Nepal: Challenges and Opportunities of Pakistan’s Economy

-Musarat Amin 

Karachi, Pakistan

-This article presents the picture of Pakistan’s Economy mere six months ago. This will be followed by another article depicting the current state of economy-Author.

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There is a strong linkage between a country’s national security and its economy. A strong economy can ensure a strong defence, which in turn enhances a country’s national power and strengthens national security. A weak economy generates violence, conflict, social unrest, political turmoil and hence weakens national security. The relationship between the national security and economic spheres is complex and characterized by many close interconnections and feedback loops. In today’s world, economic security is not an independent entity but it consists of interconnected components which include industrial security, energy security, food security, connectivity, financial security and economic diplomacy.

Pakistan’s political economy is centered on interrelationships among the business community, government public policy, and various internal and external angularities. Pakistan’s relations with neighboring countries and regional trade partners have huge potential to grow but the geopolitics of the region hampers economic growth. Out of four neighboring countries, only China has significant trading linkages with Pakistan whereas trade with the other three neighboring nations is in dismal state. The EU is Pakistan's second most important trading partner, accounting for 14.3% of Pakistan's total trade and absorbing 28% of Pakistan’s total exports.

Pakistan’s economy holds considerable potential however; high costs of doing business, complex regulation and infrastructure bottlenecks have a detrimental effect on trade and growth. The IMF forecasts an inadequate growth rate of 4% for Pakistan based on high inflation and rising unemployment rate during the current fiscal year 2021-22. According to World Bank report during the Pandemic (Covid-19), Pakistan has shown signs of a fragile economic recovery with a gradual resumption of economic dynamism. According to Pakistan Development Update, Pakistan’s economic growth is expected to reach 1.3 % in FY 2021 and strengthen to an average of 2.7 % for “Pakistan Development Update.” The World Bank Group (April24, 201) FY 2022-23.

Pakistan was placed on Financial Action Task Force (FATF) grey list in June 2018. The grey-listing of Pakistan by the (FATF) has added another difficulty to the already struggling economy. Pakistan has faced a huge loss to its GDP of about $38 billion due to FATF grey-listing. The country was given a 27-point action plan by the FATF to curtail money laundering and terror financing by the end of 2019.

Dr. Marcus Pleyer, President of FATF in February 2021 said, “Pakistan had made important progress, but there remained some serious flaws in mechanisms to plug terrorism financing.”

Challenges:

Keeping in view the overall prevalent geoeconomics environment, Pakistan’s economic woes present some internal and external challenges that hamper the economic growth of the country. Pakistan’s economic strength is a prerequisite to its national security; therefore, it is imperative to identify the fundamental challenges faced by Pakistan’s economy. In the current geoeconomic milieu, the challenges faced by Pakistan’s economy are as follows:-
(a) The biggest challenge of Pakistan’s economy is the balance of payments because the imports are multiplying rapidly and exports are experiencing a steady decline. Pakistan has an overall low level of FDI due to which there is an unsustainable rise in public and external debt. The budget crisis poses another challenge, as there is less growth in revenue due to over expenditure. Rising unemployment, particularly that of youth has also created grave challenges and is a leading cause of social unrest.

(b) Human capital growth in Pakistan has been marred by a low rate of educational attainment with slow improvements in literacy at primary and secondary school levels and limited access to health.

(c) Low investments, heavy external and domestic debts corresponding to higher fiscal deficits are also contributing factors to rising poverty.

(d) Lack of meritocracy in federal and provincial institutions and rampant corruption has not only weakened the economy but also caused poor governance.

(e) The major chunk of the indigenous budget is drained on debt servicing. Pakistan entered into the 22 nd IMF program in 2019 to manage the budget deficit which was standing at 7.1% of the GDP.

(f) Ease of doing business in Pakistan remains a big challenge due to bureaucratic hurdles, red-tapism, and lack of civil service reforms.

(g) Taxation System in Pakistan mostly depends upon indirect taxation with a low tax base and less direct taxes implies heavy burden on commoners.

