Pakistan’s economic woes –

 dwindling foreign exchange reserves,

 low exports

 high inflation

 growing fiscal deficit

 current account deficit

are nothing new, and once again, the country finds itself knocking on the doors of the
International Monetary Fund (IMF) for what will be its 22nd loan. While the exact amount of this
package has not been determined, Pakistan already owes the IMF billions from previous
programs. Indeed, 30.7% of Pakistan’s government expenditure is earmarked for debt
servicing, which cannot be supported by its decreasing revenues. Already on the Financial
Action Task Force’s (FATF) grey list, and with the current Pakistan Tehreek-e-Insaaf (PTI)
government enjoying internal institutional consensus on the national agenda, Pakistan must
focus its attention on resolving its economic woes before it finds itself on the shores of
bankruptcy.

Current State of the Economy

The CURRENT economic situation in Pakistan is indeed worrying. Almost all financial
indicators have seen a downward trend. The growth rate fell by almost 50 percent from 6.2
percent to 3.3 percent. It is expected to go down even further to 2.4 percent next year, which will
be the country's lowest in the past 10 years. The Pakistani rupee has lost a fifth of its value
against the dollar since the beginning of this fiscal year. Inflation is expected to hover around 13
percent over the next 12 months, reaching a 10-year-high as well.

In 2019, Pakistan finds itself facing a dire macroeconomic crisis. It is spending more on imports
than it receives on exports, with its current account deficit having risen from USD $2.7 billion
in 2015 to $18.2 billion in 2018. GDP growth rate for fiscal year 2018-2019 has been 3.3
percent, which is forecasted to further reduce to 2.4 percent in fiscal year 2019-2020 The
major driver of this rising current account deficit is an expanding trade deficit, which is
mostly due to the rising imports AND low exports in general. By the end of June 2018,
the gross public debt of Pakistan reached USD $179.8 billion, showing an increase of $25.2
billion within a year. More than half of this increase in gross public debt was due to an increase
in public external debt, which grew by 30.1%.In 2018, the depreciation of the Pakistani rupee
against the U.S. dollar alone was responsible for an excessive USD $7.9 billion increase in
public external debt. Despite the massive depreciation in the rupee, Pakistani exports
have remainedalmost the same. Meanwhile, the government’s external debt has
also increased from USD $64.1 billion in June 2018 to USD $65.8 billion in January 2019.
The inflation rate is now touching 9.4%, which is a record level high over the last five years
mostly due to rupee depreciation and rising energy prices. In addition, increased defense
spending and its ongoing fight against extremism only further burden the economy. Along with
a depreciating rupee that has made imports costlier, low foreign investment due to Pakistan’s
security and political challenges has also severely hit its foreign exchange reserves.

Despite rising deficits, Pakistan’s tax revenue was only 13% of its GDP in 2018. During the
current fiscal year, the country has seen a decline in its revenues while expenditures have
increased, resulting in a half-year fiscal deficit of 2.7% of GDP, the highest since 2010-
11. According to the State Bank of Pakistan, the sharp decline in revenue can be attributed to a
fall in development spending, reductions in income and corporate taxes, and taxes on petroleum
products, as announced by the previous Pakistan Muslim League-Nawaz (PML-N) government.

Similarly, the previous government failed to make any significant progress in enhancing exports:
in fact, Pakistan’stotal exports fell in real terms during the PML-N’s tenure. In its recent report
“Pakistan @100: Shaping the Future,” the World Bank held weak governance responsible for
the fiscal deficit. Pakistan’s poorly regulated financial system facilitates tax evasion, which
contributes significantly to the growth of the fiscal deficit. Having inherited this economic crisis
from the previous government, the PTI government, led by Prime Minister Imran Khan, has an
enormous task ahead: steer Pakistan’s struggling economy out of a macroeconomic crisis by
fostering economic development.

