Essay on Economic Problems of Pakistan

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Outline:

  1. Introduction: The dismal economic picture.
  2. Low economic growth rate.
  3. Declining investment in manufacturing sector
    • De-industrialization
    • Neglected informal agriculture sector.
  4. Neglected informal economy.
  5. Energy crisis and decaying infrastructure.
  6. Shrinking Foreign Direct Investment (FDI).
  7. Sluggish Revenue collection
    • Low Tax collection (Tax-to-GDP ratio).
    • Tax evasion/tax amnesty schemes.
  8. Corrupt and inefficient tax collection system.
  9. Rolling Debt and Balance of Payment crises.
    • Burgeoning budgetary deficit.
    • Excessive borrowing.
  10. Devaluation of rupee.
  11. Current Account deficit.
  12. Implication of worsening law and order situation on overall economic growth
  13. Bad law and order situation is hampering economic recovery.
  14. Huge sums are to be allocated to defence and scanty apparatus at the cost of social and developmental projects.
  15. Political instability
    • Weak and corrupt central government.
    • Clash-like situation between state institutions.
  16. Corrupt system of governance
    • Structural and institutional fault-lines.
    • Fiasco of policy implementation.
    • Faulty trade policy and planning.
  17. Trade deficit
    • Declining exports.
    • Increasing import bill.
  18. Loss making public sector enterprises (PSEs)
  19. Effects of bleeding economic out look
    • Low human development index.
    • Unemployment.
    • Increasing inflation.
    • Poverty trap widened.
    • Brain drainage.
    • Toll on overall social development.
  20. Suggestion to salvage the economic recovery
    • Need to improve security situation.
    • Need to introduce structural and organizational reforms in the economic model.
    • Need to promote regional trade.
    • Sound economic and trade policy.
    • Domestic resource mobilization and domestic trade need to be promoted.
    • Establishment of special economic zones (SEZs).
    • Public-Private partnership for economic growth.
    • Human resource and skill development.
  1. Translating socio-political positive developments into public policy i.e.
    • Growing Remittances
    • Demographic dividends
    • Woman empowerment
    • Normalization of trade with India
    • 18th amendment 7th NFC Award
  2. Conclusion: Economic growth and social development should go side-by-side!

Essay:

“Pakistan is facing a challenging economic out-look (decisive and far-reaching policy action is needed to address this challenging out-look,” said the International Monetary Fund (IMF) in its annual report). The economic problems of Pakistan have seriously jeopardized the very foundations of its polity. Due to dismal economic performance over the year, the socio-political and institutional development of the Pakistan society have been stalled and the security, sovereignty and territorial integrity of the state are mortgaged at international lending institutions. The low economic growth rate is not just a game of numbers, it has serious repercussions for human development. Dismal economic growth signifies that the gap between the rich and the poor is widening; millions are going jobless, unemployment is rising, inflation is sky rocketing, provisions of health and educational facilities are few and far between and every year millions more are pushed below the poverty-line. Successive governments have failed to formulate a viable and pro-poor economic growth model. The fatal fault-lines in the economic framework have hampered the sustainable economic recovery.

The sluggish economic outlook is characterized by a number of factors. They include inter alia slow economic growth, decline in Foreign Direct Investment (FDI), trade deficit, de-industrialization, energy crises, political instability, unemployment, development, increasing public debt, devaluation of rupee, corruption, bad governance and security situation etc. The present regime has miserably failed to improve any of the sectors responsible for the economic hardships of the nation. At the moment our economic system is standing at the verge of collapse. Political ‘will’ to salvage the system and urgent economic reforms can help ameliorate the economic woes of the country. In the coming pages, we will try to explore the causes of economic problems; their effects on the socio-political landscape of the country and finally discuss same suggestions to salvage the economic recovery.

On the top of dismal economic performance sits the low economic growth rate which has hampered the country’s economic recovery. The growth rate of about 3.3 percent is not sufficient to support sustainable economic development. The government in its budget scheme projected the growth rate at 4.4 percent but had miserably failed to achieve that goal. The International Monetary Fund (IMF) estimated growth rate is lowest in South Asia, even behind Bangladesh and Sri Lanka. The low economic performance leads to wide-spread unemployment, poverty, malnutrition, inflation etc. About one million young people enter the labour force of the country every year, to absorb such a huge proposition of unemployment youth in jobs, we need to have at least 7 percent economic growth rate for at least five years. The current trend, however, is just compounding the joblessness and pushing millions move into the poverty trap. All these hardships are hampering investment, both domestic and foreign in employment generating sectors, i.e. manufacturing sectors.