Opportunities:

The above-mentioned challenges are not greater than the opportunities that Pakistan’s economy may offer:-

(a) The completion of CPEC related infrastructure projects can provide connectivity between Central Asia, the Middle East and China through rail, road networks and maritime routes. The completion of CPEC will also boost other projects including Central Asia Regional Economic Cooperation (CAREC), TAPI Gas Pipeline, China-Russia-Pakistan-Middle East Gas/ Oil Pipeline, CPEC and Iran, CPEC and Oman, Oil Refineries, Agriculture and Halal Meat Industry.

(b) Pakistan is one of the few countries which has a young labour force that can be harnessed for its own and global economy. International financial institutions also acknowledged the youth potential of Pakistan. According to the representative of the World Bank for South Asia, “Today, more than 60% of the population of Pakistan is under the age of 30. Young men and women stand to gain significantly from global opportunities. We need to invest more in their skills and mold their ideas into new products, services, and successful businesses that will benefit us all.”

The tourism industry can be a catalyst for economic change. According a report prepared by Price waterhouse Coopers (PwC), Pakistan has a potential to join the ranks of ‘top sixteen’ economies by 2050 and improve its national power profile.

(c) Development of Gwadar Port and Special Economic Zones (SEZs) in collaboration with China would provide a gateway to trade for the landlocked neighborhood including Afghanistan and Central Asian Countries- CARs.

IT sector can play a pivotal role in uplifting Pakistan’s economy. IT startups have been able to attract more than $ 1 billion in the year 2021, as 34 startups were able to attract international financers and are likely to increase exponentially. Global investors are pouring money into Pakistan’s budding tech sector. Funding in year the 2021 has outstripped the last six combined years.

Analysis:

Pakistan’s economic growth rate is 3 – 3.5% whereas the population is growing at a rate of 2% per annum. Slower economic growth has created problems of unemployment and poverty. Due to dissatisfied population, slow development and fewer job opportunities, civil unrest has grown which not only gave rise to social chaos but also intensified political divisions and exacerbated law-and-order conditions in the country. Internal instability may have a direct effect on the national security of the country.

Pakistan’s decision to go to IMF was a big challenge because the global lender imposed tough conditions, which not only proved unpopular but also pushed the economy into more slumps. IMF packages could not bring the country’s economy out of shackles. IMF’s 22 nd package could not yield the desired results because there is a need for more robust structural reforms to put the economy on the track of growth.

After the change of regime on April 10,2022 the political instability in Pakistan caused more uncertainty, resultantly the country plunged into politico-economic crisis.

Pakistan’s foreign reserves dropped to $8.35 in September, 2022 with further uncertainty as country is preparing to get a bailout package of $1.1 billion as the economic outlook worsens. The letter of comfort from IMF opens up more economic more possibilities of foreign investment. The tough conditions of IMF to increase gas prices, electricity prices and end subsidy on multiple sectors is likely to have greater impact on the prices of food commodities. For Pakistan, the issue of economy is more related to internal political turmoil. Domestic political stability will enhance Pakistan’s economic well-being.

Pakistan has always been seen as a security-centric state, predominantly driven by geopolitical manifestation and least by geoeconomic gains. The external angularities include India’s diplomatic maneuvers to keep Pakistan in the FATF grey-list, which has caused a serious blow to Pakistan’s economy as highlighted earlier. To exit the FATF grey-list, Pakistan’s lobbying to China, Turkey, KSA and Malaysia will not help without the active support of the US and UK Despite all the challenges. An onsite visit of the FATF team from Aug,29 to Sep 3, 2022 has better prospects for Pakistan to come out of the grey-list.

Resource mismanagement in Pakistan is a great impediment to economic growth as resources are limited and consumed at faster rate due to more population. However continuity of policies and efficient management can help to address such challenges.

Export is another area which needs focused attention by the government. The key factors that are hindering exports of Pakistan include high import tariff rates, limited availability of long-term financing, inadequate provision of market intelligence services, and low productivity of firms. Incentivizing local manufacturing and encouraging innovation would bolster exports.

