Nearly 83 years since the Lahore Resolution of 23rd March 1940, while other countries in the region, namely India and Bangladesh, have become paragons of technological advancement, high-quality education, and rapid economic growth, Pakistan still seems to be trudging along with no clear direction, at the mercy of global economic shocks. In a post-pandemic world, which is being ravaged by regional wars and frequent climate change-induced natural disasters, Pakistan is now hurtling towards a potential default after decades of being trapped in a vicious boom-bust cycle. Politicians across the entire political spectrum have now finally begun to speak about an oft-forgotten buzzword: ‘structural reforms.’
Long-lasting structural reforms are crucial as nearly 76 years since independence, Pakistan remains largely dependent on imports with a diminutive share in global exports. For instance, despite possessing a predominantly agrarian economy, Pakistan will need to import 2.6 million metric tons of wheat from Russia this year to satisfy domestic demand. In past decades, with the help of ample U.S. funding, Pakistan easily circumvented its economic problems; foreign exchange reserves were high, external debts were low, and the economy was booming. In the Musharraf era alone, 11.8 million jobs were created while Pakistan’s reserves rose from US$1.2 billion in 1999 to $10.7 billion in 2004. However, it can be observed that once U.S. funding dried up, success governments began to take high-interest loans to finance consumption as well as luxury goods imports for the elite. Scarce resources were being directed towards consumption instead of investments-promoting activities. Fast-forward to March 2023 and the country is still stuck in the same vicious cycle and is awaiting the last $1.2 billion tranche of a 23rd IMF Loan. If Pakistan does not adopt export-promotion policies to reduce its dependence on imports, it risks maintaining massive fiscal deficits each year, and eventually defaulting, resulting in an irreparable loss to its international reputation.
Large and profitable industries such as real estate continue to be untaxed due to lack of will from the political elite who themselves are beneficiaries of the lucrative sector
A huge part of the country’s prevailing quagmire is the utilization of the Finance Ministry as a tool to win the favor of the voting masses right before an impending election. For years, politicians convinced the masses that a high rupee-value to the dollar as well as low inflation were signs of a healthy economy. In the wake of the war in Ukraine which disrupted global supply chains and catalysed a global economic slowdown, the entire world experienced inflationary pressures coupled with high unemployment and declining growth. Subsequently, the very same politicians that had established inflation and the exchange rates as barometers of successful governance were recently seen scrambling to reduce petrol prices in an attempt to appease the voting masses in view of imminent provincial elections. The result was a reversal of the desired policy as Pakistan’s currency devalued due to market forces, pushing petrol prices up again. Transparency regarding the economic situation which Pakistan faces is the need of the hour. Rather than placing the onus of bad economic decisions on each other, political parties could adopt a more proactive approach and inform the public about the economy’s pressing issues while also devising ways to widen the tax net, especially by tapping into Pakistan’s untaxed industries.
Large and profitable industries such as real estate continue to be untaxed due to lack of will from the political elite who themselves are beneficiaries of the lucrative sector. Income Tax on the sale and purchase of property should be levied on even non-filers. This would result in adequate income redistribution when coupled with subsidies provision for low-income groups. Additionally, the government could start taxing the informal sector. Pakistan’s informal sector is a primary source of employment for manufacturing, wholesale, and retail sectors, transportation, personal care, and cottage industries. Despite being constantly neglected by policymakers, it contributes almost 56 percent to Pakistan’s GDP. Thus, bringing the vast informal economy into the taxable fold could be beneficial as it would augment the country’s reserves which have been fast-falling due to debt repayments. Furthermore, the government could lend its support to firms in the informal sector by encouraging them to export goods at low prices, effectively helping to reduce the country’s current account deficits.
All in all, Pakistan faces severe economic crises including a liquidity crisis due to fast approaching external debt-repayments as well as a very high monthly import bill of $3 billion (despite curbs on some essential imports to reduce the current account deficit). However, structural reforms which include widening the tax net and increasing taxes on profitable, elite-dominated industries could help to sway Pakistan’s economy to a more prosperous future with lower dependence on imports and a higher share in global exports.
The writer works at the World Bank, Washington DC, and is an alumnus of Columbia University