There are reports that a number of textile manufacturers have relocated their industry in other countries such as Bangladesh, Vietnam, Sri Lanka and Tanzania etc. The Government and the economic managers should be mindful of the fact that de-industrialization has heavy toll on the social development of a society. When a factory is shut down either temporarily because of frequent power outages or permanently shifted to another destination—hundreds and thousands of households are forced to starve until their bread-winners have a new job. Apart from its implications on human development, de-industrialization or low industrial growth has serious repercussions for over-all economic development. Economic survey of Pakistan has estimated that the manufacturing sector is employing 14 percent of the workforce, and contributing about 63 percent of taxes and making 25 percent of the GDP.

Another equally neglected area is the agriculture sector that employs 45 percent of the workforce contributes 22 percent to the GDP and paying only 1 percent in income tax. This sector requires urgent reforms in terms of redistribution of cultivable land, bringing the sector into the tax net and improving the lot of the less fortunate peasantry. A report published by the “Sustainable Development Policy Institution” (SDPI) showed a phenomenal increase in the value of crops near the last five years the value added price of wheat, rice, cotton and sugarcane (combined) was 530 Billion Rupees in (2006-07). But added value of the crops jumped to Rs. 1500 Billion in (2011-12). Inspite of this increase in value, no additional taxes are forthcoming. Moreover, the substantial share of profits from agricultural proceeds is pocketed by landed gentry. Thus landlords of this part of the world are not contributing positively in the country’s economic and social development. More often than not, they are at the driving seat of the political system of the state as well. The land mafia is running the political show of the country in a way that furthers its vested interests. They discourage social and infrastructure development projects in their areas (rather fiefdoms). The gist of the matter is that the present politico-economic order favours the perpetuation of vested interests of the elitist groups in Pakistan today.

The informal sector of economy, like agricultural, small and medium enterprises and services sectors employees more than 60 percent of the workforce, it contributes about 35 percent to 50 percent of the GDP. This sector has yet to see the necessary reforms and regulations. According to an International Labour Organization report, the workers employed in the informal sector are more vulnerable to exploitation. They are paid low wages, maltreated, over-worked and are not covered by social security nets. Tax evasions are rampant. The economic and political administrators need to pay special attention to modernize and regularize this expanding sector. A regularized sector of erstwhile informal economy will definitely generate new jobs, improve working conditions and generate new revenues for the cash starve government/exchequer. The services sector, nevertheless, is a redeeming feature of the struggling Pakistani economy. This sector has seen phenomenal growth over the decade. This sector telecom, banking, real estate development marketing—contributes more than 50 percent of the GDP. Its share in jobs and taxes is 41 percent and 36 percent respectively. These sector employees are educated and trained workforce.

A sustainable economic growth requires a balanced growth in all the sectors of the economy. “The dream of sustainable growth can only be realized through structural reforms in the country’s economic model. It further requires reforms in the total system, reforms in energy sector. Uninterrupted provision of energy is the fundamental theme of sustainable economic growth.

Decaying and insufficient infrastructure is another stumbling block on the way to economic recovery Roads, Railways, Communications, Bridges, Transport, Dams, Canals, Sea Ports, Air Ports etc. are either few in number to cater the needs of the economy or insufficient and broken. The infrastructure is too weak to support the march of economic growth. Developmental projects always feature as the lowest priority of the rulers of the country. Budgetary deficit and balance of payment are always procured from the developmental funds that are already on periphery of the budgetary schemes. In such a block scenario foreign investors are reluctant to try their luck in our part of the economic world.