To ensure food security of the country, the agriculture sector plays a pivotal role in the national economy. Pakistan is an agrarian country as agriculture sector constitutes a hefty component of the national gross domestic product (GDP), and is one of the major sources of the rural economy. The agriculture sector has the potential to boost the national economy but has been neglected for decades. It has not been equipped with modern agricultural expertise resulting in the backwardness of the agricultural sector.

Key Takeaways:

• Russia-Ukraine war has impacted the global economy in a negative way. Russia is the world’s largest natural gas, second-largest oil and third-largest coal exporter. Ukraine is an important producer of wheat and sunflower. One- third of the global wheat exports come from Russia and Ukraine, whereas Ukraine makes for 10 per cent of the global export of sunflower seeds. Due to Russo-Ukrainian war, the supplies have been disrupted and world economy is likely to experience shock. Some economists are predicting about an imminent global economic recession.

US-China Trade War ramped up as both the contenders have imposed heavy duties on their imports. The trade war was initiated by the U.S. to balance the trade gap and to check China’s rising economy. Trade war is hurting both the trade partners as in light of high inflation and rising prices, the Biden administration announced dropping its current tariffs on Chinese imports to ease inflationary pressures. China’s retaliatory tariffs on U.S. exports have further hurt American firms and workers. Developing economies are likely to face serious economic problems due to prevailing international economic environment.

• A good economic system has four main components that make an economic system vibrant, it includes talent and capital. When both of these elements are combined, it builds a system of accountability.

• Efficient use of economic tools also helps to advance geopolitical objectives. Prominent economic tools include trade policy, investment policy, economic and financial sanction against external challenges, financial and monetary policy. These tools can further be expanded to energy commodities, economic aid and digitization.

• IMF prevents government to take decisions independently which constrains governmental decision making authority. Such pressures harm economic growth of a country. Pakistan should make an endeavour to come out of the International Monetary Fund (IMF) programme. IMF programme has increased many challenges for the government by putting several tough demands including the increase in gas, petrol and electricity tariffs and privatization of loss-making-state run companies like Pakistan International Airlines (PIA).

(a) Pakistan can become a connector of regional markets through timely completion of China-Pakistan Economic Corridor-CPEC, which will enhance regional connectivity, maintain peace, pursue development and share prosperity. After completion of energy and connectivity projects, it is imperative to develop 09 SEZs at the fast track to actualize the real economic and social dividends.

(b) Regional economic blocs have become a platform of cooperation amongst states. Due to regional economic blocs, nations get an easy access to market for their trade. Reaching a concuss on any trade issues remains a common interest and this approach promotes cooperation.

(c) In a developing economy like Pakistan following indicators can prove game changers;
i. Economic growth through equality and efficiency,

ii. After the surge in electricity and petroleum prices, there is a need to find alternatives as energy availability and affordability must be ensured.

iii. Being an agriculture country, there has been observed a sharp decline in food production, Pakistan has to reach food self-sufficiency by using modern technology.

iv. Political stability ensures smooth economic growth and political uncertainty curbs economic growth, Pakistan needs to ensure political stability to improve economic growth.

v. Pakistan’s economy is deteriorating due to three major factors i.e. budget deficit, external debt and unstable exchange rate. As per all the economists, the solution to increase our pie is Foreign direct investment (FDI), strategy to enhance our exports and accumulation of wealth through enhancement of tax network. We know the solution and we know the problem. How would be analyze the problem vs the solution on the paradox of desirability vs do ability.
As far as desirability vs. do ability is concerned, it is the political will. Personnel in Parliament and in institutions (Ministries, State Bank) have to work keeping aside personal interest.

(c) Tax imposition on lands is likely to trigger land reforms in Pakistan which will benefit peasants and can help in the collection of the tax through produce of the land. A Chinese model is a point in case where land was given to peasants which were irrigated by them to contribute a greater share in the economy.

(d) Pakistan needs to invest in human capital to improve the skill set of the Pakistani labour force. Additionally Pakistan also needs to proactively work on creation of national brands capable of meeting international standards.
(e) The new economic policy outlook (geoeconomics) of Pakistan is likely to reap plenty of economic benefits through political consensus. Any reforms in this regard must be strategically thought out by parliament for ownership by successive governments.

