Current situation of Pakistan economy | Economy of Pakistan and its problems
There are many articles on ‘Economy of Pakistan’ which state Pakistan’s debt repayments, foreign reserves and even projected GDP growth for the country. PTI, being such big party, while preparing their economic policy for manifesto, could have read and contemplated on the future economic prospects of Pakistan; and this could have been used in Naya Pakistan’s campaign to allow the citizens to keep in mind that the next five years would be difficult for the middle-class. However, Imran Khan used the papers of Auditor General of Pakistan, State Bank of Pakistan and other governing bodies to ensure that the two parties have been involved in corruption for decades. This rhetoric might be true, but their election campaign was on the basis of teaching the masses that how country has been looted, not explaining debt repayments while asking for the votes of the people of Pakistan. Its also true.
Its true that economic growth under PMLN has been artificial growth backed by currency pegging, import substitution, energy policies and IMF packages; however, GDP growth and income can be used to repay rising interest payments as well as principal amounts of the loans.
Under this government, interest rates are now 12.25% approx and rupee has been devalued by 33%, which means that the country has to pay its loans in much bigger value owing to market exchange fluctuations and interest rates. Moody’s and Standard & Poors have notified our government that they would mark the country ‘unstable’ in terms of debt repayments.
Despite tightening, current account deficit is still higher, fiscal deficit anticipated for the current annum is also expected to rise and the trade deficit remains high, according to State Bank of Pakistan. As Pakistan has no other option but to allow austerity, increased taxation, wealth redistribution and inflationary printing press to help country shore up its economic prosperity and GDP growth in the future, but now that rupee is devaluing and oil prices are rising further, thanks to OPEC production cuts, the import bill costs will increase further.
IMF package was necessary for Pakistan’s ailing economy. However, current administration is allowing NAB to apprehend all the corrupt citizens. Both the opposition leaders have been under investigation. Country was facing FATFs blacklisting for which the administration would likely needed the help of opposition parties to help 2/3rd majority to allow FATFs recommended legislations to be passed from the parliament, paved way for country’s economy to avoid FATFs and APG blacklisting as well as financial restrictions and international sanctions; however, opposition wasnt willing to cooperate which could land Pakistan in FATFs blacklist – the ramifications of which was manifold including refusal of IMFs package.
If IMF refused to bailout our fragile economy, Pakistan may resort to excessive tightening with deleveraging to help shore up its forex reserves and pay its lenders 37 billion$ in the next four years.
Many economists recommend that for country which has to pay its debts, the country must grow its GDP higher than the value by which its interest rates are rising because with the GDP growth much greater than interest payments, country can easily offshoot debt payments and allow spending to increase. As PTI is resorting to tightening which is absolutely needed right now, the administration isnt keeping up its pace with rising interest rates and the projected GDP growth is expected to decrease further from 5.28% during PMLNs era to 3.8% for the current fiscal year. This year country has to pay some 9 billion$ in debts including 1700 million$ in interest payments. With rising interest rates, the value will rise further and further, and despite tightening, current account deficit would remain high, fiscal deficit would still be not acceptable and country may be urged to resort to default or debt restructuring in the future. This is do or die situation for Pakistan right now.
Unemployement is expected to rise. Reserves are expected to fall again from the next year and businesses may face layoffs due to lack of expansionary needs owing to government’s decreasing spending.
PMLN had a vision: focusing on energy and infrastructure. I dont know if even PTI has a plan. Economic indicators are deteriorating despite austerity measures and reducing spending.
Expected GDP growths for Pakistan for the next four years are 3.8%, 3.7%, 3.5%,and 2.8% by the year 2023. Due to explosive population growth and demand for employement to keep up with social stability and normal unemployement rate, SBP had reported that Pakistan would need 6.6% of GDP growth to accommodate its large young population. This is very unlikely.
