer to the above question. Pakistan, as a state, inherited a plethora of problems right after the partition. The problems included administrative hiccups, financial crunch, rehabilitation of migrants and dearth of officers to run affairs of the state. To meet financial challenges, the then leaders felt compelled to seek foreign assistance. Of course, the United States was 'graced' with the opportunity to help Pakistan in the hour of need. Thus an example was set for future rulers. Later, security pacts with the United States further enhanced Pakistan's reliance on the former for financial needs for a long period of time. Economy posted higher growth rates on account of massive foreign aid. All the while, successive governments failed to put in place a robust economic system. Our tax-collection regime remained an under-performer. No one really had given attention to building human capital, which is tool to bolster economic performance in modern times. Industry in the country remained below par ,thus failed to keep pace with competitors in the region. Political instability has been a constant feature of Pakistan for the last seventy years. As a matter of fact, a strong political government is required to undertake sweeping reforms in various sectors.
All in all, successive rulers failed to work out a framework to generate enough revenue from local resources to meet a variety of financial needs. They simply became accustomed to meeting financial needs through foreign loans. Whenever foreign assistance was withdrawn for one reason or other, economy plunged into the recurrent cycle of instability. To put it back on the path of stability, rulers had to seek more loans. That is where the IMF repeatedly came into play. That's how the things worked until now. So following fundamental issues needs to be ameliorated to stabilize our economy for good.
Fundamental problems in Pakistan's economic structure
1. Political instability: As has already been said, Pakistan has never been politically stable. Although, politics is a separate domain but it is an undeniable fact that both the fields impact each other a lot. A stable and strong government is indispensable for long term economic policies. In Pakistan, a civilian government is always uncertain about its fate. Therefore, it tends to seek short-term solutions for economic problems that require long-term solution. For example, to build human capital, a government is expected to initiate the process at grass-root level by providing quality education to kids and sustain that quality education till graduate level for the kids. Such an effort requires a long-term planning, while governments last only for five years, if not two or three; and even during their short stint at the helm power, undemocratic forces continue to threaten them. With the linger sword of Damocles, governments fail to undertake requisite economic reforms. Moreover, other countries do not invest in a country which is politically weak and fragile. In recent times, our Stock Market plunged from 54,000 index points to 38,000 index points owing to the political instability.
2. Low tax-to-GDP ratio: Last year, our fiscal deficit stood at around 6% against the set target of 4.1%. This happens when a state fails to generate enough revenue through tax collection, while it has spend more than the revenue it collected to finance various developments projects. Our tax-to-GDP ratio is 10%, which is one of the lowest in the world. India's tax-to-GDP ratio is 21% and China's tax-to-GDP ratio stands at 20%. Only 1.3 million people file tax returns with the FBR. Paltry tax collection restricts options for a government in power. It cannot finance projects which are necessary for sustained economic growth. Moreover, the government fail to continue many development projects, which generally help poor masses. On the whole, such a situation leaves bad impact on economy. To keeps things over the line, the government resorts to seeking loans.
3.Wide gap between imports and exports: It has been a perennial issue in Pakistan that its exports fail to keep pace with its imports. Last year, our total exports were worth $20 billion and imports stood at staggering $50 billion, which paints a clear picture of why our current account deficit widens so quickly. Although, the previous government had imposed duties on the imports of luxury items, it failed to arrest the surge. There are multiple reasons behind the lackluster performance of our export sector. These range from inefficient human capital to infrastructure bottlenecks, to exporters facing financial crunch, to lack of technology and high cost of doing business in the country. All these imperfections and lacunae create hurdles for exporters, who have to compete with efficient competitors in the region.
4. Inefficient human capital: human capital consists of set of resources which define individuals’ overall ability and includes skills, education, training, health and other talents. Pakistan was ranked 124 out 140 countries by the World Bank as far as its human capital is concerned. Human capital proves instrumental in economic growth. Developed countries often thrives exponentially based on the efficiency and overall skill-set of their human capital. Pakistan spends less than 3% of its GDP on education against the demand of 4% as recommended by Alif Alaan. To make the picture more clear, it is unfortunate that we have a literacy rate of 58% , which is a national disgrace. In contemporary era, handling economy requires in-depth knowledge of internal and external markets, various sectors and alpha and omega of international financial institutions. Pakistan ranks 128 out of the 140 countries ranked by the World Economic Forum in 2015-16 in the Global Competitiveness Index.
5. Highly dysfunctional mega public corporations: Mega corporations like Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM) cause accumulated losses of billions of rupees to the state on annual basis. According to a report by the IMF, accumulated losses of public corporations including PIA, power sector and PSM have stood at 1.6 trillion or 4.7% of the GDP. Corruption, maladministration and nepotism are the primary causes behind the poor performance of these corporations. The state has to bear the expenses.