(f) In order to augment the export mechanism, export-related regulations and bureaucratic hurdles need to be eased. Additionally, exporters must be provided with improved information about the requirement of foreign markets.
(g) In order to incentivize the private sector, favourable conditions need to be created which will eventually allow the private sector to develop infrastructure led-growth.

(h) The informal economy needs to be brought into the tax bracket which will increase the size of the formal economy. This can be achieved through transparent and efficient functioning of the institutes linked with registering and regulating businesses.

(j) The potential for employment and foreign exchange inflows by the tourism industry in Pakistan needs to be utilized through a well-planned vision 2030 for promoting tourism.

(k) Pakistan’s economy needs to be a shock-absorbing economy that should be able to absorb any shock created by a pandemic or global recession. It can be achieved through independent monetary policy and stable exchange rates, as minor fluctuations in exchange rates cause an excessive increase in the debt burden.

(p) Providing stable policies and incentivizing manufacturing is essential for achieving the status of a higher export-oriented economy.

(t) Pakistan needs a carefully articulated politico-economic vision based on reinforced basic foundations which should include:-

(i) Structural reforms in state institutions to improve efficiency. (ii) Political stability by promoting democratic ideals. (iii) Improving governance by eliminating corruption and continuity of economic policies. (iv) Promoting peace and harmony in society by improving law and order situation and providing social justice.

(v) Improvement in energy, water & food security. (vi) Development of services sector, industrialization and export promotion. (vii) South Asian nations need to sign Free Trade Agreements (FTA) to improve bilateral trade and development.

Conclusion:

Pakistan’s policy shift from geopolitics to geoeconomics holds bountiful potential for domestic economic growth. Prevalent geopolitical and geo-economic developments at the regional as well as global level, not only pose several challenges to Pakistan but also offer many opportunities to boost economic ties with regional and global trading partners. Pakistan’s current policy is likely to promote regional peace and global partnerships. Connectivity, provided by the CPEC will help achieve set goals of development. Pakistan’s internal challenges depend on governance, as the governance improves, Pakistan can resolve these challenges. However, the external challenges need a comprehensive politico-economic strategy to promote economic cooperation with partners. Thus, based on the above argument it can be established that the economic security of Pakistan is the core component of national security.

Pakistan being a developing country is facing multiple problems including lack of energy resources, limited industrial infrastructure and unskilled youth. However, owing to its geo-strategic location, the prospects to progress distinguish her from other developing countries. The biggest hurdle in this is however, political instability, in-consistent policies and less economic resources. The prevailing situation in global economy is a challenge for developing counties like, Pakistan, however, at the same time, it offers opportunities to capitalize. We as a nation must stand up and focus on the development as a nation and progress on economic front.

List of references:

• “Pakistan Development Update.” The World Bank Group (April24,201)
https://thedocs.worldbank.org/en/doc/884b60a84f16362376215acef470fb4b-
0310062021/original/PDU-April-21-FULL-REPORT-FINAL.pdf Accessed October
12,2021
• “Unleashing Potential for Pakistani Youth to Contribute to the Global economy.”
World Bank (May 4,2017)
https://www.worldbank.org/en/news/speech/2017/05/03/unleashing-the-potential-of-
pakistans-youth-to-contribute-to-the-global-economy
• https://www.brecorder.com/news/40199068
• https://www.worldbank.org/en/research/brief/global-recession
• Hussain,Dilawar.2017. “Pakistan could become 16 th largest economy by 2050: PWC”
https://www.dawn.com/news/1313636
• Jamal, Umair. “Will Pakistan Get off FATF’s Grey List?” The Diplomat (June17,2021)
https://thediplomat.com/2021/06/will-pakistan-get-off-fatfs-grey-list/ Accessed
September 28,2021
• Mangi, Faseeh.2021. “Startup fever is gripping the world’s last big untapped nation.”
Bloomberg https://www.bloomberg.com/news/features/2021-11-17/pakistan-startups-
draw-record-money-helped-by-covid-and-china-s-tech-crackdown

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