The main causes of Pakistan’s escalating economic crisis

Pakistan needs to implement economic changes due to its ingrained structural issues. It ought to go slowly while implementing well-thought-out changes.

3 mins read
[Illustration provided by the author ]

The economy of Pakistan is struggling, and it is taking some desperate measures to prevent a collapse. The issue is so severe that the country has decided to sell its embassy property in Washington and ordered markets, wedding venues, restaurants, and shopping centers to shut early to preserve electricity, which is mostly produced by imported oil.

Even though the country’s economy has not been doing well for a while, the crisis has recently gotten worse as a result of a number of factors, including: disproportionately higher government involvement in economic activities, a sizable informal economy, agriculture’s continued role as a major employer of labor, a focus on cotton-related production activities, policies biased toward import-substituting activities, disregard for the services economy in public policies, and a low rate of savings.

The economy of Pakistan is now bound by slow growth, high unemployment and inflation, declining investment, large fiscal deficits, and a worsening external balance situation. Due to limited international capital inflows, significant debt repayments, and a sluggish expansion of foreign revenues, foreign currency reserves are rapidly decreasing. Only one month’s worth of imports can now be paid out of Pakistan’s foreign reserves. These are the results of the economy’s fundamental issues not being addressed promptly. In turn, failure to produce “inclusive” development endangers society’s social order.

Pakistan’s savings rate is consistently low compared to the need for investments. This is one of the key causes of our dependence on foreign funding. When foreign money is unavailable, the investment rate declines even further, negatively impacting employment and the economy. The main causes of Pakistan’s poor private savings are: low or negative real interest rates, insecure income, many dependents, low levels of education, high inflation, a lack of saving culture, etc.

The nation’s energy dilemma is mostly caused by circular debt, untargeted subsidies, distribution issues, and theft. Due to high generating costs relative to the price paid by distribution corporations, the government offers significant subsidies.

Large portions of the economy operate informally and are exempt from national rules and regulations. The informal economy is not included in official statistics since it is not registered. Because of this, the majority of official economic statistics show a dire situation. The informal economy has to be recorded.

Losing State-Owned Enterprises (SOEs) uses significant financial resources in addition to paying down massive amounts of debt, hindering economic development and public budgets. The major causes of SOE losses include staff incompetence, overstaffing, inefficiencies, and corruption. The government has been giving SOEs resources to guarantee that these businesses continue to operate. However, SOEs make no real efforts to increase their productivity, efficiency, etc., to make themselves financially viable in the long run. As a result, the government spends significant money annually to ensure SOE existence.

Weak regulatory systems are to blame for a lot of the economic issues. In consequence, inadequate institutional capacity contributes to the lax enforcement of rules and regulations. This is particularly evident regarding how tax and competition rules are applied. People dodge and avoid paying taxes with the help of tax authorities and legal loopholes. The lack of application of competition legislation makes it easier for vendors, in general, to defraud customers on both price and quality.

Pakistan needs to implement economic changes due to its ingrained structural issues. It ought to go slowly while implementing well-thought-out changes. The government must consider the societal effects of changes, such as joblessness, environmental damage, and economic disruption, while enacting them. Additionally, reforms should be planned such that there is no imbalance across the provinces. Strong political will and agreement between the federal and provincial governments are necessary for all of this.

Introduce fundamental changes to the economy, SOEs, and business environment, which will boost investment. The ultimate goal of SOE, restructuring and privatization should be to aid in the restoration of fiscal stability and to increase investor confidence in Pakistan’s future economic prospects and possibilities, which will promote development and job creation. Remove bias from policies discouraging exports, reduce commodity concentration, diversify export markets, and boost exports’ ability to compete globally. This will increase export shares in both international and domestic markets.

To put Pakistan on a path of higher and more inclusive growth, immediate policy changes are required, including: (1 ) strengthening public finances through revenue mobilization, cuts in wasteful and low-priority expenditure, and a strengthened fiscal decentralization framework; (ii) reforming the energy sector to eliminate the power deficit and untargeted subsidies; and (iii) Making the economy less reliant on foreign help for maintaining growth, which would be a significant structural transformation. Though it could take some time, the procedure must start right away. In this sense, policies should be implemented to encourage increased savings among all economic participants.

Any economy’s growth is driven by the private sector. Sadly, the majority of economic policies, particularly those pertaining to finance, are prejudiced against the private sector. As a result, this industry has not had the anticipated effects on the economy. The private sector should permit all economic activity to take the lead, provided that the regulatory framework is efficient. The government’s main responsibility should be to assist the underprivileged with social and physical infrastructure and social safety.

Sahibzada Muhammad Usman

Dr. Sahibzada Muhammad Usman earned his Ph.D. from the University of Pisa, Italy. He is an Assistant Professor and MS Cluster Head in Department of Strategic Studies at Air University, Islamabad, Pakistan.

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