The Causes and Impacts of Economic Crisis in Pakistan and Its Solutions

The Causes and Impacts of Economic Crisis in Pakistan and Its Solutions

CSS and PMS Solved Essays | The Causes and Impacts of Economic Crisis in Pakistan and Its Solutions

Hamail Syed, a Sir Syed Kazim Ali student, has attempted the CSS essay “The Causes and Impacts of Economic Crisis in Pakistan and Its Solutions” on the given pattern, which Sir Syed Kazim Ali teaches his students. Sir Syed Kazim Ali has been Pakistan’s top English writing and CSS, PMS essay and precis coach with the highest success rate of his students. The essay is uploaded to help other competitive aspirants learn and practice essay writing techniques and patterns to qualify for the essay paper.

1-Introduction

2-The importance of economic stability for a country

3-A bird’s eye view of Pakistan’s economic crisis 

  • Evidence: According to the World Bank Report, 2023, “Pakistan’s economy slowed sharply in fiscal year 2023, with real GDP estimated to have contracted by 0.6%.”

4-Major culprits behind the economic crisis in Pakistan 

  • Swelling debt level
  • Evidence: According to the State Bank of Pakistan Report, “The public debt of Pakistan in 1990 was 711 billion rupees, and now it has soared to 52,721 billion rupees by 2022.”
  • Overdependence on imports such as oil
  • Evidence: According to the Observatory Economic Complexity Report, 2021, “Pakistan imported crude petroleum worth 3.53 billion US dollars, becoming the 34th largest importer of crude petroleum in the world.”
  • Massive tax evasion 
  • Evidence: According to the Federal Board of Revenue (FBR) Report, 2023, “The tax evasion rate of 35% among the affluent class alone resulted in a significant decline of 75 billion rupees in tax revenues.”

5-Impacts of economic crisis on Pakistan 

5.1-Financial Impact

  • Abrupt depreciation of currency 
  • Evidence: According to the State Bank of Pakistan Report, “The Pakistani currency experienced a sharp decline, reaching a new all-time low at PKR 305 against the US dollar in May 2023.”

5.2-Political Impact

  • Reduced public and social spending 
  • Evidence: According to the World Bank Report, 2023, “Pakistan’s public expenditure on education is 1.7% of GDP for the fiscal year 2022-23.”

5.3-Social Impact 

  • Increased unemployment rate 
  • Evidence: According to the International Labor Organization (ILO) Report, 2023, “Pakistan’s employment-to-population ratio stands at a historic low of 47.6%.”

6-Previous attempts to address the crisis  

  • Reforms and bailout packages with the International Monetary Fund (IMF) 
  • Evidence: The IMF approved a $6 billion loan agreement for Pakistan.

7-Recommendations to counter the economic crisis in the country

  • To promote the tax collection.
  • To adopt China’s export-led growth economic model.
  • To enhance the Information Technology (IT) sector of the country.

8-Conclusion

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      Economic stability serves as the foundation upon which a country’s sovereignty and prosperity standstill, thereby manifesting a nation’s fate worldwide. The absence of economic stability has been the significant culprit, making the country dance to the foreign donor’s tune. In this regard, developing countries like Sri Lanka, Egypt, Ethiopia, and Ghana have been the glaring examples of being entangled in the web of economic crises that hampers the success of nations. Unfortunately, Pakistan is also no exception to this situation. The country has faced the worst economic crisis throughout its political history, and the International Monetary Fund (IMF) Report of 2023 depicts Pakistan’s meagre growth rate compared to its neighbouring countries. Such a scenario reflects the feeble economic condition of Pakistan. Moreover, the chaotic situation of the economic plight has not emerged in isolation. Many alarming factors caused the economic crisis, including debt levels, trade deficits, and overreliance on imports. Undoubtedly, the worrying aspect of the situation is its negative impacts on the country, such as currency devaluation, low public expenditure, and unemployment. Nevertheless, the government has secured a financial package from the IMF to pull the country out of a vicious cycle of economic crises, but Pakistan’s economic condition is still downgraded. Therefore, it is high time for Pakistan to take fundamental measures to upgrade its economy. In this regard, adopting China’s export-led economic model, boosting the information technology (IT) sector, and improving tax collection mechanisms may help the country escape this misery.

      Contrary to the economic crisis that shakes the foundation of a country, economic stability is the mark of success for a state. A stable economy has many indicators, including an increase in GDP growth rate, a higher employment rate, lower level of debt, and greater human development index. When a country achieves all indicators of economic stability, it begins to enjoy success and development. Verily, China, India, and Bangladesh epitomize the South Asian region’s fastest-growing economies. Besides success and growth, economic stability also has many fruitful impacts on a country, uplifting a nation socially, politically, and financially. Now, light has been thrown on the positive aspects of economic stability; indeed, a stable economy brings employment opportunities for the people, increases foreign direct investment (FDI), and ultimately enhances a state’s gross domestic product (GDP) growth. Furthermore, the government can also improve public expenditure when they have ample reserves; as a result, people can get free education, health care, and other public services. Thus, a country’s stable economy ensures national prosperity.  