6. Low Foreign Direct Investment Ratio: Pakistan attracts a small amount of foreign investment. According to the Survey of Pakistan report, Pakistan attracted FDI of $2.76 billion in fY2017-18. Of the total outlay, $1.58 billion was the Chinese investment under China-Pakistan Economic corridor. Pakistan was ranked 147 out of 190 countries in ease of doing business index, that explains why we have failed to entice foreign investors to invest in Pakistan. Other factors that contribute to the regressive trend of low investment are political instability, poor law and order situation, extremism and terrorism.
7. Money Laundering: according to International Narcotics control strategy report (2017), Pakistan incur losses of $10 billion annually due to money laundering. People earn money from local resources in Pakistan and stash that money in foreign bank accounts. It is detrimental for the economy of Pakistan in two ways: first, a sum of money which should be invested in Pakistan has been siphoned off; second, those funneling money abroad evade tax. A fragile economy like ours cannot afford an annual flight of $10 billion to foreign countries.
Unless these fundamental challenges to our economy are addressed, the economy will continue to plunge into the vicious cycle of instability. A politically strong government is needed to effectively attend to all these daunting tasks. A robust tax-collection mechanism needs to be put in place to strengthen financial position of governments. It is the need of the hours that our governments learn the importance of humans and begin investing in them for multi-fold benefits. Similarly, law and order situation should be improved on priority basis to win the trust of foreign investors. Any initiative to curtail money laundering will involve other countries. So it is imperative that we sign agreements with them to bring our money back.Ostensibly, incumbent government of Imran Khan is taking a right set of measures to plug loopholes in our economic system. It remains to be seen how he turns the tables on various fronts.
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| Annual economic growth |
It was more like a bolt from the blue for the citizens who were being assured by the previous government that the economy had been put on the path of a sustained growth and it had acquired the foundation to withstand any abrupt shock. To back their claims, they were pointing to the fact that the economy of Pakistan grew at the rate of more than 5% for two consecutive years. And projected growth rate for FY 2017-18 was also 5.5%. However, every tall claim proved to be a fiction. The incumbent government in Pakistan told the people that they needed a collective sum of $12 billion to stave off an impending economic disaster. In this regard, first, they had decided to approach the International Monetary Fund for loans to breathe life into the crippled economy. Going to the IMF for loans entails certain risks: give the United States an opportunity to intimidate Pakistan and bear the brunt of a set of stern conditions by the IMF which implies deviation from locally-devised economic reform agenda.
The question arises here;
Why the economy always plunges into perennial cycle of instability and volatility after posting a decent growth for a brief period of time?
Lets go back to the period when Pakistan came into being to find answer to the above question. Pakistan, as a state, inherited a plethora of problems right after the partition. The problems included administrative hiccups, financial crunch, rehabilitation of migrants and dearth of officers to run affairs of the state. To meet financial challenges, the then leaders felt compelled to seek foreign assistance. Of course, the United States was 'graced' with the opportunity to help Pakistan in the hour of need. Thus an example was set for future rulers. Later, security pacts with the United States further enhanced Pakistan's reliance on the former for financial needs for a long period of time. Economy posted higher growth rates on account of massive foreign aid. All the while, successive governments failed to put in place a robust economic system. Our tax-collection regime remained an under-performer. No one really had given attention to building human capital, which is tool to bolster economic performance in modern times. Industry in the country remained below par ,thus failed to keep pace with competitors in the region. Political instability has been a constant feature of Pakistan for the last seventy years. As a matter of fact, a strong political government is required to undertake sweeping reforms in various sectors.
All in all, successive rulers failed to work out a framework to generate enough revenue from local resources to meet a variety of financial needs. They simply became accustomed to meeting financial needs through foreign loans. Whenever foreign assistance was withdrawn for one reason or other, economy plunged into the recurrent cycle of instability. To put it back on the path of stability, rulers had to seek more loans. That is where the IMF repeatedly came into play. That's how the things worked until now. So following fundamental issues needs to be ameliorated to stabilize our economy for good.
