Pakistan’s economy is mired in myriad problems and has been in a state of stagnation for a long time. The problems include structural deficiencies, policy hip-hops and faulty implementation of projects and programs. Needless to say, without thorough-going reforms, there is no hope of coming out of the rut we are in. Instead of mobilising indigenous resources, the government relies on foreign loans and IMF bailouts.
The issues crying out for a solution include continuing fiscal deficits, a narrow tax base, energy shortages and stagnant industrial production and exports. Over the past few decades, the export-import gap has widened and Pakistan’s export-to-GDP ratio has declined dangerously. Due to over-reliance on low-value textiles and lack of diversification, the economy is at the mercy of external shocks and currency fluctuations. Pakistan is a medium size economy but our export income is lower as compared to many low-income countries.
On the other hand, the energy crisis has shattered the economy because power rates have become unaffordable for the industrial sector as well as the general consumer. Agriculture is another sector which has declined due to persistent neglect of its needs by successive governments. We have not modernised farming techniques, nor invested in irrigation infrastructure. The result is that from being a food surplus country in the past we have become a food insecure one at present.
The export sector is the lifeline of an economy and provides a strong base for sustained growth. To increase exports, the government should adopt measures to incentivise value-added manufacturing and technology-driven sectors. Countries like Vietnam and Bangladesh have successfully leveraged global supply chain networks to boost their exports. For this purpose, Pakistan should make it easy for everyone to do business by streamlining customs procedures, and offering targeted subsidies to exporters. Deficits and dwindling foreign reserves are symptoms of deeper structural issues. Export-led growth, driven by innovation and competitiveness, is the only viable path forward.
To ensure sufficient and affordable energy supply, steps are needed to promote infrastructural investment in renewable energy, together with reforming the distribution companies which are notorious for inefficiency and corruption. The circular debt issue must also be speedily resolved to restore the health of the power sector. A major issue is the reliable availability of energy at affordable rates. Currently, the energy availability is sufficient, given the installed power capacity and long-term contracts to purchase energy. However, due to exorbitant rates, demand has significantly decreased. Consumers have shifted to alternate energy sources, with solar power generation leading the way. As a result of this, capacity utilization has dropped to 45 percent during peak months and only 25 percent in off-peak months. The remedy does not lie in imposing punitive taxes on solar energy as is being considered now but scrapping the unjust and unjustifiable agreements with the IPPs which have become a parasite for the energy sector.
The agriculture sector is the backbone of the economy and its revival can yield numerous benefits. Banks should be advised to offer low-interest credit facilities to small farmers to enhance output and boost rural incomes. This, in turn, can reduce urban migration and ease pressure on urban infrastructure. Agro-based industries should be incentivised to create new employment opportunities in the rural areas and produce exportable goods for exports.
Simultaneously, there is an urgent need for documentation of the informal economy. For this we need to leverage technology to track transactions and incentivise digital payments which will go a long way to broaden the tax base. It is also important to mention here that policy inconsistency is the biggest hurdle to foreign and domestic investment. To this end a new charter of economy should be signed by all political parties to isolate economic policymaking and key reforms from political changes at the highest level.
Another major challenge is taxation. At current tax rates, capital formation is not viable in Pakistan. Many investors are moving their funds to countries with lower tax rates. Rationalizing tax rates is critical to attracting investment. Pakistan’s economy direly needs investment in productive sectors in general and exports in particular to break free from the cycle of balance of payment crises. To achieve this, the country needs savings which can be increased by making fiscal austerity imperative. At the same time, taxation rates must be lowered, and the tax net broadened to incentivize capital formation in manufacturing sectors. Sustainable growth hinges on expanding the tax net and reducing reliance on indirect taxation.
Our economic predicament calls for well calculated and bold policy reforms. This requires a strong political will which no government in power has ever shown. The time has come to overcome political and bureaucratic inertia and formulate short and medium-term programs to rescue the economy.