PAKISTAN: DWINDLING FOREX RESERVES and OPTIONS to STABILISE ECONOMY
Forex reserves are important in this era of post Bretton Woods system backed by SDRs and currency baskets that it is the source of trade stabilisation, currency value and market oriented policies of the both government and Central Bank. Monetary policy is the indicator that represents how country uses its forex reserves. Monetary policies may be managed to determine the pegged value of currency, exchange rate mechanism and reserve accumulation and decline. Sometimes monetary policies are just focused on currency value like China, and in some cases it is used to influence the values of inflation, interest rates and mortgage loan and fixed deposit returns. Policy may be used for band currency valuation as well as free-float market oriented money circulation. Pakistan’s forex reserves are now below than Cambodia whose economy is one tenth of the country.
Pakistan has 304 billion$ economy with exports reaching 21-22 billion$ having pressures on current account and balance of payments. PTI govt has to face drastic and challenging ramifications to handle fragile economic situations because economy may all of a sudden enter into stages of decline like inflation, hyperinflation, stagflation, deleveraging, recession and even depression. Finance Minister has to work hard to overcome these challenges and policymakers and economic advisors have to support his cause completely otherwise political uncertainty and national security may be at stake.
Argentina and Greece have experienced the same situation but they were supported by US. The problem with Pakistan is that US opposed IMF bailout for Pakistan that might involve repayment of loans to China. This was obviously not the good option, but its in consideration owing to challenges faced by our country.
Pakistan should get help from overseas Pakistani diaspora to buy government and Bank issued bonds and sukuks to incentivize its returns on investments and urging them to show the alacrity to invest in Pakistan and bring remittances back home for reinvestment and mutual fund returns. Diaspora bonds and sukuks may provide forex reserves for longer and returns on maturity may be handled later, as growth of investment may help decrease pressure on import bill costs. This is also difficult because overseas Pakistanis dont have confidence to invest in fragile economy . This is considerable and healthy option.
But its good working.
Allies may help more Pakistan by providing bilateral official reserve inflows. When Greece was in trouble, Germany and EU helped them. Now Pakistan is in trouble – the only Islamic nuclear power – and so Muslim countries should help us. As King Salman did.This would increase forex reserves and reduce pressure on current account and balance of payments.
The best option is SIMULTANEOUS approach through diaspora bonds and sukuks and bilateral official reserve inflows from allies. This would ease the pressure on Imran Khan to overcome economic challenges.
The main problem is governance, energy, industries, lack of venture capitalism, obsolete technology, substandard model of education system, political Central Bank, institutional overlap and interference in separation of powers along with political instability and political interference in economic policies which are hindering our economic growth and reserve growth. This has to change now. Dont let your beloved PAKISTAN, a new nuclear armed Somalia. Once our nuclear assets become vulnerable, NATO, EU and US would bomb the shit out of us for concealing and protection of our nuclear assets. This is not a joke. They can do it easily and they are planning for it. Financial troubles are always dangerous for social stability. We need ECONOMIC LIBERALISATION. Its just simple as that. LIBERALISE your market. Allow private entities to invest freely. Control corruption through good governance. SIMPLE!!!
Actually Pakistan needs diverse infrastructural base, industrial zones, and road networks along with CPEC to bring forth economic potential and complexity at regional level. When there is wide circuit of roads placed all over the country and different cities and industrial hubs are integrated, it becomes easy to harness industrial production and capacity of economic exports to a level that serves country’s needs. With CPEC, infrastructural base is improving and industrial zones are forming; energy shortages, if covered to enhance productivity, would provide a new potential to GDP growth based on productivity. The main problem for now is weak infrastructure and road networks all over Pakistan; Balochis are unable to export their foods and other goods and services domestically as well as internationally. Land growing exports need better transit routes, and when such routes are in dearth, exports merely exceed the requirement of a country. Punjab, on the other hand, has a major role in economic growth of Pakistan, because its industrialized areas are connected to Sindh, KPK and ports, from where they can easily exports various of products to Afghanistan, India, and China. Karachi and Gwadar ports have extensive potential of maritime economic growth, but as naval base is weak and vessels are deteriorating, it becomes difficult for largest Pakistani exporters to increasing their products exportation at sea route — a tonnage requirement greatly exceeds our maritime potential.