      Before exploring the factors responsible for the economic crisis in Pakistan, it is imperative to explain the country’s current economic condition. Ironically, Pakistan’s economy has taken a downward trajectory. Over the past few decades, Pakistan’s economy has gone through a period of impressive growth and relative stagnation. For instance, in the 1960s, Pakistan was economically strong; however, in the 1970s, the economy’s growth slowed. Currently, the country is in the abyss of a severe economic crisis. According to the World Bank Report, 2023, “Pakistan’s economy slowed sharply in fiscal year 2023, with real GDP estimated to have contracted by 0.6%.” Moreover, in FY2023, industrial sector growth has decelerated, which reflects the depreciation of Pakistani rupees and higher domestic oil and electricity prices. Further, Pakistan’s foreign exchange reserves are less than its neighbouring states, forcing the country to be on the edge of default. The state also runs on loans secured by different states and international organizations. These facts highlight the fact that the economic condition of Pakistan is extremely feeble. Hence, the major hindrance to Pakistan’s progress is its economic crisis. 

      As discussed above, the poor economic condition of Pakistan does not grow automatically. Indeed, many factors are responsible for worsening the situation. Here, it is essential to highlight some significant reasons that have caused the economic crisis in the country. To begin with, rising debt is the primary cause of the economic predicament in the state. Unfortunately, Pakistan’s crippling economy is sitting on a large pile of debt taken from international organizations such as the IMF and countries like China. According to the State Bank of Pakistan Report, 2022, “The public debt of Pakistan in 1990 was 711 billion rupees, and now it has soared to 52,721 billion rupees by 2022.” Thus, the debt has increased more than 70 times while its GDP grew only eight times during the same period.

      Furthermore, a phenomenal increase in debt has been attributed to the financial crunch rather than economic growth. Unfortunately, Pakistan’s large share of GDP is used to repay the loans, putting the state in a financial crunch. Therefore, the slope in Pakistan’s economy is due to the debt the country has incurred over the last 75 years, which has restricted its growth. Likewise, the decline in Pakistan’s economy is amply reflected in its overdependence on imports. For many years, the country’s most significant import has been oil and associated petroleum products used for energy generation. According to the Observatory Economic Complexity Report, 2021, “Pakistan imported crude petroleum worth 3.53 billion US dollars, becoming the 34th largest importer of crude petroleum in the world.” At the same time, it was the 3rd most imported product in the country. Furthermore, any sharp increase in oil prices leads to an economic crisis in the state, as higher oil prices translate into a current account deficit and eventually trigger inflation in the country. Conclusively, imported products, such as oil, are the significant reason behind the economic crisis in the state. 

      Next, tax evasion is considered a significant threat to the economy. An economic blow is seen when the elite class and retailers evade taxes. According to the Federal Board of Revenue (FBR) Report, 2023, “The tax evasion rate of 35% among the affluent class alone resulted in a significant decline of 75 billion rupees in tax revenues.” Moreover, people’s evasion tactics have shifted the tax burden onto the middle and lower classes, exacerbating the economic woes in the country. Indeed, tax evasion is a significant obstacle to a stable economy, as most of the population avoids paying taxes. According to the Federal Board of Revenue (FBR) Report, 2023, “Only 1.5 million people out of the 200 million population pay income tax.” Moreover, the high rate of tax evasion causes a massive revenue gap for the government. Hence, it is essential to the country’s mounting economic crisis. 

      As every action has an equal but opposite reaction, the factors mentioned above contributing to the economic crisis also have deep-rooted financial, political, and social impacts that are too severe to be ignored, as they have jolted the foundation of the state and retarded the growth of the nation. Some of them will be brought under discussion in this section. 

To begin with, the financial impacts of the economic crisis made Pakistan witness sharp currency devaluations as the country struggled to improve its balance of payments crisis. Because the country relies heavily on imports, the outflow of dollars depletes its foreign exchange reserves, plummeting the currency. According to the State Bank of Pakistan (SBP) Report, “The Pakistani currency experienced a sharp decline, reaching a new all-time low at PKR 305 against the US dollar in May 2023.” The downside of abrupt currency devaluations is high inflation, especially in oil and commodities. Unfortunately, the current depreciation has fueled domestic inflation, as “Inflation reaches 29.18% in 2023”, as per the State Bank of Pakistan’s Report, 2023. Indeed, the price pressures get transmitted to other sectors, such as input costs rising for industry, squeezing profit margins, and the debt service costs of the government’s external loans also increasing in rupee terms. For ordinary citizens, currency depreciation translates into higher prices of fuel, utilities, and other essentials, reducing real incomes. In short, due to the economic crisis, the rupee has devalued, resulting in elevated inflation levels in the country.