Foreign Direct Investment (FDI) is welcomed as an impetus to the sustainable economic growth of a country especially of a developing one. FDI has multiple economic dividends in terms of sustainable economic growth, creation of new employment opportunities and energy crises has dealt a severe blow to the country’s economic recovery. Industries and other business enterprises are facing acute shortages of electricity and gas. The energy crisis has impeded the country’s economic recovery. In the face of bleeding energy problems the economy is merely surviving, not thriving. The manufacturing units are lying dead across the country. Alternate energy resources are increasing the cost of production, thereby losing the competitive value of Pakistan exports. Foreign investors are reluctant to invest in such a grim situation of economic growth. According to a report of “Pakistan Institute of Development Economists” the power outages are causing 3-4 percent loss to the economic growth rate every year. It further projected that energy crisis has eaten up over Rs. 1.2 Trillion over the last four years. The same is the amount need to build Diamir Bahsa Dam (12 Bn USD). The incumbent government has failed to bridge the gap between electric generation (15,000) and demand (20,000)MW. Reforms in energy sector are needed on war-footing, lest the socio-economic landscape slides into oblivion and darkness. Improvements of a country’s foreign reserve account. The story of FDI in Pakistan is the bulk of foreign investment goes into the services sector (like telecom, Banking etc.), which in turn is not so productive and helpful for economic growth. Secondly, the FDI reached its peak 5-years ago, when
FDI was reported to have crossed 5.3 Bn (USD) (2006-07). But now it has touched lowest ebb-about 810m USD has been reported to have invested by foreign investors during the fiscal years 2011-12. Foreign investors are reluctant to invest in Pakistan mainly for the following resources; energy crises, high interest rate, security situation in country, slow economic growth rate, fiscal crisis in the west and bad governance and corruption at home.

Government generates revenues to meet their expenditures and finance public sector development projects through collection of taxes. But the story to tax collection is quite dismal in Pakistan. Hence we are, more often than not, in short supply of funds to meet expenditures and complete development projects on time. Pakistan is one of the lowest ranked countries in tax-to-GDP ratio. Federal Board of Revenue (FBR) collected Rs. 2.215 Trillion in taxes much lower than the expected Rs. 3.5 Trillion during the current fiscal year (2011-12). While the country’s fiscal deficit stands at Rs. 1.75 Trillion which is eight (08) percent of the GDP.

Tax evasion is very common phenomenon in the tax regime of Pakistan. A recent report published by National Database and Registration Authority (NADRA) has identified about 1.5 million people who own luxury cars, live in posh areas, have big houses and frequently go on foreign trips. This discovered gentry pay no taxes. Similarly another study conducted by LUMS showed that only Rs. 38 out of Rs. 100 due of tax is collected by the Revenue System. The remaining Rs. 62 is pocketed by tax collector and tax payer. The system of tax collection needs overhauling. The tax-net needs to be widened to cover all formal and informal sectors of the economy. The tax evasion must be dealt with penal liabilities.  Corruption on the part of tax collector should also be brought to an end. Last but not least, tax payer’s money must be used transparently and fairly. It will inspire people’s confidence in the tax system. A transparency International report gave another but interesting account of tax evasion. It said, “another reason for evading taxes is the lack of people’s trust in the tax system and their doubts about appropriate use of their tax money”.

The government has, of lately, announced a tax amnesty scheme, whereby black money could be whitened by paying nominal charges/withholding tax. It is yet to be seen if the scheme helps widen the tax net and generate more funds. The key to improve the economic outlook lies in increasing the tax-to-GDP ratio. Yet another cause of sluggish economic growth is the excessive borrowing of the present govt. In the last five years the foreign debt has reached 62 Billion USD from 42 Bn USD in 2008. The government is also borrowing from the State Bank and the commercial Banks, hence doubting the domestic debt-liability. Despite the fact that “Fiscal liability and debt limitation Act” has set the debt ceiling at 60 percent of the GDP. The national debt currently stands at 62.1 percent of the GDP.

Excessive borrowing is made to meet the fiscal deficit which stands at 08 percent of the GDP or Rs. 1.2 Trillion. The other Herculean task being done by borrowed money is to keep the balance of payment going. Substantial amounts of the revenue go into debt servicing and interest servicing. To cap the fiscal deficit, government has asked for international loans from the IMF and so-called friends of Democratic Pakistan forum. The IMF finished its program in Pakistan last summer when government failed to implement the economic policy reforms as agreed upon between Govt. and the fund. The so-called friends of Democratic Pakistan forum had made pledges to extend financial support to Pakistan but failed to honour their commitments.

If the history and the experience there if anything to go by, foreign aids and debts have done more harm than good to the socio-economic and political landscape of the country. So the sooner the country’s dependence on external capital inflow is reduced the better it is for its economic recovery. The alternate solution lies in the domestic resources mobilization.

