CSS 2016 Solved Current Affairs Past Papers | Measures to Improve Pakistan’s Economy
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Question Breakdown
This question has one part in which we are supposed to suggest measures to improve Pakistan’s economy, particularly in areas of debt reduction and enhancing export capacity.
Outline
1-Introduction
2-A glance at the current situation of the Economy of Pakistan
3-Debunking reasons behind the deteriorated state of the Economy of Pakistan
4-Delineating measures to improve the Economy of Pakistan
4.1- By Reducing Debt Burden
- ✓ Expanding the tax base to generate maximum revenue and improve tax-to-GDP ratio
- ✓ Curtailing government expenditures on non-essential services to minimize fiscal account deficits
- ✓ Privatizing state-owned enterprises to reduce external sovereign debt
- ✓ Debt Restructuring to adjust sovereign domestic debt burden
4.2-By enhancing Export Capacity
- ✓ Capitalizing on exportable goods and services by incorporating high technology for sustainable economic growth
- ✓ Shifting towards production of high-valued products that comply with international standards
- ✓ Empowering small and medium enterprises to reach maximum export potential
- ✓ Encouraging entrepreneurship and workforce development to diversify the export base
5-Critical Analysis
6-Conclusion
Answer to the Question
Introduction
The dawn of the 21st century has witnessed the economic emergence of developing countries with elevated levels of industrialization and well-developed technological infrastructure, maintaining their standing at the global level. For instance, China, India, Japan, Russia, and South Korea are leading Asian countries adding their due share in the global economy. Lamentably, Pakistan resides in an agonizing state with a mounting debt burden, persistent stagflation, and a low-performing economy in the region. Moreover, the country’s unsustainable economic policies and political instability find a basis for its volatile and slow growth. However, the country could reduce its debt burden by expanding the tax base, curtailing non-essential government expenditures, and restructuring domestic debt. Similarly, the export capacity could be increased by capitalizing on exportable goods and services, empowering small and medium enterprises, and encouraging entrepreneurship and workforce development. According to Statista’s macroeconomic indicators, Pakistan’s general government gross debt is expected to be USD 253.70 bn by 2024. It reflects the pressing need for an effective economic recovery plan with critical structural reforms for debt reduction and long-term sustainable development. Moreover, the country needs to implement a clear strategy for broadening its export capacity, keeping in view the international demands and market trends to transform into an export base economy from an import substitution economy.
A glance at the current situation of the Economy of Pakistan
The economic indicators of Pakistan paint a bleak picture with escalated current account deficits and fiscal account deficits, heightened inflation, and augmented levels of unemployment. While Pakistan is stepping into a 37-month Extended Fund Facility Arrangement (EFF) of about US $7 billion under the 2023 Stand-by-arrangements of IMF, the macro-economy seems to be stabilized a bit with imports cut down and a positive impact on the rupee against the dollar. Moreover, the Special Investment Facilitation Council (SIFC) announcement has surfaced as a ray of hope to foster growth and investment opportunities in Pakistan, particularly in the Energy and Power Sector. However, the overall economic situation is unsatisfactory, with the rise in double-digit inflation due to high interest rates and increased government borrowings. According to Pakistan’s Debt and Liabilities summary by the State Bank of Pakistan, the economic indicators are presented below in comparative analysis (in billion rupees):
| Jun-23 | Jun-24 | |
| Gross Public Debt | 62,881.0 | 71,245.9 |
| Total Debt of the Government | 57,779.2 | 65,079.8 |
| Total External Debt and Liabilities | 36,125.7 | 36,327.4 |
| Gross Domestic Product (GDP) | FY23 83,874.9 | FY24 106,045.1 |
Debunking Reasons behind the Deteriorated State of the Economy of Pakistan
Since its inception, Pakistan has survived major economic calamities coupled with political instability and social turmoil. However, 2023 remained the most challenging year in recent times, with constant resonation of default and the government’s failure to manage the economic state of affairs. Previously, the country had not fully recovered from destructive waves of COVID-19 when flash floods of 2022 submerged 1/3rd of the country, causing an estimated loss of about US $14.8 billion. Furthermore, currency devaluation and high interest rates lead to heavy government borrowings from multilateral donor institutions. For instance, Pakistan ranks fifth in the outstanding debt with the IMF and owes US $7.596 billion to the global lender. Additionally, the lack of employment and business opportunities has resulted in a historic brain drain in 2023, removing qualified and skilled professionals from the country. Likewise, the lack of infrastructure and unstable socio-political setup shrunk the investment opportunities, negatively impacting the burdened economy. Simply put, Pakistan’s current economic system must be overhauled for better performance and continuous economic growth.
