CSS Solved Current Affairs Past Papers | Discuss Why Pakistan’s Growth Continues to be a ‘Balance of Payments’ Constraints which is One of the Core Causes to Keep the Foreign Exchange Reserve under Pressure. Do You Think that Pakistan’s Export Performance Remains the Most Relevant Long-term Challenge to Alleviate the Balance of Payment Constraints for Sustained Economic Growth and Explain Radical Structural Reforms to Improve Export Performance?
The following question of Current Affairs is solved by Miss Nirmal Hasni, the best Current Affairs coach in Pakistan. Moreover, the question is attempted on the same pattern taught by Sir Syed Kazim Ali to his students, scoring the highest marks in compulsory subjects for years. This solved past paper question is uploaded to help aspirants understand how to crack a topic or question, how to write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.
Question Breakdown
The following question sheds light on Pakistan’s poor export performance and how it has led to an intense balance of payment crisis as well as pressurized the foreign exchange reserves. Moreover, it explains as to how the poor export performance has always forced the country to beg loans thus elevating the economic crisis. Lastly, radical measures are required to deal with the problem at home.
Outline
1- Introduction
2-From current account imbalance to balance of payment crisis
3- Pakistan’s Poor Export Performance- The greatest issue alleviating the balance of payment constraints
4-Radical structural reforms required to improve export performance
- ✓ Improving export competitiveness in the global market
- ✓ Empowering SMEs
- ✓ Simplifying regulations on both export and import
- ✓ Establish a cell in the Ministry of Commerce to deal with export-related issues
- ✓ Withdraw custom tax
5- Conclusion
Answer to the Question
Introduction
The economy of Pakistan has been in recurring doldrums since the 1980s after intense economic crisis episodes. The economy has witnessed a myriad of boom-and-bust cycles but could not get a sustainable economic model. Pakistan had been repeating mistakes that have, time and again, landed the country into account imbalance, thus leading to a balance of payment crisis. The recurring affair of Pakistan with the global lending bodies has also kept its foreign exchange reserves under pressure. One reason which seems to be the bedrock of the economic crisis is the significant decrease in exports leading to the intense economic crisis.
From Current Account Imbalance to Balance of Payment Crisis
The economy of Pakistan relies on three industries; agriculture, textile and food production, thus calling it a semi-industrialized economy. The industry contributes 21 per cent to the GDP, which, however, has declined since 2015. While the services sector contributes 51 per cent and agriculture contributes around 23 percent.
The problem started back in the 1980s, when the deregulation policies were at their peak, and the country was flooded with expatriate remittances, experiencing a high economic growth. In the 1990s, economic growth averaged 4.0%. During this period, Pakistan experienced a debt crisis, which was triggered by persistent fiscal and external deficits. Exports stagnated, and Pakistan lost market share in a buoyant world trade environment. Poverty increased from 57.9% in 1998 to a high of 64.3% in 2001. However, by 2010, poverty had reduced to 36.8% following sustained average economic growth.
From 2010 to 2017, economic growth again experienced a decrease to 4.1 percent, with the poverty rate standing at 24.3 percent. It will be correct to say that the poverty rate of Pakistan has direct nexus with the economy, and its elasticity had always been high. This was due to several factors, which are explained below:
- Firstly, energy imports contributed to an increase in the number of overall imports. The limited and insufficient energy supplies made the manufacturing process slow, thus causing a deficiency in the number of exports.
- Second, since Pakistan is not the hub of manufacturing, it usually relies on imports for machinery. The energy factor has also contributed largely to this cause. since
- Third, past investments did not prove productive for the sustainable economic growth of the country.
Pakistan’s export performance has been weak for decades. Since 2010, the export growth has been stagnant, with constant growth in the trade deficit. The exports have continued to lose ground because of an increase in imports. This could be because of the supply and demand mechanism. Therefore, Pakistan has always failed to keep up with the global income growth.
According to the Massachusetts Institute of Technology (MIT) Observatory of Economic Complexity, Pakistan ranks 74th out of 89 countries in the economic complexity ranking. As per the Economic Survey of Pakistan 2022-23, the growth of the agriculture sector was estimated by 1.55 percent in FY2023. The industrial sector posted negative growth in FY2023. The industrial sector’s 2.94% performance is more dependent on the Manufacturing sector, which has a share of 65.0% of the industry. The services sector constitutes the largest share of GDP for the last several years.
According to the provisional figures compiled by the Pakistan Bureau of Statistics, exports from Pakistan during January 2023 amounted to Rs.525,461 million (provisional) as against Rs.519,817 million in December 2022 and Rs.460,856 million during January 2022, showing an increase of 1.09% over December 2022 and by 14.02% over January 2022. The ratio of imports is so high that it creates a balance of payments crisis where the country is flooded with intakes, and there are no competitive Pakistan-made products in the competitive market.
Pakistan’s Poor Export Performance- The greatest issue alleviating the balance of payment constraints
Pakistan’s export performance has remained weak over the span of the past two decades. The export rate, as per the World Bank, has declined from 0.18 to 0.13 percent. Similarly, the global export rate in competitive markets increases incredibly. Specifically, Bangladesh’s share in world exports increased from 0.06 per cent to 0.19 per cent, India’s from 0.61 percent to 1.65 percent, and Vietnam’s from 0.14 percent to 1.17 per cent.
In the year 2014 to 2015, the exports of Pakistan consisted majorly of cotton, rice and skins only. Right now, the exports include more items just because of high domestic demands and elevated surplus. The last major spurt in export growth of Pakistan in FY2010-11 was due to the high international price of cotton. However, as the price normalized in the next year, the growth in exports turned negative.
Radical Structural Reforms required to improve export performance
The export performance of Pakistan is in a sorry state. Therefore, radical structural reforms are required to boost export. The following measures must be taken:
- Improving export competitiveness in the global market
The production house in Pakistan must be kept in order and incentivized. The industrial factor must be enhanced to move the production from low to high-value products. For instance, the global ratio for MMF to Cotton is 70:30, whereas Pakistan’s composition ratio is 30:70 owing to a lack of prioritization or incentivization by the government. One thing that can give an ultimate boost to exports is to ease the import restrictions.
- Empowering SMEs
Another measure that could elevate the export economy is to focus on Small and Medium Enterprises (SMEs). Pakistan’s economy currently consists of 3.3 million SMEs. These startups can work with the manufacturer at home to increase the export ratio and make its place in the competitive market. Furthermore, it will create ample opportunities such as jobs, tax revenue and sustainable economic growth.
- Simplifying Regulations on both imports and exports
The government must try to ease the restrictions on both exports and imports to nullify the effects of fewer exports. The cumbersome bureaucratic procedure negatively impacts the performance of exports.
- Establish a cell in the Ministry of Commerce to deal with Export-Related Issues
Experts on trade need to be hired for policy formulation. Specific persons with expertise in the required field are required to look over the trade policies. Schemes must be simplified so that they may impact positively on export performance. The cell must also organize structured trade missions to opt for new export-related policies.
- Withdraw custom duty/sale tax
Withdraw custom duty/sale tax on the import of raw materials (i.e., cotton & polyester) short in supply for industry consumption. This withdrawal will definitely impact the ratio of exports, and the manufacturing industry will flourish.
Conclusion
The export performance of Pakistan has been facing a downfall for the last two decades. The roller coaster ride of Pakistan’s economy, especially in terms of export demand, has caused a severe balance of payment crisis. The minimal and faulty export performance caused the current account deficit, thus leading to a severe balance of payment crisis. The abovementioned radical measures are required to streamline the economic system of Pakistan ensuring stability.
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