THE persistent knock on the International Monetary Fund’s door has become a routine for Pakistan. The cyclical nature of Pakistan’s economic growth is emblematic of a repeating pattern, wherein, spurts of economic growth, witnessed over a span of two to three years, are often followed by challenges rooted in trade imbalances and balance of payment crises. In response to such conditions, Pakistan needs to go to IMF. Although IMF interventions succeed in restoring macroeconomic stability, they at the same time cause a conundrum marked by diminished economic growth, exacerbating socio-economic disparities, which in the long run is unsustainable for any state. To break free from this cycle, Pakistani governments should abandon policies which engender fleeting spurts of growth the moment Pakistan achieves macroeconomic stability. Instead, they should undertake profound structural reforms, addressing the foundational deficiencies that perpetuate this cyclicality and ensure a more viable economic trajectory.
At the heart of Pakistan’s recurrent recourse to the IMF lies structural issues that have woven a narrative of economic vulnerability. The nation grapples with an export sector that remains stagnated, hovering around the $30 billion mark and has been unable to increase it. As a share of GDP, Pakistan’s exports fell from 16 percent in 1999 to 9 percent in 2021 – an exceptionally low level among middle-income countries. In 2000, Pakistan was the country of origin for $14 of every $10,000 worth of products and services exported globally. In 2021, this had dropped to just $11. In stark contrast, Vietnam was able to expand its market share of export from $23 to $123 in the same period. This stagnation of exports casts a dark shadow on the prospects of achieving sustainable economic growth and results in balance of payment crisis.
A confluence of fiscal challenges further tightens the economic tangle, with a low and decreasing tax-to-GDP ratio standing as a glaring testament to the inadequacies in revenue collection. Pakistan has seen its tax-to-GDP ratio declining over the years from 14percent in 1980s to 10.4percent in the fiscal year 2022. Additionally, the regressive nature of the taxation system exacerbates the socioeconomic divide, widening the gap between the privileged few and the struggling masses.
However, perhaps the most immediate concern for Pakistan’s economic health is the rising circular debt in the power and gas sector. Circular debt of this sector collectively has exceeded the enormousRs5 trillion mark. This not only engenders a dangerous fiscal imbalance but also contributes significantly to the perennial balance of payment crises that punctuate Pakistan’s economic trajectory and compels Pakistan to go back to IMF. As Pakistan braces itself for another phase in its IMF saga, a thoughtful analysis of the structural impediments underline the urgency for a recalibration of economic policies. The cycle must be unlocked and the door to the IMF’s footsteps should not be a constant gateway but a bridge to sustainable economic growth.
Reducing Pakistan’s dependence on the international lenders requires a multifaceted approach. The most immediate aspect is the rationalisation of subsidies, addressing structural inefficiencies, minimising technical and non-technical losses and promoting transparent governance mechanisms besides bolstering revenue collection in the power and gas sector. For example, Pakistan suffers from depleting gas reserves and imports expensive LNG to cover the shortfall but still continues to provide households and businesses with subsidised cheap rate of indigenously produced gas, which is untenable. Furthermore, Pakistan needs to realign the energy sector to local resources like coal, solar and wind. It also needs to implement a comprehensive EV policy. These policies collectively will reduce the balance of payment crisis by reducing the energy imports.
Simultaneously, increasing the tax-to-GDP ratio is imperative for strengthening the fiscal position. This involves a strategic recalibration of the tax system, starting with a reduction in distortive tax exemptions. The introduction of new taxes on real estate and agriculture, will also broaden the tax base. Furthermore, simplifying the complex web of tax code and enhancing compliance procedures through digitisation will provide a more transparent and efficient tax regime. If Pakistan is able to reform its taxation system as outlined above, it will add almost 5percent of GDP to its economy according to the World Bank estimates.
To ensure economic growth and increase foreign exchange reserves, there is an urgent need to boost exports. This entails a two-pronged strategy: firstly, limiting government borrowing to increase access to capital for the private sector and secondly, simplifying the regulatory framework at both the federal and provincial levels. A streamlined regulatory environment will facilitate businesses in navigating bureaucratic hurdles, encouraging investment and fostering a conducive environment for export-oriented industries. According to World Bank estimates, Pakistan has an export potential of $88 billion, capacity to attract $2.8 billion of FDI and a growth potential of 7-8 percent if it is able to implement the strategy outlined above. To conclude, a comprehensive and integrated approach entailing subsidy rationalisation, power and gas sector optimisation, tax system reform and export promotion is important to reduce Pakistan’s reliance on the IMF and foster sustained economic growth. Implementing these measures with due consideration to socio-economic factors and in a transparent manner will be vital in achieving tangible and lasting results for Pakistan in breaking the cycle.
—The writer is a researcher at Centre for Aerospace and Security Studies (CASS), Lahore, Pakistan.
Email: zaheenqureshi20@gmail.com
views expressed are writer’s own.