Delineating Measures to Improve the Economy of Pakistan
A- By Reducing Debt Burden
- Expanding the tax base to generate maximum revenue and improve tax-to-GDP ratio
First, a country’s effective and well-managed tax collection system generates sizeable revenue and reduces its probability of repeatedly performing as a borrower. However, in the case of Pakistan, tax-to-GDP stood at 9% during 2023-24, as per the revenue forecasting report of the Federal Board of Revenue (FBR). Furthermore, the current taxation system of Pakistan is quite unfair and fragmented, which reduces government revenue, making the country prone to foreign loans and debts. Likewise, tax evasion and avoidance are also leading issues in the following realm, worsening the structural economic imbalances. Hence, there is a dire need to broaden the tax base to ensure a more equitable tax distribution system and generate maximum revenue to eradicate the debt burden.
- Curtailing government expenditures on non-essential services to minimize fiscal account deficits
Second, government borrowings and expenditures are a true reflection of its long-term priorities towards the socio-economic development of a country. Contrarily, unnecessary and unplanned spending leads a country towards the risk of default. Likewise, the Finance Division estimates Pakistan’s fiscal account deficit to be 6.54% of GDP in FY 23-24. Additionally, under the country’s poor fiscal management and inefficient resource allocation, only a few sectors benefit from the subsidies and incentives, leaving others in a miserable state. Moreover, another primary driver of the fiscal deficit is Pakistan’s bloated state-owned enterprises (SOEs), which are operating at significant losses and undermining budgetary strength. Simply put, Pakistan’s dependence on global lenders cannot be minimized until there is a check and balance on mismanaged government spending.
- Privatizing state-owned enterprises to reduce external sovereign debt
Third, Pakistan’s current economic turmoil points towards the demand for privatization of debt-producing state-owned enterprises (SOEs) such as Pakistan International Airlines, Pakistan Steel Mills, Pakistan Railways, WAPDA, etc. For instance, the outstanding domestic debt of PIA increased by PKR 5 billion in FY24, according to the Central Bank. Moreover, privatization would not only provide much-needed cash flow via the sale of state-owned assets. Still, it would reduce the budgetary burden of supporting poorly performing loss-making state-owned enterprises. Similarly, it would provide a way to mitigate the external sovereign debt of countries that have soared to US $130.179 billion by May 2024, as revealed by the Senate Standing Committee on Economic Affairs. Hence, Pakistan must accelerate privatization to stop feeding white elephants and reduce the debt burden.
- Debt Restructuring to adjust sovereign domestic debt burden
Fourth, debt restructuring is often regarded as a last resort for ailing economies to make their domestic debt load more manageable after the default. Although the overall process is quite painful for a country facing financial distress, it smoothens out existing debt obligations, making it more flexible for debt repayments. According to The Hindu, Sri Lanka has completed its domestic debt restructuring of about US $42 billion, a process that started in June 2023. Nonetheless, Sri Lanka’s economic situation was worse than Pakistan’s at the time of default in May 2022, and Pakistan, too, remained on the brink of default in 2023. Likewise, Pakistan could also manage its contractual payments into the future while considering the case of Sri Lanka. Thus, Pakistan could constitute an early debt restructuring involving debt rescheduling and reduction to mitigate the domestic debt burden.
B-By Enhancing Export Capacity
- Capitalizing on exportable goods and services by incorporating high technology for sustainable economic growth
First, considering the export potential of Pakistan, there is plenty of room for exportable goods and services for sustainable and steady economic growth. Notably, the growing global demand for Information Technology (IT) and IT-enable services (ITES) necessitates investing in these sectors that require minimal infrastructure and provide substantial financial volumes—according to data released by Central Bank, Pakistan’s telecommunication, computer, and IT services surged 24.2% year-over-year (YOY) to record the highest-ever exports of US $3.2 billion in FY 2023-24. Therefore, the Trade Development Authority of Pakistan (TDAP) should acknowledge the fast-changing reality of recent times and incorporate automation, high technology, and artificial intelligence to help exporters harness the maximum benefits of online marketing platforms. Terminally, it signals the future prospect of IT exports and services, yet there remains a pressing need for investing in the training of IT professionals and providing special economic zones for IT companies to utilize the talented and worthy community of the country to its full potential.
