CSS 2023 Special Solved Current Affairs Past Paper | Measures to Stabilize Pakistan’s Deteriorating Economic Conditions
The following question of CSS Current Affairs 2023 is solved by Sir Ammar Hashmi, the best Current Affairs Coach, on the guided pattern of Sir Syed Kazim Ali, which he taught 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.
Outline
1-Introduction
2-Current situation of vital economic parameters
3-Major reasons behind the devastating economic conditions of Pakistan
- ✓Debt-producing public sectors
- ✓Abysmal tax collection and wide range of untaxed sectors
- ✓Widened capacity payments to IPPs and Unsustainable debt servicing
4-Measures to stabilize the deteriorating economic conditions
4.1-Short-term measures
- ✓Defining the direction and state of Pakistan’s economy
- ✓Devising pro-poor growth policies
- ✓Privatization of debt producing SOEs and Boosting Investors Confidence
- ✓Seeking debt restructuring with sustainable paying options
- ✓Channelizing remittances through better exchange rates
4.2-Medium-term measures
- ✓Devolution of tax collection to the third tier of government
- ✓Enhancing direct taxation and reducing indirect taxation
- ✓Paying out IPPs and investing in renewables
- ✓Fully documenting all transactions through digital payments
4.3-Long-term measures
- ✓Making exports competitive
- ✓Completion of all the looming energy-sharing projects at the regional level
5-Critical analysis
6-Conclusion
Answer to the Question
Introduction
In recent times, Pakistan has faced a severe economic downturn due to various internal as well as external reasons. Among the external reasons, the most significant one is the fluctuation of energy prices that have a cascading effect on Pakistan. However, among the internal reasons, debt producing public sector, abysmal tax collection with wide range of untaxed or undertaxed sectors and widened capacity payments to IPPs and unsustainable debt servicing are the major ones. These reasons resulted in the form of low foreign reserves, a depreciating currency, and exponentially high inflation. Thus, there is an urgent need to address these vital economic aspects and stabilize the deteriorating economic conditions through various short, medium, and long-term measures. The short-term measures include defining the direction and state of Pakistan’s economy, privatization of debt producing SOEs, and channelizing remittances through better exchange rates. Moreover, the medium and long-term measures include devolution of tax collection to the third tier of government, enhancing direct taxation and reducing indirect taxation, and making exports competitive.
Current situation of vital economic parameters
Pakistan has been facing an extreme economic downturn since mid-2022 mainly attributed to rampant currency devaluation of more than 30%, leading to severe inflation of about 40%. Also, the unchecked subsidies as well as unregulated imports have resulted in depleting the much-needed foreign exchange reserves that dropped to an abysmal low of less than 3 billion USD, covering only 3 weeks of imports.
Major reasons behind the devastating economic conditions of Pakistan
Following are some of the major reasons behind the devastating economic conditions of Pakistan.
- Debt producing public sector
The first and the foremost reason behind the devastating economic conditions of Pakistan is the burden of debt producing public sector. According to the World Bank report on State owned enterprises (SOEs), Pakistan’s public sector is among the top worst performing SOEs and alone PIA has accumulated a debt of more than Rs. 800 billion. Thus, continuous injection of funds through subsidies are getting burned due to poor managerial practices and the public sector (PIA, WAPDA, etc.) is gathering even more debt which is a direct burden on the already precarious economy of Pakistan.
- Abysmal tax collection and wide range of untaxed sectors
Second, the abysmal tax collection and wide range of untaxed and undertaxed sectors in Pakistan’s economy. According to Asian Development Bank’s report, Pakistan’s tax-to-GDP ratio is one of the lowest globally with 9% only. This abysmal tax collection alone is enough to state the condition of Pakistan’s economy. Moreover, various sectors like traders are still out of the tax net, causing a significant revenue loss. According to PIDE survey, there are more than 2 million commercial outlets in Pakistan and only 30,000 pay tax. Further, taxes on various sectors like agriculture and real estate are close to none. Thus, these taxation issues are a major reason behind the devastating economic conditions of Pakistan.
- Widened capacity payments to IPPs and Unsustainable debt servicing
Third, the capacity payments to IPPs have also jacked up to unsustainable levels. According to their agreements, they will be paid a significant amount even if no electricity is purchased and the payment will be made in dollars which are already scarce in Pakistan. Furthermore, Pakistan’s debt servicing has touch limits of unsustainability as almost 55% of the financial year’s budget will go directly in servicing the debt payments. Thus, leaving a little for the country to spend on development and other aspects and becoming a major reason behind the devastating economic conditions of Pakistan.
Measures to stabilize the deteriorating economic conditions
There are a lot of measures that can be taken to stabilize the deteriorating economic conditions of Pakistan. These are divided into short, medium, and long-term reforms. Some of these are as follows.
Short-term measures
Following are some of the most significant short-term measures to stabilize the deteriorating economic conditions of Pakistan.
- Defining the direction and state of Pakistan’s economy
The first and the foremost short-term measure the state should take is to clearly define the direction and state of Pakistan’ economy. By doing so, the state should be clear in its policies and will act upon them to focus on that particular sector(s). The state should can make a hybrid arrangement in such a way that the agriculture sector is supported in such a way to make it eligible to fulfill the local demand to curb the imports. Also, the industrial as well as IT sector should be given a special focus to make its exports more competitive to earn much needed foreign exchange to fund for necessities like energy products.
