ECONOMY OF PAKISTAN - CHALLENGES & OPPORTUNITIES
Mar 26 - Apr 1, 2012
Since independence, Pakistan's growth experience has been both impressive and disappointing. Pakistan is able to become self-sufficient in food with an ever-increasing population whereas various structural changes transformed a predominantly agrarian economy to a more diversified production structure and later to a trading country.
Now manufactures account for 80 per cent of the country's exports. But, there is a sense of disappointment too. Social indicators are among one of the worst in the developing countries. Income inequalities, rural urban disparities, and gender differentials have worsened over time.
Pakistan's economy in recent years demonstrated mixed signals. In the domestic sector, there are indications of strong production performance in the crop sector as well as positive turnaround in industrial investment whereas positive is offset by negative energy shortfalls. According to the economic survey of Pakistan, "The economy has considerably lost significant growth momentum during last three years as the economic growth averaged just 2.6 percent as against 5.3 percent in the preceding eight years. There are many reasons for deceleration of growth momentum like massive terms of trade shock of 2008, global financial crisis, intensification of war on terror, security hazards, and high profile killings."
Presently, the economy is broadly facing five main challenges: i) heavy external and domestic indebtedness; ii) high fiscal deficit with low revenue generation capacity; iii) rising poverty and unemployment; iv) weak balance of payments; and v) energy shortage. Hence, it is facing the threat of economic downturn due to high inflation, global recession, ever increasing oil prices, energy shortages, stagnant exports, unstable foreign exchange reserves, a depreciating currency, and slowdown in investment activities.
The country is also facing lack of developed physical infrastructure i.e. power, gas pipelines, and terminals, ports, railways, roads and highways and airports. The inefficiencies of utility companies, exceptionally high transmission losses, circular debt, and nonpayment of electricity dues have further aggravated the situation. Pakistan has huge investment opportunities in each of these areas. Government has given a lot of incentives to the prospective investors including fiscal incentives which can attract foreign investment.
Globalization has demolished barriers and increased economic interdependence. This in turn has positive and negative consequences on Pakistan's economy. On the positive side, the rate of investments and capital movement increased while on the negative side, the recent global economic crisis, including the US financial crisis and the debt problems of some EU countries, seriously impacted the investment appetite of foreign companies and export credit agencies for Pakistan.
Pakistan also needs to invest in the human development as nothing concrete has done in this field since independence. Almost half of the country's population is youth and there is a dire need to engage them in the productive activities. Neglecting education, training, skills, and professional development has impaired Pakistan's capacity to develop quality people.
Various foreign countries are offering numerous incentives to highly skilled people of the third world countries and millions of doctors, engineers, accountants, IT professionals, bankers, and teachers from Pakistan are migrating to those countries. Reduction in poverty and improvement in the quality of life of the people can only be possible by investing in the education and health sector.
Since 2001, Pakistan is getting bilateral assistance from the United States uninterrupted. The time has come to reappraise the overall strategy. Instead of aid, the country should focus on trade but it can not just happen by saying only. Policymakers and political leadership need to take concrete measures in changing the business environment and attitude of the people. The need is to get market access for exports, lowering trade barriers, flow of foreign direct investment, transfer of technology, easy movement of labor and active collaboration in scientific education, research and development.
Pakistan has one of the lowest domestic saving rates in the world, which means that the amount of money available to invest for economic growth and development is too inadequate in relation to the country's needs. It may be because of the fact that people don't have much to save. In order to sustain the growth rate and to get self-reliance, the country will have to at least double the national savings rate.
Government must promote good economic governance. Transparency, consistency, predictability and rule-based decision-making can bring legitimacy to the government. Privatization has remained a controversial issue. Last government lost its credibility on the privatization of Pakistan Steel Mills. Since the verdict from the Supreme Court on steel mill, no government could be able to privatize any other state owned institution. Another revenue generation is through taxation, which needs complete overhaul. As a matter of fact, taxation reforms remain on the agenda of every government. Despite many efforts, tax base couldn't be broadened and unfortunately tax evaders couldn't be brought into the tax net.
The reason for the fiscal deficit is low revenue collection. Tax to GDP ratio is one of the lowest in the world but there is a scope to widen the tax net, improve tax collection, and remove various exemptions and concessions.
Improving financial conditions of the state owned enterprises will also help the in diverting funds to other areas especially education sector. It is estimated that with the same tax rates the tax authorities can be able to raise as much as 30 per cent of the existing revenue collection by tightening enforcement and compliance, carrying out robust post assessment audits, better supervision of tax administration and plugging the loopholes.
Pakistan has stuck with the export of few commodities to few countries only, for example, textiles, leather, rice, sports, goods, and the surgical goods to USA, European Union and Middle East and so far didn't venture in the industrial products. The country can generate additional revenues by focusing on industrial products, improving the quality of the products, and targeting untapped markets.
The economy has made a substantial progress during the last 65 years yet it has lagged behind other Asian countries. That is mainly because of not utilizing its full potential. The constraints our country is facing are of serious nature. However, there also exist the opportunities which can convert these challenges into gains. This can only be possible with better governance, right decision instead of popular decision, and by implementing rule of law.