FeaturedNationalVOLUME 18 ISSUE # 48

Without a paradigm shift, Pakistan’s economy will collapse

The World Bank in its latest report says that Pakistan’s economy slowed sharply in FY23 with real GDP estimated to have contracted by 0.6%. According to the World Bank’s “Pakistan Development Update: Restoring Fiscal Sustainability” released last week, the decline in economic activity was caused by a toxic combination of domestic and external shocks which included the floods of 2022, official restrictions on imports, domestic political uncertainty and rising world commodity prices.

The last fiscal year was a difficult one for Pakistan’s economy. The year was marked by tremendous pressure on domestic prices, fiscal and external accounts and exchange rate. As per the WB report, the difficult economic conditions, along with record high energy and food prices, lower incomes, and the loss of crops and livestock due to the 2022 floods, increased poverty levels which reached 39.4% in FY23 as compared to 34.2% in FY22, with 12.5 million more Pakistanis falling below the poverty line.

All these are indicators showing that Pakistan’s economy is vulnerable to serious domestic and external risks which cannot be minimized without necessary fiscal adjustment and broad-based reforms. The World Bank says that if the IMF Stand-By Arrangement (SBA) is fully implemented and fiscal restraint is observed, real GDP growth may recover to 1.7% in FY24 and 2.4% in FY25.

However, the near-term outlook remains gloomy. As import restrictions have been removed, the current account deficit is projected to widen in the coming months, while inflationary pressure will intensify due to weaker currency and higher domestic energy prices. While the primary deficit is expected to narrow down as fiscal consolidation shows results, the overall fiscal deficit will decline only marginally due to substantially higher interest payments. The economic outlook is further darkened by extremely high downside risks, including debt payment challenges and external sector uncertainties.

The tough economic challenges call for comprehensive reforms in all sectors, including a thorough review of the existing tax policy, reduction in public expenditure and better management of public debt. To regain stability and establish a base for medium-term recovery, the report recommends reforms to withdraw tax exemptions and broaden the tax base through higher taxes on agriculture, property and retailers; improve the quality of public expenditure by reducing open-ended subsidies, improving the financial viability of the energy sector and strengthening management of public debt through better institutions and systems.

In this connection, it is important to add here that last month, the World Bank launched a new programme to initiate debate and discussion on various development policy issues facing Pakistan. The idea behind the programme was to elicit views of a broad range of stakeholders on what fundamental policy decisions are needed to put Pakistan’s economy on the path to sustainable growth and development.

The discussion points included a wide range of reform measures urgently needed to tackle the economic crisis characterized by the current low-growth, anti-development paradigm. A primary requirement is to move away from wasteful and rigid public expenditures benefiting a small elite towards carefully prioritized spending on public services, infrastructure, and investments in climate adaptation, benefiting populations most in need.

Another overdue reform is restructuring of the present tax system which is distortive and inequitable and make it broad-based, efficient and progressive so that it generates sufficient revenues to significantly increase public investment in human development, infrastructure, and climate adaptation.

Agriculture is another sector which is a victim of wrong policy decisions. The need is to guide and enable the farmers from a low-value, low-productivity farming towards a more market-driven, productive agricultural system, including value chains that are resilient to climate change impacts and water scarcity. Similarly, energy sector policies call for a complete overhaul because they cause high energy costs, environmental damage, and unsustainable accumulation of debt. Instead we need to develop an energy system that is efficient, sustainable and resilient generation and distribution, based on accurate price signals, increased competition and private participation, and a cleaner energy mix.

Last but not the least, thinking out of the box, we must discard wholesale the present economic model which is rigid, stagnant, and unproductive with a large state presence and move towards a dynamic and open economy driven by private investment and exports. The plain truth is that the present economic system has failed to deliver. Large sections of the population are sinking deeper and deeper into poverty, as a small elite has grabbed all the goodies and adopted an indecently luxurious lifestyle. Such a situation is unsustainable and must be changed if we want to avert total disaster.