- Devising pro-poor growth policies
Second, the state should do a special focus on devising the pro-poor growth policies in order to lift the living standards of the masses from extreme poverty to at least middle class to enable them to afford a basic lifestyle. Also, it will help in boosting the confidence of the youth to work in the country. Moreover, in doing so, a special focus should be on subsidies by ensuring that they reach the deserving, unlike a flat subsidy on petrol prices of which everyone benefits no matter he earns a few thousands and millions. By doing so, it can also help in reducing the volume of subsidies and will contribute for a greater good.
- Privatization of debt producing SOEs and Boosting Investor Confidence
Third, the state should prioritize the privatization of debt producing SOEs. There are various SOEs that are continuously jacking up the losses due to poor or corrupt managerial practices. These SOEs are just a burden on the shoulders of the state’s already limited direct taxpayers. By doing so, not only it will reduce the burden of continuous debt accumulation but will also boost investor confidence as the economy will be seen opening up and away from the government control and will result in attracting much needed FDI. This will ultimately help to stabilize the deteriorating economic conditions of Pakistan.
- Seeking debt restructuring with sustainable paying options
Forth, Pakistan is facing a severe economic downturn as almost 55% of its fiscal year budget directly goes into debt servicing. And its not the end, it is growing more and more with every passing year. Thus, the state should act urgently to address this looming disaster by seeking debt restructuring with sustainable paying options to get a breathing fiscal space. Thus, it will prevent the economy from further downturn and will surely help to stabilize the deteriorating economic conditions of Pakistan.
- Channelizing remittances through better exchange rates
Last but the most significant measure is to channelize the remittances by doing MOUs with various foreign banks and offering better exchange. Doing so will curb the grey channels like hawala and hundi that are in use to obtain better exchange rates by the Pakistanis working abroad. According to the Ministry of Overseas Pakistanis and Human Resource Development of the Government of Pakistan, there are approximately 8.8 million Pakistanis are living abroad. Among these, the majority, over 4.7 million, reside and work in the Arab states. All these send remittances back home but to flawed policies, most of the remittances aren’t counted due to grey channels. Thus, by channelizing this system, the state can stabilize the deteriorating economic conditions of Pakistan.
Medium-term measures
Following are some of the most significant short-term measures to stabilize the deteriorating economic conditions of Pakistan.
- Devolution of tax collection to the third tier of government
Among the medium-term measures, the first one should be the devolution of tax collection to the third tier of government. By doing so, the efficiency of tax collection will be enhanced as the area of influence and collection will be small and almost no-one will be able to evade the taxation mechanism. But the main difficulty is its implementation and the will of the policy makers for this devolution. Once done, this can help stabilize the deteriorating economic conditions of Pakistan.
- Enhancing direct taxation and reducing indirect taxation
Second, the state should utilize the devolution of tax collection as a pre-requisite to enhance the direct taxation and reduce the burden of indirect taxation from the masses. Once the direct tax collection that currently stands at mere 9%, surpasses the indirect taxation, it will have a domino effect on the inflation in the country. Thus, it will stabilize the deteriorating economic conditions of Pakistan.
- Paying out IPPs and investing in renewables
Third, the state should do a golden handshake with IPPs and revoke or renegotiate their contracts to curb the painful yet compulsory capacity payments in US dollars. Alongside this, the state should seriously consider renewable energy projects to reduce the burden of both the capacity payments as well as imported energy products. Also, Pakistan has a high availability of these renewable resources like solar and wind. Thus, it will stabilize the deteriorating economic conditions of Pakistan.
- Fully documenting all transactions through digital payments
Last but a significant medium-term measure should be documenting all the transactions through digital payments and replacing cash transactions. Doing so, the tax evasion will come crashing down as everything will be documented. State bank statistics have already shown the rise in digital payments through RAAST system and by implementing this fully can stabilize the deteriorating economic conditions of Pakistan.
Long-term measures
Following are some of the most significant short-term measures to stabilize the deteriorating economic conditions of Pakistan.
- Making exports competitive
First, the state should encourage the exporter of various goods across industries to make their exports competitive rather than relying on preferred export status aka GSP plus status. This can be done by making the products quality competitive or price competitive. Also, to successfully execute this, a policy continuity will be required that will be de-hyphenated from politics, thus any government change will not affect it. Thus, it will help a lot to stabilize the deteriorating economic conditions of Pakistan.
- Completion of all the looming energy-sharing projects at the regional level
Second, the state should work on swift completion of all the looming energy projects at national level like Diamer-Basha dam, Suki Kinari project, etc. as well as energy-sharing projects at the regional level like CASA-1000, Iran-Pakistan gas pipeline, etc. By doing so, the state can safeguard the energy supplies at low cost as well help in navigating the expensive power agreements. Thus, these projects can stabilize the deteriorating economic conditions of Pakistan.
Critical analysis
Critically, Pakistan needs these as well as many other necessary reforms to overcome the growing monster of economic crunch. However, the success of these reforms in directly linked with the policy continuation and how the ruling elite responds to these reforms. If the state is serious to reform the economic structure of the country to become independent in true sense, then it must implement these reforms by avoiding any political aims to prosper by compromising the sustainable growth. In this way, the state can stabilize the deteriorating economic conditions of Pakistan.
Conclusion
In conclusion, Pakistan has been facing an extreme economic downturn for the past few months mainly in the form of currency devaluation, excessive inflation, and extremely low foreign exchange reserves. The most significant reason behind this being the unsustainable debt as well as poor tax collection. But, still, all is not lost as through various short, medium, and long-term reforms, the state can successfully overcome the menace of economic crisis. These include debt restructuring, devolution of tax collection mechanism, and transition to renewable energy projects. These reforms if taken seriously and urgently by sparing them of political meddling, have the potential to turn the precarious economic situation upside down.
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