Question

write an essay in your own words on the current position of Pakistan economy . give an overview from 2013 to 2020 and suggest some policies do you think Pakistan should adopt. (1500 words)

Answer 1

The economy of Pakistan is the 23rd largest in the world in terms of purchasing power parity (PPP), and 42nd largest in terms of nominal gross domestic product. Pakistan has a population of over 220 million  (the world's 5th-largest), giving it a nominal GDP per capita of $1,357 in 2019,^[which ranks 154th in the world and giving it a PPP GDP per capita of 5,839 in 2019, which ranks 132nd in the world for 2019. However, Pakistan's undocumented economy is estimated to be 36% of its overall economy, which is not taken into consideration when calculating per capita income.^[39] Pakistan is a developing country and is one of the Next Eleven countries identified by Jim O'Neill in a research paper as having a high potential of becoming, along with the BRICS countries, among the world's largest economies in the 21st century. The economy is semi-industrialized, with centres of growth along the Indus River.Primary export commodities include textiles, leather goods, sports goods, chemicals and carpets/rugs. In July 2019, Pakistan entered into a 39-month Extended Fund Facility (EFF) arrangement with the International Monetary Fund. Stabilization measures under the EFF were expected to moderate aggregate demand pressures in the economy. Leading indicators suggested a slowdown in growth in the first 7-8 months of FY20. The output of large-scale manufacturing (which accounts for around 50 percent of industrial output) contracted by 3.4 percent in Jul-Jan FY20. The agriculture sector, however, registered growth in the rice and livestock sub-sectors.However, the rapid spread of the COVID-19 virus since February 2020 has brought economic activity to a near-halt. Most of the country has been placed under a partial lockdown. The closure of non-essential businesses and domestic supply chain disruptions are having a significant impact on wholesale and retail trade and transport, storage and communication, the largest sub-sectors of the services sector. The drop in domestic and global demand is also compounding the strains on the industrial sector, which is hit by both supply and demand shocks. In addition, the country’s main industrial sector – textiles and apparel – is highly exposed to COVID-19-related disruptions due to its labor-intensity. While addressing the World Economic Forum at Davos in January, Prime Minister Imran Khan claimed that the year 2020 will be one of economic growth for Pakistan. Khan’s words echoed his vows to the domestic audience, as he has promised fiscal “development” in the country within the ongoing calendar year. After a tumultuous first 12 months since the Pakistan Tehreek-e-Insaf (PTI) government took over in August 2018, the fiscal positives for the country have indeed been tangible in recent months. In September, Pakistan’s current account deficit dropped by 80 percent to a 41-month low of $259 million, with a 111.5 percent rise in foreign direct investment (FDI) and 194 percent increase in private investment. With FDI of $1.34 billion during the first half of the current fiscal year, a 68.3 percent increase was registered in January, compared to $796.8 million of the same period of the previous fiscal year. This month, the reserves of the State Bank of Pakistan (SBP) also hit a 21-month high at $11.586 billion. The economic positivity was also reflected by the Karachi Stock Exchange (KSE), which registered a 16-month high this month, crossing the 42,000 point mark after a cumulative increase of 13,000 points in four months. The financial developments in Pakistan have been duly recognized globally as well, with Moody’s Investor Service upgrading Pakistan’s economy outlook from negative to stable in December. The World Bank has also acknowledged Pakistan as one of the top 10 “most improved” countries in the Ease of Doing Business Index. Pakistan’s economic freedom score is 54.8, making its economy the 135th freest in the 2020 Index. Its overall score has decreased by 0.2 point because of a drop in the fiscal health score. Pakistan is ranked 32nd among 42 countries in the Asia–Pacific region, and its overall score is well below the regional and world averages. The Pakistani economy has been mostly unfree since the inception of the Index in 1995. GDP growth, however, has been vigorous for the past five years, led by exports of cotton textiles. Economic freedom in Pakistan is impeded by inadequate protection of property rights and the government’s failure to enforce anticorruption statutes and laws against crimes like money laundering and financing of terrorism. Regulatory inefficiencies, complex labor laws, and an unreliable security situation continue to burden the business environment. High tariffs reduce the buying power of average Pakistanis’ income and hurt efforts to reduce poverty. Decades of internal political disputes and low levels of foreign investment have led to underdevelopment in Pakistan. Pakistan has a large English-speaking population, with English-language skills less prevalent outside urban centers. Despite some progress in recent years in both security and energy, a challenging security environment, electricity shortages, and a burdensome investment climate have traditionally deterred investors. Agriculture accounts for one-fifth of output and two-fifths of employment. Textiles and apparel account for more than half of Pakistan's export earnings; Pakistan's failure to diversify its exports has left the country vulnerable to shifts in world demand. Pakistan’s GDP growth has gradually increased since 2012, and was 5.3% in 2017. Official unemployment was 6% in 2017, but this fails to capture the true picture, because much of the economy is informal and underemployment remains high. Human development continues to lag behind most of the region.In 2013, Pakistan embarked on a $6.3 billion IMF Extended Fund Facility, which focused on reducing energy shortages, stabilizing public finances, increasing revenue collection, and improving its balance of payments position. The program concluded in September 2016. Although Pakistan missed several structural reform criteria, it restored macroeconomic stability, improved its credit rating, and boosted growth. The Pakistani rupee has remained relatively stable against the US dollar since 2015, though it declined about 10% between November 2017 and March 2018. Balance of payments concerns have reemerged, however, as a result of a significant increase in imports and weak export and remittance growth.Pakistan must continue to address several longstanding issues, including expanding investment in education, healthcare, and sanitation; adapting to the effects of climate change and natural disasters; improving the country’s business environment; and widening the country’s tax base. Given demographic challenges, Pakistan’s leadership will be pressed to implement economic reforms, promote further development of the energy sector, and attract foreign investment to support sufficient economic growth necessary to employ its growing and rapidly urbanizing population, much of which is under the age of 25.In an effort to boost development, Pakistan and China are implementing the "China-Pakistan Economic Corridor" (CPEC) with $60 billion in investments targeted towards energy and other infrastructure projects. Pakistan believes CPEC investments will enable growth rates of over 6% of GDP by laying the groundwork for increased exports. CPEC-related obligations, however, have raised IMF concern about Pakistan’s capital outflows and external financing needs over the medium term.