- Shifting towards production of high-value products that comply with international standards
Second, one of the core reasons for the low penetration of exports in global markets in Pakistan is the production of low-value-added products that do not align with the market demand of international standards. Therefore, a pivotal shift towards producing high-value products is mandatory to expedite export competitiveness and reduce payment issues. For instance, Bangladesh attained export competitiveness by transforming its industrial sector with major structural reforms and becoming a leading player in ready-made garments, contributing to about 82% of its exports. Likewise, the announcement of the ‘Made in Pakistan 3.0’ initiative to enhance Pakistan’s economic standing by producing high-quality and innovative products for the global market has embarked on a ray of hope. Yet, the integral role of key government bodies such as the National Productivity Organization, Engineering Development Board, and Trade Development Authority of Pakistan could speed up the overall process. Thus, the government should realize the need of the hour and prioritize mandatory legislation, research institute strengthening, capacity building, product diversification, and tariff rationalization.
- Empowering small and medium enterprises to reach maximum export potential
Third, small and medium enterprises (SMEs) have been crucial in streamlining Pakistan’s economic growth in the last two decades. Critically, in developing countries like Pakistan, the significance of SME sectors is paramount as they promise employment opportunities creation, revenue generation, and poverty reduction. According to the Senate Standing Committee on Industries and Production, SMEs contribute 40% of the country’s GDP and 25% of overall exports. Likewise, the SME sector bestows employment to the highest percentage of the working population in the country after agriculture. Critically, it becomes a need of the hour to empower well-performing SMEs with financial assistance, tax incentives, and regulatory support. Similarly, the role of the Small and Medium Enterprise Development Authority (SMEDA) is multifold in providing facilitation, devising policies, and formulating a framework for strengthening SMEs. Thus, to gain full-scale benefits from SMEs, the country should invest in adequate infrastructure, the latest and upgraded technology, and the training of skilled professionals.
- Encouraging entrepreneurship and workforce development to diversify the export base
Fourth and one of the significant factors of economic stagnation in Pakistan is a large amount of unemployed but skillful and qualified youth deprived of business and work opportunities. Moreover, the conventional approach towards the labour workforce further reduces the manufacturing capacity and overall economic development. The UNDP’s 2023-24 Human Development Report places Pakistan in the ‘low’ human development category with a Human Development Index (HDI) of 0.540 and a global ranking of 164 out of 193 countries. It highlights the reasons behind the socio-economic backwardness of the country and calls to action to promote entrepreneurship for surplus economic returns. Furthermore, entrepreneurship would serve as a double-edged sword for the country by diversifying the export base via innovation and uplifting the country’s economic standing via employment generation for skilled youth. Likewise, encouraging workforce development and enhancing female participation in the labour force is equally essential to expanding the country’s labour pool, particularly in the textile and agriculture sectors. Thus, the government should coordinate with entrepreneurial organizations and networks such as The Organization of Pakistani Entrepreneurs (OPEN) and The Indus Entrepreneurs (TIE) to help entrepreneurs yield prosperity and stable economic growth for the country.
Critical Analysis
Critically, Pakistan’s economic dilemma is an output of abrupt decisions, inefficient policies, and inconsistent growth modules since its inception. Moreover, in a time of calamity, the country’s mounting debt burden added fuel to the fire of the low-performing economy. Despite having export potential, the country has lagged in the following realm due to a lack of infrastructure, investment, and a much-needed framework. While considering all the parameters, it becomes a key priority for the government and its functionaries to devise policies and methods to reduce dependence on foreign loans and debts. Likewise, a comprehensive and strategic approach is required to foster exports of goods and services to maintain a creditable global market space. Nonetheless, the entire process is relatively long-term and would require major economic interventions; it possibly seems the only viable solution to prevailing economic woes. Thus, the country needs effective solutions to be implemented for sustainable economic growth and for competing in the global marketplace as well.
Conclusion
To cap it all, Pakistan’s economic challenges share a cyclic pattern and have remained more or less the same in successive governments’ ruling since its birth. However, in recent times, the country come closer to the risk of default in 2023 with a gigantic debt burden and widened current account deficits, fiscal account deficits, and balance of payment crisis. Similarly, the country’s exports in the global market have shrunk periodically due to a lack of export competitiveness and diversification, high import duties and tariffs, and limited access to the global market. However, the country could reduce its debt burden by expanding the tax base, curtailing unnecessary government borrowing and spending, and restructuring its domestic debt. Likewise, the country could increase its export capacity by capitalizing on exportable goods and services, empowering small and medium enterprises, and encouraging entrepreneurship. To conclude, the government needs dynamic policy-making and effective implementation to eliminate multilateral donor institutions, escalate export capacity to meet international market demands and take steps towards stable and resilient economic growth.
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