The perilous law and order situation has hampered the economic activities across the country. Terrorism and suicide bombing in Khyber Pakhtoon-Khwa have dealt a severe blow to the provincial economy. Target killings in Karachi the commercial capital of the country, have also messed-up the socio-economic and cultural and political activities in the metropolis. The bad law and order situation has two dimensions. First, terrorism and related incidents have caused a loss of about 60 Bn USD to the business and property over the last 10 years. The toll of life is still horrific. Investors, particularly the foreign investors are reluctant to invest in such a volatile atmosphere when both life and property are in great perils secondly, expenditures on defence and security apparatus have increased manifold over the last decade. Thus precious funds and resources that would have been spent on social and human development projects are going to the state security apparatus. It is however, yet to be seen whether the strong security apparatus or the strong economy helps the nations to sail through rough waters!

Political stability is the first and foremost perquisite for sustainable economic growth. Weak and unstable political govt. cannot take tough policy decisions necessary to fix economic woes. Economy cannot grow in an uncertain political environment as political stability is necessary to boost private investment, create jobs and increase production. About political instability and institutional disharmony, the Moody’s investors Service has rightly observed about country’s state of economy. It said, “The institutional disharmony, particularly between judiciary, government and between military and government has hampered the government’s ability to frame effective economic policy and implement governance and financial reforms to salvage the sliding economy.”

The report further said, “……clash-like situation among state organs has undermined government’s ability to formulate policies to address the country’s pressing domestic economic challenges, to bolster investors’ confidence and attract much needed external financial support from officials lenders and donors.”…..

Corrupt governing and slow delivery system have caused great damage to the country’s economic performance. Bad governance has contributed significantly to the incidence of poverty and slow economic growth rate. A report published by the Dr. Mabbob-ul-Haq centre (Lahore), titled:
“Governance for Peoples’ Empowerment”, suggested that the lack of governance of political and economic system has adversely hampered the efforts to attain economic prosperity to improve living standards and cut rising poverty.” Widening trade deficit is another Skeleton in the cupboard of Pakistan’s dismal economic outlook. The trade deficit stands at 15.28 Bn USD. This deficit is mainly because of burgeoning bill of petroleum imports. Our total imports are about 40.5 Bn USD, 12 % up from the previous financial year whereas the exports have declined by 2.8 % from 25.35 Bn (USD) to $24.65 Bn.

Loss making public sector enterprises like railways, PIA, Pakistan Steel mills etc. are a drain on the national exchequer. Instead of generating revenues, government has to bail-out them over time and again. Mismanagement and corruption have retarded this potential to earn profits. If we want to turn these enterprises into profitable ventures, we will have to fix the problems of corruption and mismanagement and rectify the structural and institutional fault-limits. Organizational structure need to be downsized and reduce expenditures regulations need to be introduced to make them competitive with their international counterparts. The pernicious effects of sluggish economic out-look have varied and multifaceted implications for the social and psychological development of an individual and a society. In these lines we will try to expound some of the most pressing and unavoidable implications of a failing economic system.

First, when the economic growth rate is slow but the corresponding population growth rate is high, it inevitably results into unemployment, hence poverty. The current scenario is that over one million persons enter the labour workforce every year, the growth rate of about 3.3 percent is not sufficient to absorb even half of that work force into the economic system. The un-employment rate is about 8.6-9.5 %. This rate will further increase if growth rate remains slow. A Pakistan Institute of Development Economists (PIDE) report suggested that a growth rate of 7% is required to absorb the unemployed, for at least five years. Secondly, the most undesirable but unavoidable consequence of slow economic recovery and unemployment is the increasing incidence of poverty. A report published by “sustainable Development Policy Institute” (SDPI) has portrayed a very grim picture of poverty in Pakistan. According to the report, about 58. 7 million, out of 180 million (about 40%) of population, are living below the poverty line. The institute used the World Bank’s formula of 1.25 Dollars per person per day to compile the results. The province-wise distribution of poverty is given

  •             Punjab – 19%
  •             Sind – 33%
  •             K.P – 32%
  •            Baluchistan – 50%

Pakistan institute of Development Economists (PIDE) report revealed that “lack of Political and economic governance are responsible for the hefty rise in the incidence of poverty inspite of substantial increase in pro-poor expenditures over the years. Both the rural and urban poor continue to suffer multiple deprivations because of corruption, inefficiency and misplaced priorities. Dr. Mehboob-ul-Haq Centre in its report, human development in South Asia, concluded it with the following observation:-

“You cannot expect to cut poverty just by handing out cash to the poor. This requires investment in job generation sectors and improvement in public service delivery to eliminate deprivations to provide equal opportunities to the poor to compete and get out of the poverty trap”.