There is no such policy in the minds of our politicians, that the affirmative role of maritime growth of an economy is yet to be developed. With CPEC, heavy machines and construction materials are importing everyday by Pakistan, which has increased our imports by 8 billion USDs per annum — major contributor of deficit in current account. IMF recommends that CPEC construction should continue according to the current account requirement and net exports of the country, but they think IMF is pro-western, and it is their goal to delay economic potential of CPEC. Relevant to the consideration of CPEC, Pakistan needs domestic industrial bases and energy, so that production continues to increase, and industries work uninterruptingly.
Since Deng Xiaopeng’s economic and industrial reforms during 1970-80s, Chinese domestic industries were unable to compete with foreign companies; they had weak bases, and trade protectionism was the only way to enhance their export potential. Trade protectionism hurts in a long run, although it is very effective when it comes to short run increasing of exports. China planned to decentralise its economy, and so continued the policy of managed monetary influence by Chinese Central Bank and devalued currency against the USD, which helped domestic investors to harness weak yuan against the USD and produce various goods and services domestically by using devalued yuan currency. When we look into currency fluctuations of Chinese yuan, during 1980s-1995, Chinese yuan devalued to value of 16.06 against the USD. During these 15 years, their industrial base grew exponentially; they allow domestic investors to grow their bases rapidly, buy shares in foreign companies, steal technology from western powers and bring it to China, so that domestic market improve according to the needs of booming Chinese population and domestic needs. After 1995, they followed managed monetary policy, and as they had trade surplus against other countries due to which their current account was in surplus, they had enough foreign reserves to peg their currency at fixed exchange rate. During 1995-2005s, China allowed its currency to follow fixed exchange rate of 16 against the USD, using foreign reserves in international market to peg its currency, giving way for their exports to become cheaper, and so increasing exports and stealing of technological barriers led their domestic market to grew with rocket pace of 10-12% of GDP growth per annum. Till 2005, their economy reached a booming 7 trillion USDs mark, and China became the world’s fastest growing economy and exporter of goods and services in the world. After 2005, their reserves were declining, and they had done enough inflation to keep their currency devalued, but now it was difficult to follow managed monetary policy. Chinese Central Bank allowed managed inflation according to needs of Chinese domestic investors and exporters, and allowed their currency to gain value against the USD slowly, transitioning their economy from exports towards consumption and investment. Yuan reached 8.3 against USD, and their GDP growth declined to 8% of GDP.
After 2005, they have followed transitioning of economy towards consumption and investment; allowed their currency to slowly gain value against the USD. Exports declined, current account deficit widened; US economy boomed and in 2015, we see Chinese financial crisis. Their currency has entered a chokepoint, after which it cannot be kept devalued, and now Chinese yuan has gained 377 base points to 6.22 yuans against the USD, which means that exports would become expensive, and China would embark upon an investment and consumption oriented economy the way US and EU economies are. Real estate has a bubble, but if allowed deleveraging and independent operation of Chinese Central Bank, they can handle it..
Anyhow my suggestions for strong economy:
1) Enhancing industrial services through technology and innovations: It directly needs high quality education and research.
2) Enriching technological approaches to improve the quality of landgrowing economy: It needs inclusive economic institutions.
3) Welfare-based system of Capitalism with incentives and directives for new innovations: It needs proper separations of powers among government, and professionally graduated faculty of higher education institutes.
4) Improving the quality of services sector: It covers governance and its management competency.
5) Enhancing Exports: Keeping in view demand and supply ratio, so that most of resources are harnessed.
6) Controlling of Imports by balancing technological innovations with Foreign direct investment in the country:
7) Keeping Inflation low and incentives high: It ensures competency inside the market.