Fundamental problems in Pakistan's economic structure
1. Political instability: As has already been said, Pakistan has never been politically stable. Although, politics is a separate domain but it is an undeniable fact that both the fields impact each other a lot. A stable and strong government is indispensable for long term economic policies. In Pakistan, a civilian government is always uncertain about its fate. Therefore, it tends to seek short-term solutions for economic problems that require long-term solution. For example, to build human capital, a government is expected to initiate the process at grass-root level by providing quality education to kids and sustain that quality education till graduate level for the kids. Such an effort requires a long-term planning, while governments last only for five years, if not two or three; and even during their short stint at the helm power, undemocratic forces continue to threaten them. With the linger sword of Damocles, governments fail to undertake requisite economic reforms. Moreover, other countries do not invest in a country which is politically weak and fragile. In recent times, our Stock Market plunged from 54,000 index points to 38,000 index points owing to the political instability.
2. Low tax-to-GDP ratio: Last year, our fiscal deficit stood at around 6% against the set target of 4.1%. This happens when a state fails to generate enough revenue through tax collection, while it has spend more than the revenue it collected to finance various developments projects. Our tax-to-GDP ratio is 10%, which is one of the lowest in the world. India's tax-to-GDP ratio is 21% and China's tax-to-GDP ratio stands at 20%. Only 1.3 million people file tax returns with the FBR. Paltry tax collection restricts options for a government in power. It cannot finance projects which are necessary for sustained economic growth. Moreover, the government fail to continue many development projects, which generally help poor masses. On the whole, such a situation leaves bad impact on economy. To keeps things over the line, the government resorts to seeking loans.
3.Wide gap between imports and exports: It has been a perennial issue in Pakistan that its exports fail to keep pace with its imports. Last year, our total exports were worth $20 billion and imports stood at staggering $50 billion, which paints a clear picture of why our current account deficit widens so quickly. Although, the previous government had imposed duties on the imports of luxury items, it failed to arrest the surge. There are multiple reasons behind the lackluster performance of our export sector. These range from inefficient human capital to infrastructure bottlenecks, to exporters facing financial crunch, to lack of technology and high cost of doing business in the country. All these imperfections and lacunae create hurdles for exporters, who have to compete with efficient competitors in the region.
4. Inefficient human capital: human capital consists of set of resources which define individuals’ overall ability and includes skills, education, training, health and other talents. Pakistan was ranked 124 out 140 countries by the World Bank as far as its human capital is concerned. Human capital proves instrumental in economic growth. Developed countries often thrives exponentially based on the efficiency and overall skill-set of their human capital. Pakistan spends less than 3% of its GDP on education against the demand of 4% as recommended by Alif Alaan. To make the picture more clear, it is unfortunate that we have a literacy rate of 58% , which is a national disgrace. In contemporary era, handling economy requires in-depth knowledge of internal and external markets, various sectors and alpha and omega of international financial institutions. Pakistan ranks 128 out of the 140 countries ranked by the World Economic Forum in 2015-16 in the Global Competitiveness Index.
5. Highly dysfunctional mega public corporations: Mega corporations like Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM) cause accumulated losses of billions of rupees to the state on annual basis. According to a report by the IMF, accumulated losses of public corporations including PIA, power sector and PSM have stood at 1.6 trillion or 4.7% of the GDP. Corruption, maladministration and nepotism are the primary causes behind the poor performance of these corporations. The state has to bear the expenses.
6. Low Foreign Direct Investment Ratio: Pakistan attracts a small amount of foreign investment. According to the Survey of Pakistan report, Pakistan attracted FDI of $2.76 billion in fY2017-18. Of the total outlay, $1.58 billion was the Chinese investment under China-Pakistan Economic corridor. Pakistan was ranked 147 out of 190 countries in ease of doing business index, that explains why we have failed to entice foreign investors to invest in Pakistan. Other factors that contribute to the regressive trend of low investment are political instability, poor law and order situation, extremism and terrorism.
7. Money Laundering: according to International Narcotics control strategy report (2017), Pakistan incur losses of $10 billion annually due to money laundering. People earn money from local resources in Pakistan and stash that money in foreign bank accounts. It is detrimental for the economy of Pakistan in two ways: first, a sum of money which should be invested in Pakistan has been siphoned off; second, those funneling money abroad evade tax. A fragile economy like ours cannot afford an annual flight of $10 billion to foreign countries.
Unless these fundamental challenges to our economy are addressed, the economy will continue to plunge into the vicious cycle of instability. A politically strong government is needed to effectively attend to all these daunting tasks. A robust tax-collection mechanism needs to be put in place to strengthen financial position of governments. It is the need of the hours that our governments learn the importance of humans and begin investing in them for multi-fold benefits. Similarly, law and order situation should be improved on priority basis to win the trust of foreign investors. Any initiative to curtail money laundering will involve other countries. So it is imperative that we sign agreements with them to bring our money back.Ostensibly, incumbent government of Imran Khan is taking a right set of measures to plug loopholes in our economic system. It remains to be seen how he turns the tables on various fronts.
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