Pakistan's economic problems are caused by the nation's reliance on imports, political upheaval, corruption, and a lack of fundamental reforms. Pakistan must enact reforms to encourage investment, growth, efficiency, and innovation, such as deregulation, privatization, tax and tariff reforms, investments in the agriculture sector and most importantly, integrate itself with regional economy.
Introduction
The severe economic crisis that Pakistan is currently experiencing is characterized by rising inflation rates, a growing trade deficit, and a diminishing value of its currency. Political unrest, corruption, and a dearth of fundamental changes have all contributed to the nation's economic troubles. Finding long-term solutions to Pakistan's economic issues requires an understanding of the underlying reasons for the country's economic dilemma. On Tuesday, 18 April 2023, citing persistently high inflation rates, the International Monetary Fund (IMF) lowered its forecast for Pakistan's economic growth rate for the current fiscal year to a meagre 0.5 percent.1 Additionally, the IMF predicted that the unemployment rate would increase to 7% and that inflation would approach 27%. Pakistan is already dealing with serious issues, so any development would only make them worse.
Challenges to Pakistan’s Economic Growth
One of the primary reasons for Pakistan's economic crisis is its dependence on imports. The country relies heavily on imports of oil, machinery, and other essential goods, which has led to a widening trade deficit. The trade deficit means that the country is spending more on imports than it is earning from exports, putting pressure on its foreign exchange reserves. As a result, the country's currency, the Pakistani rupee has depreciated significantly against the US dollar (PKR 283.57 to a dollar), making imports more expensive and exacerbating inflation.
Another contributing factor to Pakistan's economic crisis is chronic political instability. The country has faced political instability for several decades now, and frequent changes in leadership have resulted in a lack of consistent economic policies. This inconsistency has led to a lack of confidence among domestic and foreign investors who are wary of investing in an uncertain environment. Moreover, the frequent leadership changes have led to a lack of continuity in the implementation of economic policies, hindering long-term planning and adversely affecting the country’s overall economic performance. Moreover, the absence of effective policymaking has resulted in a lack of clarity on the direction of the economy, which has led to uncertainty among investors. Furthermore, the lack of stability in the government has led to frequent changes in regulations, policies, and laws, which has made it difficult for businesses to plan and operate effectively. This unpredictability in the regulatory environment has also led to an increase in corruption and rent-seeking behaviour among the business community, further exacerbating the country's economic problems.
Role of Corruption in Pakistan's Economic Crisis
Corruption is also a significant issue in Pakistan, adversely impacting the country's economy. Corruption has eroded public trust in government institutions, which has made it difficult to implement policies that could address the country's economic problems. Furthermore, corruption has hindered foreign investment, as investors are often reluctant to invest in countries with high levels of corruption.
As the country continues to grapple with corruption, experts and scholars have extensively studied the issue, shedding light on the root causes and potential solutions. In his book, The Political Economy of Corruption, Arvind K. Jain argues that corruption is a structural problem in Pakistan, arising from the nexus between politics and business. He writes that the interaction between politics and business in Pakistan has facilitated the exchange of rents, the transfer of wealth from the public to the private sector, and the distortion of market forces, leading to inefficiency and waste.
Additionally, Jain suggests that the solution to this problem lies in strengthening institutions and reducing the role of politics in economic decision-making.2 Similar assertations are made by Adil Najam and Shahid Javed Burki in the book Political Corruption in Pakistan: A Study of Its Nature, Causes, and Effect. They would argue that corruption in Pakistan is rooted in the country's political and institutional structures and the state and its institutions are not seen as neutral arbiters but as extensions of the power of the political elite, which uses them to extract rents, accumulate wealth, and maintain its grip on power. The authors suggest that the solution to this problem lies in strengthening institutions, promoting accountability, and reducing the concentration of power in the hands of the political elite.
Pakistan's Economic Problems Persist due to the lack of Structural Reforms
Pakistan's economy has also been affected by a lack of structural reforms. The country has failed to implement reforms that could address issues such as tax evasion, inefficient state-owned enterprises, and an inadequate social safety net. The absence of these reforms has limited the government's ability to generate revenue and provide essential services to its citizens.
Globally acclaimed academicians have extensively studied the issue, highlighting the importance of structural reforms and their potential impact on the economy. S. Akbar Zaidi writes in his book Issues in Pakistan's Economy that Pakistan has not undertaken significant structural reforms that could transform its economy and address the root causes of its economic problems. Zaidi suggests that the solution to this problem lies in implementing reforms that promote growth, investment, and efficiency, such as tax and tariff reforms, deregulation, and privatization.2
Similarly, in his book Pakistan's Development: Social Goals and Private Incentives, Gustav Fritz Papanek argues that Pakistan's economy has been constrained by a lack of structural reforms, leading to inefficiencies and waste. They suggest that the solution lies in implementing reforms that promote competition, market-based incentives, and innovation, such as trade liberalization, labour market reforms, and infrastructure development. The impact of lack of structural reforms in Pakistan's economy is evident in various sectors. The agriculture sector, in particular, has been severely affected4 leading to low productivity, low investment, and poor growth. The authors suggest that the solution lies in implementing reforms that promote innovation, research and development, and investment in the sector.
Another important factor that has adversely affected Pakistan’s economic growth is its inability to develop an unbiased view of regional economic integration, which could be a boon to Pakistani economy. During the time of Musharraf’s rule, State Bank of Pakistan had made a rough calculation about the impact of India-Pakistan uninterrupted trade on Pakistani economy and said that it would add about US$ 10 billion to Pakistan’s revenues from overland transit fees as well as savings from cheaper imports of various consumer items from India. Overland trade through its territory would open up a whole world of opportunity for Pakistan and boost its earnings.
Pakistan’s mindless obsession with Kashmir and hitherto inoperable UN resolutions has come in the way of reconciliation with India and regional economic integration. It is the only country which has vetoed the proposed regional agreement for free movement of vehicles in the region and allowed itself to remain a victim of its own miscalculations. The initiatives taken by former Prime Minister Nawaz Sharif to normalise trade and commercial relations with Indian were stalled by the powerful deep state of Pakistan and led to his ouster through conspiratorial political manipulations, which could have only taken place in Pakistan, where tame clauses of the Constitution [62 (1) (f) and now 184(3)] are exploited by various institutions to derail the process of democratic governance and cause political instability that has had a debilitating impact on Pakistan’s economy in the long run.
Conclusion
Pakistan is currently experiencing an economic crisis buffeted by the reasons mentioned above. The power elite in Pakistan must take measures to address the issue of corruption, reform financial institutions and practices, seek out ways of reconciliation with its neighbours, strengthen institutions through political consensus and create a conducive environment for investment, if they are sincere about addressing the root cause of the ongoing economic crisis that has almost posed an existential threat to the country.
Toseef Ahmad Bhat is Associate Research Fellow at International Centre for Peace Studies in New Delhi.
1.Khaleeq Kiani, “IMF slashes Pakistan’s growth outlook to 0.5pc”, Dawn, April 12, 2023, URL: https://www.dawn.com/news/1747207
2. Arvind K. Jain (2001), The Political Economy of Corruption, New York: Routledge, pp. 34-37.
3.S. Akbar Zaidi (2005), Issues in Pakistan's Economy, London: Oxford University Press, pp. 43-44.
4.Gustav F. Papanek (1967), Pakistan’s Development: Social Goals and Private Incentives, Harvard University Press, pp. 87-89.