Thirdly, low economic growth, unemployment and poverty are pushing our men to travel to abroad in search of jobs. Talented and professionals are leaving the country when their country needed them the most to contribute in its economics and social development. This brain drainage has affected the economic growth in more than one ways.

Lastly, (of course not least) the dismal economic show and multiple economic problems have hampered the overall social development of the society. We are not able to improve the quality of education, provide health care facilities to a large segment of the population, safe and clean drinking water and above all to make sure the provision of much chanted dream of “ Rote, Kapra and Makan”.

Increasing inflation has reduced the purchasing power of millions and pushing them into the poverty trap. Lower classes and middles classes are struggling hard to make the ends meet. Inflation has eaten up the savings of the people. Education and health facilities are no more within their reach. Resultantly, the marginalized sections of society are hit the hardest by the current economic crises. High inflation has tarnished our human development index.

Now let us examine some practical suggestions to fix the current economic woes of the country. First of all we will have to improve the security situation in the country. Person and property of the businessmen need to be protected. Secondly, urgent introduction of structural and institutional reforms are needed to put the economic cart on the motorway of sustainable economic adviser to the Federal Govt. to chalk out and implement deep-rooted structural and organizational reforms if it wants to achieve sustainable economic growth.

“Without fixing the structural fault linesin the economy, Pakistan cannot hope to grow its economy sustainably” – Sustainable Development Policy Institute”

Thirdly, the ongoing global economic recessions inter alia, has reduced the share of developing countries in international trade the trend has changed in favour of regional trade. Thus economies of South Asia can enormously benefit from regional trade. SAARC should be transformed into economic and trading bloc. Normalization of the economic ties between India and Pakistan will benefit both countries and the region at large. There is a huge potential in the South Asian Region to emerge on the lines of ASEAN as a trading bloc.

Fourthly, sound economic policies must be formulated and sternly implemented.  Reforms should be introduced in loss making. Dependence on external capital inflow should be minimized by captivating domestic resource mobilization and reducing non-developmental expenditures. Austerity measures should be adopted.

Fifthly, the downward slid of economic growth can also be arrested/checked by stimulating domestic resource mobilization. Tax system will have to be improved. Tax net needs to be widened to generate additional funds. Moreover, domestic trade should be promoted. It will create employment opportunities and accelerate indigenous business activities. Dr. Nadeem-ul-Haq, chairman planning commission reported to have said,

“Retail is the front end of all business activity. It has to be supported by competitive market for whole sale, warehouse, real estate development and transport.”

Sixthly, special attention should be given to the establishment of special Economic Zones (SEZs). These special zones will attract foreign investment, because they offer special tax cuts, transportation and infrastructural facilities. In this backdrop, CPEC is expected to boost the economic recovery of Pakistan. It may prove to be game change for Pakistan and help to create more jobs.

Seventhly, human resource development and skill development can help to promote a positive trend in the economic performance of the country. About 60 percent population aged between 25 to 30 years. This great demographic dividend can play a significant role in economic development if harnessed and employed. Most of our workforces are untrained and unskilled if they can be adequately trained and equipped with modern skill, they can increase their dividends for the economy. Similarly, overseas workforce skilled and professionals are more likely to earn big wages and send huge remittances.

Last but not least, that inspite of sluggish economic picture, the recent encourage development on the social and political landscape of polity and play a dramatic role in the economic recovery of Pakistan. There are reasons to be optimistic that of these positive developments are translated into public policy. They will pay-off in terms of progress and prosperity of the nation. They include:-

  • Growing remittances they have stabilized the current account deficit and improved the country’s external capital inflow. Remittances should be motivated to invest in manufacturing sectors.
  • 60 percent youth of the country if put on work will help accelerate the economic recovery.
  • Successful launch of CPEC programs.
  • Educated and skilled women should be encouraged to participate productively and constructively in the economic life of the nation.
  • Normalization of trade links between India and Pakistan can help boost bilateral trade between two neighbours. It is expected to reach 8 Bn within one year.

The problems of Pakistani economy can only be fixed by deep rooted structural and institutional reforms. Economic growth and social development must go side by side. An economic growth model which does not care for the

social end results is a failure by default. The economic growth must yield social development in terms of universal quality education healthcare and above all social security rest for all citizenry.

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