Beyond Borders: A Microscopic Look into The Pakistani Economy

Introduction

Pakistan's economy is facing severe challenges, with high inflation, low foreign reserves, and a falling rupee value. The country's long-standing structural weaknesses have resulted in a consumption-driven growth model with limited productivity-enhancing investment and exports. The political tensions and non-tariff barriers have further limited the bilateral trade between India and Pakistan, which has immense potential given their proximity and size. The situation calls for urgent solutions to address the underlying issues and promote economic growth in Pakistan. In this article, we will discuss the challenges facing Pakistan's economy, the limited trade relations with India, and the possible solutions to address these issues.

Current Economic Situation?

Although the country made progress in reducing poverty between 2001 and 2018, human capital outcomes remained poor and stagnant, with high levels of stunting and learning poverty. The consumption-driven growth model, with limited productivity-enhancing investment and exports, has resulted in frequent macroeconomic crises and low long-term growth of real GDP per capita.

Currently, Pakistan's economy is under significant stress with low foreign reserves, a depreciating currency, and high inflation. Economic growth increased substantively above potential in FY22, leading to strong pressures on domestic prices, external and fiscal sectors, the exchange rate, and foreign reserves. These imbalances were exacerbated by the catastrophic flooding in 2022, surging world commodity prices, tightening global financing conditions, and domestic political uncertainty. Economic activity has fallen with policy tightening, flood impacts, import controls, high borrowing and fuel costs, low confidence, and protracted policy and political uncertainty.

Looking ahead, real GDP growth is expected to slow sharply to 0.4 per cent in FY23, reflecting corrective tighter fiscal policy, flood impacts, high inflation, high energy prices, and import controls. The lower activity is expected to spill over to the wholesale and transportation services sectors, weighing on services output growth. While output growth is expected to gradually recover in FY24 and FY25, it is predicted to remain below potential due to low foreign reserves and import controls, curbing growth. Without higher social spending, the lower middle-income poverty rate is expected to increase to 37.2 per cent in FY23. Poor households remain vulnerable to economic and climate shocks, given their dependency on agriculture and small-scale manufacturing and construction activity.

Trade relations with India?

India and Pakistan have a long and complicated history when it comes to trade relations. Despite being neighbouring countries, the bilateral trade between India and Pakistan has been limited due to political tensions and cross-border conflicts.

In recent years, the trade relations between India and Pakistan have been strained. In 2019, India revoked the special status of Jammu and Kashmir, which led to a complete suspension of bilateral trade between the two countries. Since then, the trade relations have not improved much, and the countries only engage in limited trade through third-party countries.

According to the World Bank, the total value of exports from India to Pakistan in 2020 was USD 278 million, while the imports from Pakistan to India were USD 341 million. These numbers are significantly low compared to the potential of trade between the two countries, given their size and proximity.

The limited trade between India and Pakistan mainly comprises agricultural products, textiles, and cement. There is significant demand for Indian medicines, especially COVID-19 vaccines, in Pakistan, but political tensions prevent the countries from engaging in direct trade. As a result, Pakistan has been importing vaccines from China, Russia, and other countries.

In addition to political tensions, non-tariff barriers such as high customs duties, strict visa policies, and lack of banking channels also hinder bilateral trade. These barriers make it difficult for businesses to establish and maintain trade relations between the two countries.

Flaws in The Pakistani Economy

1. Political Instability and Polarisation: Pakistan is facing political instability and polarization in 2023, with an election year coming up in October. Former Prime Minister Imran Khan is leading a popular opposition movement against the incumbent coalition government and the military. The direction of the country is unlikely to change regardless of the election outcome.
2. Economic Crisis: Pakistan’s economy is in crisis, with inflation, a falling rupee value, and low foreign reserves that could lead to default. This is worsened by internal political instability and the aftermath of catastrophic floods. The government has been mired in politicking and has failed to address the underlying problems.
3. Slow Recovery from Catastrophic Floods: Pakistan is still recovering from catastrophic floods that killed over 1,700 people, displaced millions, and destroyed homes, infrastructure, and cropland. The government has brought awareness of the catastrophe to the world stage, but recovery efforts are slow and challenging.

Solutions for the Pakistani Economy

1. Fiscal Reforms: The government needs to implement fiscal reforms to improve tax collection, reduce government spending, and address the issue of corruption. This could help increase revenue and reduce the budget deficit.
2. Investment in Infrastructure: The government could invest in infrastructure projects, such as transportation, energy, and telecommunications, to attract foreign investment and create jobs. This could help stimulate economic growth and reduce unemployment.
3. Promoting Exports: The government could promote exports by providing incentives to exporters, diversifying the export base, and improving the trade infrastructure. This could help increase foreign exchange reserves and reduce the current account deficit.
4. Encouraging Foreign Investment: The government could improve the investment climate by simplifying the regulatory framework, ensuring the rule of law, and providing incentives to foreign investors. This could help attract foreign investment and improve economic growth.
5. Addressing Agriculture Issues: The government could address the underlying issues in the agriculture sector, such as the lack of modern technology, irrigation, and storage facilities. This could help improve productivity and reduce food insecurity, which would ultimately help reduce inflation.

Conclusion :

To revitalise Pakistan's economy, the government needs to implement fiscal reforms, invest in infrastructure, promote exports, encourage foreign investment, and address underlying issues in the agriculture sector. By taking these steps, Pakistan can overcome its challenges and build bridges with other countries to foster greater trade and economic cooperation.

References?

1. World Bank. (2022, October 25). Pakistan. https://www.worldbank.org/en/country/pakistan/overview
2. Raza, M. (2023, January 13). Pakistan: Five major issues to watch in 2023. Brookings Institution. https://www.brookings.edu/blog/order-from-chaos/2023/01/13/pakistan-five-major-issues-to-watch-in-2023/
3. The Economic Times. (2022, January 10). India-Pakistan trade stood at USD 1.35 billion during April-December 2022. https://economictimes.indiatimes.com/news/economy/foreign-trade/india-pakistan-trade-stood-at-usd-1-35-billion-during-april-december-2022/articleshow/97737133.cms