With its domestic industry in ruins, Pakistan has not been able to rely on consistent foreign
investment for more than stopgap measures. It did recently receive USD $2 billion from the
United Arab Emirates (UAE) through the Abu Dhabi Fund for Development (ADFD), which
provides concessionary development loans. This inflow has increased Pakistan’s foreign reserves
from USD $14.956 billion at the start of March 2019 to $17.398 billion. In February, the Crown
Prince of Saudi Arabia, Mohammad bin Salman, signed seven Memorandums of Understanding
(MoUs) with Pakistan, pledging up to USD $21 billion worth of investment over the next six
years. However, relying only on foreign aid and friendly countries for loans is not enough. If
Pakistan is to tackle its current account deficit in the long run, the government must take
substantial steps to improve the macroeconomic conditions of the country and modernize its
industrial sector to become more competitive in international markets.

The Way Forward: Steps for the Pakistan Government

Pakistan’s economy can only be fixed if we address its most fundamental

structural flaws. This requires an understanding of what ails the economy – a
disparity between public sector spending and income, and an underdeveloped
export base. Unless policymakers take concrete measures to address the
underlying causes of macroeconomic crises, this fiscal situation will repeat
itself every few years.

To make a significant impact on the current account deficit, Pakistan needs to ensure an
investment-friendly environment that attracts more foreign direct investment (FDI), instead of
relying so heavily on foreign aid. According to the World Bank’s Ease of Doing Business
report, Pakistan ranks 136th out of 190 economies. To improve this ranking and draw more
investment, Pakistan should ease customs laws and regulations, improve the security of the
country, and rebrand and boost its international image as a desirable destination for tourism and
industry alike – a goal the current government is set to pursue as it eases its visa policies,
including its introduction of e-visas. It should also encourage domestic investment through
more flexible tax policies, particularly targeting small and medium-sized enterprises
(SMEs). Such measures would reposition Pakistan on the international stage as stable,
competitive ground for foreign investment. Pakistan also needs to focus on building its
domestic industry to expand its export portfolio and enhance its competitiveness in the
international markets. In 2018, Pakistan ranked 107th out of 140 on the Global
Competitiveness Index (GCI), which measures the performance of countries in indicators such
as infrastructure, ICT adoption, macroeconomic stability, labor market, skills, financial stability,
innovation capacity, etc. The low ranking signifies that the Pakistani government needs to take
measures to stimulate economic growth and provide favorable business environment. The
country’s ongoing energy crisis, which has caused significant losses in industry, has led factory
owners to increasingly relocate to countries such as Bangladesh. Moreover, since its exports
currently lose out to low-priced, good-quality products from countries like China and
Bangladesh, Pakistan needs to modernize its industrial sector by establishing new plants
and equipment to enhance global integration. It can do this by investing in research and
development (R&D) to encourage product innovation and enhance labor productivity.

On top of these issues is the larger question of Pakistan’s failure to expand its export
portfolio beyond a few low value-added products, such as textiles, rice, surgical goods,
carpets, sports goods, and leather items, which is one of the largest factors behind its
balance of payments deficit. Broadening the country’s export portfolio and exploring new
export destinations such as Eastern European and Central Asian countries could revitalize
foreign exchange earnings. As a security-oriented state, Pakistan’s priority has never been the
economy, but it now needs to focus more on geoeconomics over geostrategy.

Currently, Pakistan is not taxing its agriculture sector and large businesses are often given big
tax breaks. Hence, Pakistan needs to broaden its tax base – by taxing the agricultural produce of
landlords with big land holdings and stop giving tax amnesties to big businesses – instead of
overburdening current taxpayers, improve fiscal transparency, and strengthen tax collection
coordination at the national and provincial levels to ensure that revenue targets are met. These
steps would go a long way to addressing the myriad financial and deficit issues stemming from
the country’s weak governance.

Conclusion

The coming months are going to be tough for the current government as the rupee is expected to
depreciate further, causing inflation to rise. Pakistan’s economic crisis cannot be resolved
overnight. Support from the IMF and friendly countries like Saudi Arabia, China, and the
UAE will only provide some breathing room in the short term to its shattered economy.
Promoting manufacturing by creating a more investment-friendly environment, broadening its
tax base, and encouraging innovation and modernization in export-led industries are just some of
the most urgent measures the government can take to address the growing fiscal and current
account deficit. Pakistan must take advantage of this moment of hard-won reprieve by building a
truly stable and sustainable economy before it once again finds itself digging its own economic
grave – and that of its people.

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