What major economic challenges are being faced by Pakistan? What recommendation do you suggest to deal with these issues.

Introduction

Mahbub ul Haq, Pakistan's celebrated economist, warned in a speech in April 1968 that just 22 families controlled most of the country's industrial assets and banking, and that growth without equity could not last. More than half a century later, Pakistan's economy still grows in short bursts that end in crises, while the benefits are unevenly shared. Twin deficits, low taxes, rising debt, inflation, loss-making state enterprises and weak exports keep the country dependent on external loans. Overcoming these challenges requires deep structural reforms rather than temporary fixes.

Overview

Since 1988, Pakistan has entered more than a dozen IMF programmes, a sign of chronic balance-of-payments weakness. Growth has averaged around 4 percent in recent decades, too low for a population growing at about 2.5 percent. Each growth spurt, as in 2004-07, 2016-18 and 2021-22, widened the current account deficit and ended in an IMF programme. In 2022-23, Pakistan faced inflation of nearly 38 percent in May 2023, foreign reserves of only a few weeks of imports and a real risk of default, before a new IMF arrangement stabilised the economy.

Major economic challenges

1. Twin deficits.

Pakistan persistently runs a fiscal deficit (often 6-8 percent of GDP) and a current account deficit during growth periods, so it must borrow at home and abroad. (Reference: Finance Division, Pakistan Economic Survey 2023-24; State Bank of Pakistan, balance of payments data.)

2. A low tax-to-GDP ratio.

Tax revenue is only around 9-10 percent of GDP, among the lowest in the world, because agriculture, retail, real estate and much of the informal economy pay little tax. (Reference: Federal Board of Revenue, Year Book 2022-23; World Bank, Pakistan Development Update, 2023.)

3. Rising public debt.

Public debt has exceeded 70 percent of GDP, and interest payments now consume a large share of federal revenue, leaving little for development. (Reference: Ministry of Finance, Debt Policy Statement 2023-24.)

4. Inflation and currency depreciation.

Imported inflation, energy price increases and monetary expansion pushed inflation to record highs in 2023, while the rupee lost much of its value, eroding living standards. (Reference: Pakistan Bureau of Statistics, Consumer Price Index data, May 2023; State Bank of Pakistan, exchange rate data.)

5. Loss-making state-owned enterprises.

SOEs such as PIA, Pakistan Steel Mills, Pakistan Railways and the power distribution companies lose hundreds of billions of rupees a year, draining the budget. (Reference: Ministry of Finance, Federal Footprint: SOEs Annual Report; State-Owned Enterprises (Governance and Operations) Act 2023.)

6. Energy sector circular debt.

Power-sector circular debt exceeded Rs 2.3 trillion in 2023, driven by high generation costs, losses, theft and unpaid subsidies. (Reference: Ministry of Energy (Power Division), circular debt data; NEPRA, State of Industry Report 2023.)

7. Low savings, investment and productivity.

National savings of around 13 percent of GDP and investment of about 15 percent are far below the levels in East Asian economies, limiting growth. (Reference: Finance Division, Pakistan Economic Survey 2023-24, chapter on growth and investment.)

8. Narrow exports and low human capital.

Exports rely heavily on textiles and remain around 10 percent of GDP, while low literacy and poor health limit productivity. Pakistan ranks low on the Human Development Index. (Reference: Pakistan Bureau of Statistics, trade data; UNDP, Human Development Report 2023/24.)

Recommendations

1. Broaden the tax base.

Bring agriculture, retail and real estate fully into the tax net, use technology for documentation and reduce exemptions, while lowering rates for compliant taxpayers. (Reference: IMF, Pakistan Extended Fund Facility staff report, 2024; Federal Board of Revenue, reform roadmap.)

2. Fiscal discipline.

Cut unproductive spending, target subsidies through the Benazir Income Support Programme and adopt binding fiscal rules under the Fiscal Responsibility and Debt Limitation Act. (Reference: Fiscal Responsibility and Debt Limitation Act 2005, as amended; Benazir Income Support Programme, NSER data.)

3. Reform SOEs and privatise.

Restructure or privatise loss-making enterprises under professional boards, as envisaged by the SOE Act 2023 and the privatisation programme. (Reference: State-Owned Enterprises (Governance and Operations) Act 2023; Privatisation Commission programme.)

4. Fix the energy sector.

Reduce losses and theft, renegotiate IPP contracts, shift to cheaper local and renewable energy and reform distribution companies. (Reference: Power Division, Circular Debt Management Plan; Alternative and Renewable Energy Policy 2019.)

5. Boost and diversify exports.

Support high-value manufacturing, IT services and agro-exports, provide competitive energy to exporters and seek new markets. (Reference: Ministry of Commerce, Strategic Trade Policy Framework; Pakistan Software Export Board data.)

6. Raise savings and investment.

Develop capital markets, pension funds and long-term savings instruments, and improve the investment climate through the SIFC. (Reference: State Bank of Pakistan, National Financial Inclusion Strategy; Board of Investment (Amendment) Act 2023.)

7. Invest in human capital.

Increase spending on education, health and skills to build a productive workforce. (Reference: Constitution of Pakistan, Article 25A; UNDP, Pakistan National Human Development Report 2017.)

8. Ensure policy continuity.

A charter of economy agreed by all parties would protect reforms from political cycles. (Reference: Pakistan Business Council, Charter of Economy proposals; Planning Commission, 13th Five-Year Plan 2024-29.)

Conclusion

At the opening of the State Bank of Pakistan on 1 July 1948, Quaid-i-Azam urged the nation to "work our destiny in our own way." Pakistan's economic challenges, from twin deficits and low taxes to debt, inflation, loss-making SOEs and weak exports, are serious but not insurmountable. Countries such as Bangladesh, Vietnam and Indonesia overcame similar problems through reform and consistency. With a broad tax base, fiscal discipline, reformed enterprises, competitive energy, export growth and investment in people, sustained by political consensus, Pakistan can break its boom-bust cycle and achieve inclusive prosperity.