Why Pakistan Economy is

Sinking?

• Noman Shah
• Hafiz Rehan Ul Haq
• Abdul Amir
• Shakir Shahid
• Syeda Qurat Ul Ain
 Current Condition of Pakistan Economy
Pakistan held its most recent elections in July 2018. The Pakistan
Tehreek-e-Insaf party gained over 100 seats in the parliament, and
its founder Imran Khan, a famous cricket team captain, was
installed as prime minister. Prime Minister Khan has inherited a
balance of payments crisis, the third one in the last 10 years.

By the end of June 2018, Pakistan had a current account deficit of

$18 billion, nearly a 45 percent increase from an account deficit of
$12.4 billion in 2017. Exorbitant imports (including those related to
the China-Pakistan Economic Corridor (CPEC)) and less-than-
projected inflows (export revenues and remittances) have led to a
current account deficit widening, with foreign currency reserves
levels covering less than two months of imports—pushing Pakistan
towards a difficult economic situation.
 Main Reasons behind failed Economy
• Global monetary tightening & local loose
monetary policy
• Increased oil prices
• Reduced investor confidence
• Overvalued exchange rate
• Low interest rates
• Subdued inflation
• Pervasive tax evasion
• Low level of domestic resource mobilization
 Global monetary tightening & local loose
monetary policy

• Global banks increase their foreign reserves in

currency areas with the highest interest rate, while
decreasing lending in these markets.

• Local loose monetary policy has led to high domestic

demand, with two-thirds of Pakistan’s economic
growth stemming from domestic consumption.
 Increased oil prices
• Increase in the oil price cause to increase in the production cost,
import bills and price of petroleum products, so the decline in the
productivity due to increasing cost of input (oil) cause decline in
the consumption level, investment and consequently in economic
growth.

Oil price hike couldn’t come at worse time for Pakistan's economy

• Analysts have underlined certain negative implications on

Pakistan’s fragile economy ranging from higher import bill and
higher electricity tariff to further monetary tightening as global oil
prices surged around 10 percent following drone attacks on Saudi
Aramco’s two oil processing facilities.
 Reduced investor confidence
Any distortion in confidence results in a loss of investor welfare as it
causes investors to deviate from their optimal investment allocation
given the true level of risk and return. Investors who overestimate
expected returns will receive an insufficient return to compensate for
their assumed risk.

Overseas Investors Chamber of Commerce and Industry (OICCI) shared

the results of its Business Confidence Index (BCI) Survey – Wave 17,
which shows that the overall Business Confidence in Pakistan stands at
12 percent negative, a 26 percent decline from the 14 percent positive
recorded in the Wave 16 results announced in May last year. The Wave
17 survey was carried out in December 2018.

https://dailytimes.com.pk/350355/business-confidence-in-pakistan-de
clines-26-oicci-survey/
 Overvalued exchange rate
The policy of overvaluation of the Pakistani rupee is equivalent to an
across-the-board subsidy on all imports. Anyone who purchases $100
receives $90 of it from private sources seeking to buy Pakistani rupees,
while $10 comes from the government, that borrows dollars and sells
them cheaply to keep the price of dollars low. Naturally, this makes
imports cheaper, because the government pays part of the bill.

While occasionally it might make sense to subsidize strategic imports, it

can never be sensible to provide across-the-board subsidies for all
imports. Yet, in Pakistan, this is what has been happening for several
decades. Governments have maintained significantly overvalued
rupees, effectively borrowing dollars to subsidize all imports.

https://www.dawn.com/news/1483223
 Low interest rates
Conventionally it is considered that when people get high return in
terms of interest from banks on their money, they tend to deposit
more in banks. It could be an alternative of investment in various
projects. The investment and saving rates in Pakistan could not achieve
significant growth in the past three decades and resulted in slow
economic growth.

A comparison with the Asian economies reveals clearly that Pakistan

has a long way to go. To be at the same level of growth with these fast-
growing economies, Pakistan needs to finance the desired investment
through increased domestic saving without undue reliance on the
foreign resources as these introduce an element of unsustainability. So,
it is essential to get the saving rate up to 20–25 percent, if we want to
follow the model of these countries. There is need to boost up the
saving and investment in the country through effective policies giving
due consideration to the effectiveness of the potential determinants.
 Subdued inflation
Pakistan’s annual inflation rate increased to 11.63 percent in August of
2019 from 10.34 percent in the previous month. It was the highest
inflation rate since May of 2012.

The inflation numbers have been mainly driven by the increasing

prices of fuel and food. Importantly, inflation is a tax that erodes the
purchasing power of the currency.
 Pervasive tax evasion
The World Bank said tax evasion in Pakistan is pervasive due to low tax
morale and legal loopholes that enable high-value individuals to conceal their
incomes.
Pakistan can generate handsome tax revenues from the corporate sector. But
unfortunately, corporations do not pay taxes according to their taxable
liabilities. One of the reasons behind tax evasion is high corporate tax rates in
Pakistan. According to a December 2015 World Bank report, Pakistan’s
corporate income tax rate — tax on profits — is the third highest in the world.
Corporate tax rate of Pakistan is currently 31% which is quite high as
compared to other Asian countries like Indonesia, Malaysia, Bangladesh and
Thailand which are 25%, 24%, 25% and 20% respectively.
Another reason behind tax evasion is that the FBR has failed to ensure that all
the firms filed their returns. FBR authorities did not keenly scrutinise the
status of those filers who showed nil income in their returns. This depicts the
poor enforcement on the part of the tax machinery. Pakistan’s administration
system has flaws that cannot acutely analyze income statements due to which
revenue from tax collection remains low. In order to increase the tax revenue
from the cooperate sector, implementing few steps might prove to be helpful.
 Low level of domestic resource mobilization

Domestic Resource Mobilization (DRM) — the process through which

countries raise and spend their own funds to provide for their people – is
the long-term path to sustainable development finance. DRM not only
provides governments with the funds needed to alleviate poverty and
deliver public services, but is also a critical step on the path out of aid
dependence.

DRM does not necessarily mean new taxes or higher tax rates. Governments
often see their revenues rise though improved audits or simplified filing
processes.

Successful DRM programs are highly cost-effective; they return many times
what is invested in them. One analysis showed revenue increases amounting
to $20 or more for every assistance dollar invested.
A strategy to improve Pakistan’s saving rate needs to
benefit from the recent insights in the saving, investment
and growth literature. Tax and interest rate instruments
are important policy tools but need to be a part of an
overall policy package aimed at fostering growth through
improved productivity and financial liberalization.
The financial instruments requiring particular attention
are a well functioning stock market, fully-paid
compulsory pension and provident fund schemes with
wide coverage and postal and national savings schemes
which lower the transaction cost for savers emerging
largely from geographical spread of post offices in rural
areas whose savings need to be mobilized.
 Pakistan GDP Comparison

https://www.ceicdata.com/en/indicator/pakistan/real-gdp-growth