      Another significant political impact of the economic crisis is the low public expenditure in the state. Unfortunately, the country’s severe economic crisis has necessitated sharp cuts in public spending by the government to reduce the broad fiscal deficit. Due to this, development expenditures and social services, like a bit of heed paid to combat climate change and natural disasters, and compressed spending on education, health, and infrastructure projects have faced significant reductions, directly impacting the citizens’ welfare. For instance, the World Bank Report, 2023, states, “Pakistan holds the lowest regional ranking in education funding with its public expenditure on education as a percentage of GDP estimated at 1.7 per cent for the fiscal year 2022-23.” Moreover, fiscal consolidation was an unavoidable demand of the IMF to restore macroeconomic stability in light of dangerously depleting foreign reserves. In a word, cuts to human and social development risk further marginalizing vulnerable sections instead of protecting them from crisis impacts.

      Apart from the financial and political impacts of the economic crisis, the economic plight also affects the country socially by increasing the unemployment rate to an alarming level. It is saddening to know that economic growth has slowed, industries have been closed, and new job creation has suffered a lot. According to the International Labor Organization’s (ILO) Report, 2023, “Pakistan’s employment-to-population ratio stands at a historic low of 47.6%.” Indeed, the crisis has impacted both salaried jobs and self-employment, especially the youth bulge under 30 years of age that is almost unemployed. Sadly, manufacturing services and trade firms have laid off contractual and temporary workers to cut costs amid reduced demand and increased losses. Additionally, the lack of job creation has compounded matters as firms postpone expansion and recruitment plans. In summary, the financial crisis has resulted in an elevated unemployment rate, making it difficult for the commoner to have a peaceful and prosperous life.

      As the country faces its worst economic crisis, Pakistan’s government has tried to save it from default by turning to the IMF for emergency financing. Since the 1980s, the country has entered 13 different IMF programs, with the latest approved in 2019. For example, the IMF approved a $6 billion loan agreement for Pakistan. Indeed, the IMF bailout packages provided relief to the crash-trapped country. Moreover, the IMF loans help meet urgent financial needs and require the government to implement painful fiscal adjustments and reforms. For example, under the $6 billion extended fund facility, Pakistan has to reduce its fiscal deficit, increase tax revenues, rebuild foreign reserves, and eliminate energy subsidies. Unquestionably, IMF bailouts highlight Pakistan’s failure to attain economic stability. In short, IMF financing provides temporary relief; unanimous efforts are required to pull the country out of the abyss of a financial crisis. 

      Therefore, Pakistan must implement deep-rooted reforms to achieve macroeconomic stability to break out of a recurring economic crisis. For this purpose, expanding the narrow tax base is imperative to enhance revenue mobilization. According to the Federal Board of Revenue (FVR) Report, 2023, “The tax evasion in Pakistan is 50%.” The report reflects the alarming situation of tax evasion in the state. Hence, it is vital to strengthen tax administration through investments in IT infrastructure and audit capacity. Furthermore, an integrated tax collection mechanism with FBR must be introduced in the country. Increasing tax revenues is essential for the government to lessen the tax and fiscal deficit burden, as the higher the tax collection, the higher the economic stability. 

      Moreover, Pakistan must adopt China’s export-led growth economic model to address its financial issues. The country can become self-sufficient by developing its industries by adopting an export-led strategy. Moreover, by expanding its exports and improving trade, Pakistan can earn foreign exchange, which can be utilized to address the current account deficit and trade deficit. The strategy ultimately helps the country reduce its dependency on external borrowing. Furthermore, trade also provides finances for innovations. When industries compete in the global market, they are motivated to form new products of high quality. This competition leads the country to invest in research and development. Hence, the export-led model is a significant solution to reduce the economic crisis.

      Lastly, to alleviate the economic crisis in Pakistan, it is imperative to focus on enhancing the information technology (IT) sector, which is the need of the hour. The IT industry has enormous growth potential. It can add a considerable share of Pakistan’s GDP. For instance, the IT sector’s share in India’s GDP Pakistan must follow India’s footprints, and the Pakistan government should enhance the ease of doing business in the country to increase IT exports. The government should collaborate with universities and colleges to develop more IT training programs that may help nurture IT skills in youth. Therefore, Pakistan can generate massive revenues by enhancing its IT sector, as IT exports have immense potential to take the trajectory of the country’s economy on the path of prosperity. 

      Conclusively, Pakistan’s economy is in a dire situation due to the vicious cycle of debt traps, overreliance on import goods like oil, and tax evasion, which pushes the country towards an economic crisis. The persistent economic downfall affects the country by decreasing the currency’s value, increasing unemployment, and decreasing public spending, leading the nation towards failure and the country towards the danger of default. However, economic prosperity can be achieved by expanding tax revenues, adopting an export-based economy, and enhancing IT sector growth. In a nutshell, in the era of technological advancement and globalization, the country must be economically stable to survive in a competitive world.   

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