Pakistan’s poorly regulated financial system facilitates tax evasion, which contributes significantly to the growth of the fiscal deficit.
Having inherited this economic crisis from the previous government, the PTI government, led by Prime Minister Imran Khan, has an enormous task ahead: steer Pakistan’s struggling economy out of a macroeconomic crisis by fostering economic development.
By the end of June 2018, the gross public debt of Pakistan reached USD $179.8 billion, showing an increase of $25.2 billion within a year. Despite the massive depreciation in the rupee, Pakistani exports have remained almost the same.
More than half of this increase in gross public debt was due to an increase in public external debt, which grew by 30.1 percent. Meanwhile, the government’s external debt has also increased from $64.1 billion in June 2018 to $65.8 billion in January 2019.
The Way Forward: Steps for the Pakistan Government To make a significant impact on the current account deficit, Pakistan needs to ensure an investment-friendly environment that attracts more foreign direct investment (FDI), instead of relying so heavily on foreign aid.
According to the World Bank’s Ease of Doing Business report, Pakistan ranks 136th out of 190 economies.Pakistan’s economic woes – dwindling foreign exchange reserves, low exports, high inflation, growing fiscal deficit, and current account deficit – are nothing new, and once again, the country finds itself knocking on the doors of the International Monetary Fund (IMF) for what will be its 22nd loan.While the exact amount of this package has not been determined, Pakistan already owes the IMF billions from previous programs.In 2018, the depreciation of the Pakistani rupee against the U. dollar alone was responsible for an excessive USD .9 billion increase in public external debt. The inflation rate is now touching 9.4 percent, which is a record level high over the last five years mostly due to rupee depreciation and rising energy prices.In addition, increased defense spending and its ongoing fight against extremism only further burden the economy.It can do this by investing in research and development (R&D) to encourage product innovation and enhance labor productivity.On top of these issues is the larger question of Pakistan’s failure to expand its export portfolio beyond a few low value-added products, such as textiles, rice, surgical goods, carpets, sports goods, and leather items, which is one of the largest factors behind its balance of payments deficit.Along with a depreciating rupee that has made imports costlier, low foreign investment due to Pakistan’s security and political challenges has also severely hit its foreign exchange reserves.Despite rising deficits, Pakistan’s tax revenue was only 13 percent of its GDP in 2018.Current State of the Economy In 2019, Pakistan finds itself facing a dire macroeconomic crisis.It is spending more on imports than it receives on exports, with its current account deficit having risen from .7 billion in 2015 to .2 billion in 2018.