File photo. Rizwan Tabassum—AFP
There is little good news on Pakistan’s economic front so the nearly $10 billion pledged by the global community for the recovery and rehabilitation of the country’s flood-hit areas must be appreciated, as trying to go solo is no longer an option. Trapped in low growth, high inflation and unemployment, falling investment, excessive fiscal deficits, and a deteriorating external balance position, Pakistan appears to be stuck in a terminal crisis, especially when compared with the rest of South Asia.
India and Bangladesh—which is in the midst of its own IMF program—have outpaced a Pakistan burdened with heavy debt repayments and slow growth, and foreign exchange reserves barely sufficient for a month of essential imports. One of the primary reasons Pakistan must rely on foreign capital is that nobody in the country saves in commensurate with investment requirements. There are many reasons for this: low or negative real interest rate, unstable incomes, large family sizes, low education levels, high inflation, lack of culture to save, to name just a few.
As bad as things are, however, they can still worsen. Pakistan is already facing an energy shortage, which officials attribute to circular debt, untargeted subsidies, line losses, and theft. No amount of subsidies can fix this problem, as global oil prices continue to fluctuate and little has been done to stem line losses. Attempts to curtail the national energy demand—such as early market closures—have repeatedly fallen on deaf ears and often fall prey to political bickering.
Another problem is the “informal economy” that fails to yield any taxable revenue to the government. This “undocumented” segment of the economy is repeatedly brought up by experts, but no government has been able to muster up the courage to enact reforms or take steps that risk the public’s ire. Economists, caring little for political considerations, warn the government can no longer afford to avoid tough and unpopular policies if it wants to protect the national economy. In their view, immediate steps are needed to strengthen public finances through revenue mobilization; cutting wasteful spending; strengthening the fiscal decentralization framework; reforming the energy sector by removing the power deficit and untargeted subsidies; reducing the government’s involvement in the economy; reducing inflation; protecting the external position; safeguarding the stability of the financial sector; strengthening and enforcing competition laws; removing unnecessary controls; removing policy bias against the private sector, non-agriculture sectors, and non-textile sectors; and working to reduce the economy’s dependence on foreign assistance for sustainable growth.
Whether or not the incumbent government—facing crises on multiple fronts—is willing to sustain the political loss this would require remains to be seen.