Pakistan’s newly-elected government is already dealing with a balance of payments crisis, which has been a consistent theme for the nation’s newly elected officials. Pakistan’s structural problems are homegrown, but what is different this time around is an added component of Chinese debt. Pakistan is the largest Belt and Road (BRI) partner adding another creditor to its already complicated economic situation.Pakistan’s system is ill-equipped to make changes which would avoid future excessive debt. A bailout from the International Monetary Fund (IMF) is probably the safest bet for the country although it is unclear whether the United States will support the program. How Pakistan decides to handle its debt crisis could provide insight into how the U.S., IMF, and China will resolve development issues in the future. Beijing is a relatively new player in the development finance world so much is to be learned from how it deals with Pakistan and how it could possibly maneuver in other developing countries in Asia, Africa, and Latin America. Pakistan held its most recent elections in July 2018. The Pakistan Tehreek-e-Insaf party gained over 100 seats in the parliament, and its founder Imran Khan, a famous cricket team captain, was installed as prime minister. Prime Minister Khan has inherited a balance of payments crisis, the third one in the last 10 years. By the end of June 2018, Pakistan had a current account deficit of $18 billion, nearly a 45 percent increase from an account deficit of $12.4 billion in 2017. Exorbitant imports (including those related to the China-Pakistan Economic Corridor (CPEC)) and less-than-projected inflows (export revenues and remittances) have led to a current account deficit widening, with foreign currency reserves levels covering less than two months of imports—pushing Pakistan towards a difficult economic situation. Part of Pakistan’s financial crisis stems from the fact that 2018 was a poor year for emerging markets. Global monetary tightening, increased oil prices, and reduced investor confidence have negatively impacted the country’s already precarious economic situation. But the country’s deep structural problems and weak macroeconomic policies have further exposed the economy to an array of debt vulnerabilities. Pakistan has had an overvalued exchange rate, low interest rates, and subdued inflation over the last few years. This loose monetary policy has led to high domestic demand, with two-thirds of Pakistan’s economic growth stemming from domestic consumption. An overvalued exchange rate has led to a very high level of imports and low level of exports. Pakistan’s high fiscal deficit was accelerated even further in 2017 and 2018 because elections have historically caused spending to rise (both of the most recent fiscal crises followed elections). Perhaps the greatest financial issues facing Pakistan are its pervasive tax evasion and chronically low level of domestic resource mobilization. Taxes in Pakistan comprise less than 10 percent of GDP, a far cry from the 35 percent of countries that are part of the Organisation for Economic Co-operation and Development (OECD). Pakistan also suffers from impediments in the energy sector through frequent and widespread power outages that hurt its competitiveness.In Western media, Chinese investment is often cited as the main driver of Pakistan’s debt crisis. This is somewhat true as China’s BRI makes Pakistan a key partner through the shared CPEC. The CPEC is a $60 billion program of infrastructure, energy and communication projects that aims to improve connectivity in the region. CPEC infrastructure costs have certainly placed a greater debt burden on Pakistan, but the current structural problems are homegrown; the root cause of the energy shortages is now less a matter of power generation, and more of fiscal mismanagement of the power sector.