Pakistan's Economic Outlook, Future Challenges and Way Forward Outline

Pakistan’s Economic Outlook, Future Challenges and Way Forward
Outline:
1. Background
- Economic Vulnerability due to the security challenges
- Political uncertainty
- Natural disasters
2. Problem Statement
3. Pakistan’s Economic Status; highlights of 2017
4. Status in 2018 and Future Predictions
5. Analysis and Important Areas of Focus
6. Recommendations for Economic Recovery
Background:
Pakistan’s economy remains highly vulnerable because of continued security challenges, political uncertainty, and
two recent and severe floods. Large fiscal deficits keep inflation high and limit growth, and the outlook for the short
and medium term is not good. The media often focuses on the deteriorating security situation in Pakistan, but
Pakistan’s feeble economy may prove a more dangerous—but less visible.
Pakistan has abundant economic potential. It is located in an economically dynamic neighborhood, is ready to
massively benefit from increased regional trade, and has the potential demographic dividend of a young population
eager for employment. Pakistani economy was vulnerable to shocks due to its heavy dependence on certain imports
and exports and its limited economic buffers. Nearly half of Pakistan’s exports are in the textile sector and almost one-
third of Pakistan’s imports are petroleum products. This relatively undiversified trade leaves Pakistan vulnerable to
external price shocks. Additionally, most of the government’s revenues are either spent in areas of non-discretionary
spending (interest payments) or as subsidies to politically powerful groups.
Problem Statement:
While Pakistan was held up decades ago as a shining example of economic progress in the developing world, its
economy is now;
- hobbled by a low savings rate

- weak tax structure
- a low investment in human capital
- and the country’s fraught political situation.
- Undiversified trade
Pakistan’s economic status; highlights from 2017:

- 8.5% growth in Large-Scale Manufacturing (LSM)
- Inflation rate of 3.9%
- Super strong growth in lending to the private sector
- 74.4% growth in Foreign Direct Investment (FDI) worth $939.7 million
- 19.5% growth in the Federal Board of Revenue (FBR) Tax Revenues and a double-digit growth in exports
Pakistan’s economic status; Status in 2018 and Future Predictions:
Considering the mixed trends in the macro-economy, which includes challenges and opportunities, GDP growth is
expected to remain between 5-6 percent in 2018. The economy is expected to benefit from accommodative
macroeconomic environment, activities related to the China-Pakistan Economic Corridor (CPEC) and constantly
improving energy supply and security situation. Pakistan’s annual GDP growth rate has touched 5% in 2016-17 after
almost a decade. However, it is noteworthy that Pakistan was one of the high economic performers among developing
countries over 1960-1990 and had a much higher economic growth than either India or Bangladesh. Unless Pakistan
is able to revive its annual growth to a sustained 6 percent to 7 percent per annum, it will not be able to generate jobs
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needed for its large young population. Growth prospects of Pakistan’s economy from fiscal year 2018 onwards would
largely hinge on planned infrastructure projects and capacity expansion by industries. In order to make these plans a
success story, enhanced coordination amongst all public-sector institutions would be more crucial. Also, continuity
and consistency in policies, especially those related to investment and industry, would be necessary to ensure
sustainability of the growth momentum. Key trends in economy during 2018 and beyond are listed below;
- The external and fiscal accounts may remain under pressure.

- Growth in exports and workers’ remittances is expected to recover.
1. The exports are expected to benefit from a recovery in global commodity prices and ease in energy
constraints. This is particularly indicated by a double-digit growth in exports recorded during the first
two months of FY18.
2. In case of workers’ remittances, the initiatives under PRI could help in attracting more receipts
through official channel. The key initiatives include new products for diaspora, extending the tie-up
arrangements as practiced in case of GCC and UK to other sources of remittances like Malaysia and
New Zealand and plans to further reduce the cost of fund transfers. Incorporating these
developments, workers’ remittances are projected to remain in the range of $20 billion during FY18.
Yet, the pace of increase in exports and remittances is likely to be slower compared to increase in imports.
The economy is likely to continue to expand with low and stable inflation in FY18.
Encouraging trends in private sector credit indicate underlying dynamics in real economic activity. However,
maintaining this momentum going forward would largely depend on addressing emerging challenges in external and
fiscal accounts.
Analysis and Important Areas of Focus
- Poor Record of Performance:

Pakistan has repeatedly sustained high budget deficits. In order to mitigate the deficits, however, it has
reduced its discretionary funding in areas like infrastructure and health in order to continue its interest
payments and wasteful subsidies. While this may solve the short-term problems of budget deficits, it
accentuates the long-term problems of low economic growth, since sustained growth requires higher
infrastructure spending.
- Energy Supply:
Pakistan’s constrained energy supply provides an example of this vicious cycle. The energy supply
problems are the product of decades of neglect and decrease GDP growth by up to 10 percent each year.
The low long-term economic growth, in turn, depresses the government’s revenues and creates budget
deficits, which again leads to less spending to resolve Pakistan’s energy problems.
There are seven areas in need of attention and strong policy action before strong and sustained growth can be revived.
1. Incentivizing performing sectors (non-textile) to boost exports.

2. Re-strategizing taxation.
3. Re-thinking emerging energy mix.
4. Focusing on investment and creating employment.
5. Re-negotiating adverse trade deals.
6. Re-prioritizing government spending.
7. Transforming at least one public sector enterprise into a profitable entity.
Recommendations for Economic Recovery
Based on the above, following reforms are required that would further improve the economy:
1. Promotion of capital formation and consolidation to improve competitiveness through withdrawal of Super
Tax, restoration of group relief and focus on retention of reserves.
2. Formulation of separate tax policy while withdrawing full and final tax regime for commercial importers
which will discourage under-invoicing.
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3. Creation of jobs by supporting local industries through import substitution.
4. Creation of long term debt market to fund mortgages, credit and local infrastructure.
5. Through simplification and digitization, making it easier to do business.
6. Enhancement in the technological capacity of FBR to harvest data on non-filers and penalizing them.

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Pakistan’s Economic Outlook, Future Challenges and Way Forward

- hobbled by a low savings rate

Pakistan’s economic status; highlights from 2017:

Pakistan’s economic status; Status in 2018 and Future Predictions:

- The external and fiscal accounts may remain under pressure.

Analysis and Important Areas of Focus

- Poor Record of Performance:

1. Incentivizing performing sectors (non-textile) to boost exports.

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