8 Inclusive economic institutions: It should provide property rights, liberal market enterprises, ensure competency and provisions of subsidy, keeping technological advancement and innovations in target.
Supportive factors are:
1) Better transport system: It greatly affects agricultural economy.
2) Enhancing computerized cost-effective and rapid system: It ensures proper time and policy evaluation management.
3) Checks and counterchecks of institutions: To keep corruption under surveillance.
4) Better infrastructure and economic policy and its implementation:
5) Political centralization:
In Short Improving industrial sector of our economy:
(1) Laws enacting special privileges for those who are involved in innovative researrches and technological advancements like new drugs preparation, new vaccines, new research publications that help in technological improvement and protecting their patent rights.
(2) Competent management and faculty in order to ensure specific requirements, which must be completed by every industry.
(3) Providing continuos supply of energy, so that full productive capacity of every industry is brought to its full use. There should be no energy shortage, and machines should continue to work 24/7 to increase productivity. Increases productivity increases GDP growth and hence the country flourishes.
(4) Energy crisis should be controlled by water dams, nuclear power plants, solar plants, and construction of water reserviors and energy dams like Diamer-Basha dam, so that cheap energy is produced. But transition towards nuclear and solar plants should also be encouraged to avoid climate change effects.
(5) Domestic businessmen should be facilitated to buy stocks in international corporations, so that technology can be bought and brought to Pakistan before putting into use.
(6) GST+ taxes should be avoided, so that productivity is ensured for the cause of profit based growth.
(7) tariffs and import duties should be facilitated to help domestic corporations enhance their services in domestic market as well as international market, (8) FTA and other trade aggrements are necessary for growth of industrial sector, (9) Protectionist policies should be avoided, and market should be allow to compete for prices, avoiding price subsidies and tarrifs.
(10) Industrial zones should be developed, and foreign investment should be attracted.
(11) law and order should be maintained. (12) Industries should be facilitated by government when it is in need to compete, and merging of companies should be avoided, and
(13) industrial monopolies – avoided.
After solving BoP crisis, the next important things to do are:
1. Floating exchange rate regime.
2. Invest in education.
3. MoUs between industries and universities.
4. Funding at Professor level – for supervising industrial needed research projects through fellowships.
5. Revisiting FTAs.
6. Invest in different sources of energy.
7. Providing low-interest loans to businessmen.
8. Reform revenue department.
9. Deregulation of market.
10. Attracting capital investment.
11. Improving security situation.
12. Banning all terrorist organisations.
13. Banning all extremist organisations.
14. Invest in health.
15. Automatic approval of FDI.
16. Invest in tourism.
17. Developing IT hubs in major districts.
18. Faculty growth scholarships.
19. Joint-venture capital investments.
20. Industrial support.
21. Investing in technology.
22. Protecting IP rights.
23. Laws for non-commodity exports.
24. Having good and friendly relations with all the exporting countries.
25. Investing in petroleum products, metallurgical research and AI.
26. Capital and liberal market.
27. MoUs between universities and foreign companies for undergraduate level research and scholarships.
28. Faculty training scholarships.
29. Agriculture subsidie
Invest on your youth. Invest in your education. Invest in your health.
Stop money laundering. Stop political victimization. Implement checks and balances in its true sense. Liberalise all exporting sectors. Implement progressive taxation system. Reduce bureaucratic hurdles. End red-tape bureaucracy. End socialist policies. End regulation.
And pls stop corruption and correct all the constitutional nonsense!!
P.S.: Exports cant be increased within a year or two, it takes decades to have sustained exporting economy. Pakistan will face economic crisis, for atleast next 3-5 years.
This is not the first time that Pakistan has been experiencing BoP crisis. Even it happened in 1990s, 2000s and so on. Pakistan’s democratic system is weak. It is based on feudalist structure and non-representative democracy.
Won’t ever blame democracy for declining economic growth. Military interference is never justified. I repeat never. I repeat never.
I hope Pakistanis would comprehend their position, and consider that economy is very important for prosperity and peace.