NationalVOLUME 17 ISSUE # 15

Can Pakistan break its boom and bust cycle?

Pakistan has faced booms and busts every three to four years and failed to achieve its true potential. Its current account deficit starts widening when its economic growth accelerates. However, there is a strong possibility that the country will break the cycle and attain sustained growth as a result of recent economic reforms.

Recently, the government has finalised a three-year economic growth strategy, which focuses on trade with China and other sectors to achieve an average growth rate of 5.9pc and per capita income of over $2,100 by 2025. The plan, to be implemented from the beginning of 2023, the last year of Prime Minister Imran Khan’s term, seeks to achieve sustainable growth by focusing on economic relations with China and the sectors with a competitive advantage.

Pakistan’s textile exports have touched a historic high of $11b during the last seven months of the current fiscal year, up by 25% YoY, data released by the Pakistan Bureau of Statistics (PBS) shows. In January, textile exports remained above the $1.5b level as it was $1.55b, up by 17% YoY. The year-on-year increase in the exports is due to the strong pent-up demand ahead of the summer season in the West while other factors include resumption of normal economic activities which led to shortages at various retail brands, competitive utility and borrowing rates, as well as continued US-China trade rift, have favoured Pakistan, a report by Intermarket Securities (IMS) said.

Pakistan IT exports are also expected to reach $50b in the next few years after the government has announced a number of incentives. In a span of two years, Pakistan’s IT exports have jumped from $2 billion to $3.75 billion. The exports increased by 36% during the current fiscal year.

The latest data shows Pakistan has embarked on the road to sustained growth after decades of failure to reform its economy, though external and internal pressures still exist. According to a new report by the Asian Development Bank, Pakistan has the potential of becoming a hub of economic activity for Central, South and West Asian countries if it follows the model of economic corridor development (ECD). The ADB study, titled “Economic Corridor Development in Pakistan: Concept, Framework, and Case Studies”, examined how Pakistan could address economic challenges through ECD. “Through market reforms, Pakistan needs to transform its economy into an export-led growth trajectory. In addition to improving the economy’s competitiveness and productivity with a vibrant private sector, it is critical to attracting domestic and foreign investments to support this transformation,” it suggests.

The report observed that Pakistan had already adopted and implemented an ECD-focused strategy as part of its core development and growth framework. “ECD can be one of the most credible ways to help the government achieve its socio-economic objectives of reaching the upper-middle-income status by 2025.” However, it cautioned that private sector development and a fair and efficient tax system were also required for transforming the economy to export-led growth. Defining ECD, the study said that it aimed to promote economic growth by connecting different economic agents along defined geographic areas.

The study pointed out that Pakistan currently lacked the administrative machinery for effectively managing ECD. “Its complex tax administration and compliance requirements impede growth and expansion of private investment, project management and implementation are weak, and a coherent regulatory framework for land use and urban development is lacking,” it noted. When implemented successfully, ECD supports economies of scale and scope and induces economic transformation and diversification through foreign direct investment. By enhancing domestic connectivity and linking lagging regions, including secondary cities with urban growth centres, ECD can help Pakistan become a hub of economic activity for Central, South, and West Asian countries. Pakistan could “revitalise” its economic growth through facilitating economic centres by bolstering them with an efficient transport network based on “robust infrastructure and supported by a business-enabling policy framework”.

The study proposed several recommendations which could enable Pakistan to tackle the challenges, including empowering a central corridor planning and development agency to oversee the overall development and management of ECD, strengthening an overall policy framework for ECD, including streamlining policies for transport, logistics, public-private partnerships, land use, zoning regulations, business regulatory framework and taxation regimes, providing institutional support for skills development to align labour force skills with industry needs. It also suggests linking current industrial clusters and urban areas with new industrial hubs and urban centres through infrastructure networks, and seeks ways to channel partial resources from overseas Pakistanis into profitable investment ventures to fund ECD-related projects. The study also identified four routes that could be used for a pilot ECD programme: M4 Motorway linking Faisalabad and Multan, N70 (national highway) connecting Multan and Killa Saifullah, N50 (national highway) linking Dera Ismail Khan and Kachlak, and the Hazara Motorway (E35 Expressway) from Islamabad to Mansehra.

According to the International Monetary Fund, Pakistan had entered the Covid-19 pandemic with strengthened buffers and “a strong economic recovery has gained hold since summer 2020, benefiting from the authorities’ multifaceted policy response to the unprecedented shock. But external pressures started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate which also reinforced domestic price pressures.” It warned that Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions, as well as delayed implementation of structural reforms. It reminded Pakistan that strengthening the medium-term outlook “hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy”. To this end, the IMF suggested increased focus on measures to strengthen economic productivity, investment, and private sector development, as well as on the challenges posed by climate change. “Further ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy will help unlock sustainable and resilient growth. Making those extra efforts would also foster job creation and improve social outcomes for the benefit of all Pakistani citizens,” it noted

The government is set to announce more incentives for exporters to new markets such as Africa, South America, and Central Asia. Pakistan can overcome its economic problems and solve public issues by enhancing exports and improving tax collection. It will not only help create jobs but also lift people out of poverty.