Pakistan’s Next Government Faces An Economy Sliding Into The Void – Analysis

By Saima Nawaz

Pakistan faces multifaceted challenges, spanning an economic downturn, high unemployment and political turbulence. The major ingredients in Pakistan’s economic and social malaise are the Pakistan Democratic Movement coalition government’s election year policies, such as exchange rate caps and import controls, and delays in the International Monetary Fund’s (IMF) Extended Fund Facility program.

Growth dipped sharply to -0.2 per cent in 2023, down from 6.1 per cent in 2022. The drop was primarily due to sluggish growth in industrial and services sectors. This recession translated to greater unemployment, which reached a record high of 8.5 per cent in 2023, surpassing the 6.2 per cent observed in 2021.

The interim government formed after the ouster of former prime minister Imran Khan  has failed to create economic stability in the country. Unnecessary delays to the 2024 elections — announced only after intervention by the Supreme Court — and political chicanery further added to the economic and political uncertainty.

One positive for the interim government was the successful negotiation with the IMF for a US$3 billion Stand-By Arrangement, restoring creditor confidence and supporting external sector needs. The IMF Executive Board approved US$700 million in January 2024, bringing total disbursements to US$1.9 billion.

The government that emerges after the elections, now set for 8 February 2024, will face numerous challenges. Addressing the increasing uncertainty and distrust in the electoral process among political parties and the public will be key to fostering political stability.

Fiscal imbalances, high debt payments and balance of payment gaps will pose significant hurdles to the new government’s economic revival agenda. The government must also tackle rising unemployment, especially among the youth, and historically high inflation that is responsible for the significant increase in poverty, in order to secure social prosperity. 

Pakistan’s high vulnerability to climate change demands serious attention. Globally, Pakistan is ranked the fifth most vulnerable to climate change. The devastating impacts of climate shocks and floods in 2022, with an estimated total loss of US$15.2 billion, emphasise the urgency of mitigation and adaptation strategies.

A stable and well-functioning democracy is a prerequisite to initiating structural reforms and institutional overhauling. Pakistan should pursue a five-pillar approach to revamp its economic model and achieve a growth target growth of 7–9 per cent in 2024. These measures would pave the way for long-term reforms.

The government should reduce wasteful expenditure across all sectors and in the 200 state-owned enterprises that suffered losses exceeding 500 billion rupees (US$1.8 billion) in 2020. Fiscal management must be considerably improved by adhering to established rules and regulations governing public finance management to manage debt servicing costs, which exceed 7.3 trillion rupees (US$2.5 trillion) in 2024. Poor fiscal management has resulted in inadequate investment in human capital development and other needs.

The complex tax system must be simplified by reducing excessive documentation requirements, lowering compliance costs and improving the efficiency of tax administration to incentivise economic activity. The system of granting exemptions and concessions through regulations known as Statutory Regulatory Orders should be abolished. Any exemptions and concessions should be subject to evaluation with a sunset clause.

The government should also foster a fair and competitive environment to encourage private sector investment, enhance productivity and drive innovation and growth. This includes reducing the red-tape costs resulting from the widespread use of Non-Objection Certificates and other permitting requirements. The estimated annual cost of such bureaucracy to the economy is around 39 per cent of GDP. This discourages investments and lowers productivity, which ultimately reduces GDP growth. The government could begin to reduce red tape by simplifying the regulatory framework to allow markets to develop in all sectors of the economy, especially the agriculture, real estate, financial and automotive markets.

Pakistan should seek new partnerships with international financial institutions, particularly the IMF, to secure financial support for a reform agenda. This will enhance global confidence and attract foreign direct investment. During negotiations with these institutions, prioritising expenditure rationalisation over tax rate increases is crucial to reviving the economy.

Job creation, especially for the youth, requires facilitating private sector engagement in productive activities. But success will also depend on implementing broader reforms. Allowing greater financial inclusion and technology will help Pakistan to harness its e-commerce potential.

Pakistan needs to address the quality of its labour by investing in the development of skills, education, health and mindset. Widespread access to the internet and equipping youth with advanced information and communications technology skills are essential for Pakistan’s global competitiveness. There is a need to revisit the role of technical vocational institutions to ensure they meet future work requirements. The labour market can also be strengthened by redefining the social protection strategy to focus on graduation-based programs rather than expanding unconditional cash transfers.

Alongside these reforms, Pakistan must replace its ineffective ‘bricks and mortar’ economic model with a holistic model based on structural reform and market orientation. While reforms require political and social capital to be expended, their long-term benefits for the nation far outweigh these burdens. The new government must brand 2024 as a year for reform.

  • About the author: Saima Nawaz is Associate Professor at COMSATS University Islamabad, Pakistan.
  • Source: This article is part of an EAF special feature series on 2023 in review and the year ahead.