Challenges of 2022

Pakistan is in its 75th year of independence, in all these years, Pakistan initially progressed very well and had somewhat reasonable economic performance in the later years. However, it is on a decline since 2005, which is very unfortunate. Almost everyone now feels that country is slipping from the hands and going down and down. In one of the World Bank’s reports, main risks to the economic outlook of Pakistan are domestic, including fiscal slippages, increasing liabilities related to infrastructure projects and weak tax revenues that derail the fiscal consolidation efforts.

Pakistan’s economy in 2021 faced many challenges like trade, current account and budget deficits, high inflation, and depreciation of rupee against US dollar and overall political situation of the country. The trade deficit is increasing; the government has announced to form a special policy for the exporters but couldn’t finalize. Federal Bureau of Revenue is collecting more than its targeted tax collection because of indirect taxes. Economic fundamentals have deteriorated since last year and it seems that it would further deteriorate in coming months if things would continue like this.

Pakistani rupee is continuously losing its value against US dollar. Due to the fall in rupee, the economy has suffered badly. Devaluation of rupee has a direct impact on almost all the consumer products, country’s foreign currency debt and its ability to pay its import bill. Pakistan has recently received a foreign currency support from Saudi Arabia, which is not sufficient enough to cover the gap and that carries a high interest rate.

Pakistan is facing a foreign exchange crisis where boosting exports on a sustainable basis remains the prime focus of the current government. Pakistan doesn’t has strong economy, it has high budget deficit, with high debt profile. The focus is on fiscal belt-tightening, improving business climate, improving deteriorating current account deficit and curbing corruption. Pakistan has so far not able to attract foreign investment from US, Europe and Middle East while most of its infrastructure needs are being taken care of by China only.

One of the most important steps the government should take is to boost the manufacturing within Pakistan. Pakistan would not come out of its current economic situation on a sustainable basis without boosting manufacturing and installing new manufacturing facilities. Government should form a small but effective and focused task force to revive micro, small and medium enterprises, cut red tape; clearances, consents and permits should be made transparent and time-bound, incentivize SMEs, and offer cheap loans.

Pakistan is already working with International Monetary Fund (IMF) for a bailout program for which there is a meeting in January 2022. IMF has asked Pakistan to ensure primary surplus on budget deficit to move ahead with the program, leaving it with the hard choice of either slashing down its defense or development expenditure. The terms which IMF has offered are quite stringent and will put a lot of burden on the people. Government is reluctant in putting more burden on the people but it has very limited options.

State Bank of Pakistan (SBP) has recently increased the policy rate so as to contain rising inflation. It is said that inflation in Pakistan is not very much linked with the interest rates and is more linked with the governance. Increase in lending rates means a higher cost of finance for many sectors of the industry thus putting more pressure on the businesses. However, these measures clearly indicate that Pakistan is serious in reviving its IMF program. It’s a fact that the government is borrowing from the central bank to retire previous debts of the commercial banks and to meet its current expenses. Bankers view this increase in interest rate as slowing down in the growth and private sector borrowings. The latest monetary tightening means an increase in banks’ lending rates, which means a higher cost of finance. It is being said that the higher interest rates will hurt even those five sectors of large-scale manufacturing (LSM) that have so far shown a rising trend in production. These are electronics, leather products, paper and board, engineering products and rubber products. Independent analysts’ view that serious impact of the interest rate increase will be on small and medium enterprises (SMEs). It is expected that with low economic growth, a weaker rupee, and high-interest rates, SMEs’ loan defaults will grow. And that, in turn, will discourage banks from lending to the SME sector, particularly if the government restarts borrowing from the banks heavily.

Rising interest rates and tighter liquidity situation will also pose challenges for Pakistan in 2022, given the high gross external financing requirements. Pakistan’s economic situation is expected to remain fragile for next couple of years as a combination of low economic growth and high inflation due to stabilization policies will undermine efforts to lift people out of poverty and create jobs.

Pakistan has a huge advantage of its geographical location yet it couldn’t avail the full advantage of its resources. Low foreign direct investment, the high cost of doing business, poor infrastructure, and political instability have impeded the economic growth of Pakistan. In these circumstances, the establishment of special industrial zones is a must to attract foreign direct investment (FDI) and generate economic activities in the country. One of the most important objectives of planning is to make a balanced growth of the different regions of the country and reducing disparities. Therefore, it is the job of the government to plan in such a way where it could provide equal opportunities to its people and no area should feel neglected. Pakistan desperately needs foreign direct investment (FDI) where offering industrial zones to international investors can help to achieve this target.

Since long, Pakistan is facing circular debt issue in the energy sector. Government should take measures to reduce the circular debt gradually. It is important for the government to introduce measures to reduce the cost of electricity. Government should introduce measures to incentivize distributed solar projects and other renewable projects so that the cost of generation could come down. This will thereafter help the government in bringing down the circular debt. One more thing which government should do is to privatize state own entities. These bankrupt state owned entities are a huge burden on the national exchequer.

Government should also control the smuggling. This alone factor will have a serious positive impact on the economy. Smuggling goods into Pakistan but taking goods out of Pakistan is mind boggling. Pakistan cannot progress without controlling its boarders, be it security or economic situation. The sooner we realize this, the better it would be.

The federal government has to address all of the above issues on a priority basis in case it wants to have an economically better Pakistan in 2022. Therefore, short-term measures for fiscal consolidation and export growth need to be complemented with the implementation of medium-term structural reforms to uplift the economy.

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