Major economic challenges faced by Pakistan

At present, Pakistan has been facing major economic challenges that have badly affected the lifestyle of people. Unless these issues are resolved, the citizen will continue to face, extreme poverty, inflation, unemployment and so on. It is, therefore, the existing PTI-led government has made this issue as its top priority. However, the economic issue is so complex that it will take decades to put the country on the stable footing.

The major economic challenges faced by Pakistan are given as follows:

Fiscal Deficit:

In the budget, presented by the federal government for the fiscal year 2019-20, the total fiscal deficit was recorded as Rs3,151.2 billion, which was 7.2 per of GDP. Lets understand the fiscal deficit. The federal government generated Rs6,716.6  revenue from different tax and non-tax sources during the previous fiscal year^___.2018-19. It means, this was the total money the federal government possessed, apart from provincial share, for the expenditure and called gross federal revenue. Out of this revenue, the central government transferred Rs3,254.5 billion to the provinces under the NFC Award. After transferring to the provinces, the net federal revenue became Rs3,462.1 billion. Against this revenue, the total expenditure of the federal government was Rs7,036.3 billion making the deficit of Rs3,574.2 billion. However, the provinces generated Rs423 billion for the federal government. Thus, subtracting Rs423 from Rs3574.2 will bring out the actual fiscal deficit i.e. Rs3,151.2 billion. Alarmingly, a major chunk of expenditure^___ Rs2,891.4 billion^___ is to be paid as an interest for the loans Pakistan has taken for the years. Thus, the fiscal deficit of around 7.2 per cent of GDP is the most critical economic challenge faced by Pakistan.

The picture below further explains in detail the federal revenue collection and expenditure.

Poor Tax-to-GDP ratio:

According to the budget for the fiscal year 2019-20, the tax-to-GDP ratio of Pakistan stood at 12.6 per cent. It is not adequate as compared to the ratio of the developed countries. Tax-to-GDP ratio is defined as the amount of revenue collected through taxes relative to its GDP. The higher is the ratio, the better is the financial condition of a country. The average tax-to-GDP ratio of the world is 16-17 per cent. In the US, the ratio is around 28 per cent. If the ratio is increased, Pakistan would not require to get loans for its survival. Because of this reason, Imran Khan is trying to bring more people to the wider tax-net of Pakistan.

Balance of Payment Crisis:

Pakistan is facing the issue of balance of payment crisis. Apart from other reasons, it is commonly caused when import of a country surpasses its export. As a result, a gap is created between money entering and leaving the territory causing the crisis. Taking loans from the IMF then fills the gap. Money laundering can also cause it. During the fiscal year 2018, the total trade deficit of Pakistan was around $37.5 billion because the total export was $23.21 billion and import stood at $60.8 billion. In the fiscal year 2019, the deficit reduced to $31.8 billion because the total export was recorded as $22.97 billion and import decreased to $54.8 billion. Still the gap of $31.8 billion is alarming for Pakistan’s economy.

Surging burden of External Debt and liabilities:

In 1999, external debt and liabilities stood around $45 billion, and during Musharraf’s era from 1999 to 2007 there was no increase in external debt and remained static around $45 billion. However, the external debt increased from $45 to $62 billion, from 2008 to 2013 — an increase of $17 billion during PPP’s five-year term. The total external debt and liabilities rose from $62 billion to around $95 billion from 2013-2018. Thus, it increased by $33 billion during PML-N. At present, the total foreign debt and liabilities have reached $106.8 billion, according to the State Bank of Pakistan. So far, the external debt has increased by $11.8 during the PTI-led government.

Poor GDP growth rate:

According to Pakistan Economic Survey 2018-19, the GDP growth rate of Pakistan is 3.29 per cent, which is alarming. It is estimated that to eliminate extreme poverty and double per capita income (from $1600 to $3200) in a decade, Pakistan’s economy should grow at 7 per cent annually. To achieve this target, Pakistan’s economy needs an investment of around $60 billion annually.

Low money saving rate:

According to Raza Baqir^___ Governor State Bank of Pakistan^___ the country’s saving rate is one of the lowest in the region.  He further said, “Low savings rate is one of the main reasons for low domestic investments in the country.” In the last five fiscal years (2013-2018), Pakistan’s domestic saving growth rate averaged below 7.4 per cent. The citizens are withdrawing money from National Saving Centre because they are getting 11-12 per cent in return, which is inadequate when inflation is around 12 per cent. Pakistan’s needs an investment of 20-30 per cent of GDP annually. To reach this threshold, the saving rate of Pakistan must be at least 25 per cent. At present, India’s saving rate is 34 per cent while China’s 50 per cent.

Depleting Foreign Direct Investment:

According to Pakistan Economic Survey 2018-19, foreign investment is on low growth trajectory. It dropped by 51.7 percent in July-April FY2019 to US $ 1.376 billion as compared to US $ 2.849 billion in July-April FY2018. As already mentioned, Pakistan, at least, needs around $60 billion both foreign and domestic investment. Hence, the dwindling FDI is among the major economic challenges faced by Pakistan.

Conclusion:

Thus, fiscal deficit, poor tax-GDP ratio, balance of payment crisis, surging burden of external debt, low saving rate and depleting FDI are the major economic challenges faced by Pakistan. These are very complex challenges and have developed since the creation of Pakistan. It is, therefore, they will take decades to be addressed and will require more time, proper implementation of policies and patience of the citizens.