Pakistan’s economy has faced severe challenges over decades. It is now on the verge of an economic default situation it could scarcely have imagined at that time. Once considered one of the potentially developing economies in the 20th century, it is hard not to wonder what went amiss during the last three decades. Certainly, multiple reasons contributed to the failure of Pakistan’s economic sector. The present article talks only about structural problems concerning growth.

Pakistan’s tax-to-GDP ratio remains alarmingly low, with the agricultural sector contributing less than 0.03% despite employing 50% of the workforce.

Structure problems have formed the most important themes in public discourse well coupled with demands for structural reforms. Structural problems include internal inefficiencies and weaknesses within the institutions of Pakistan. Strong and effective institutions play the role of the roots of the good economy making effective and efficient institutions imperative for the achievement of sustainable economic growth.

Aspects like political instability, security situations, and non-democratic forces in civilian domains have made sure the interference of successive governments would hinder the addressing of these institutional weaknesses. One glaring example is Pakistan’s low tax-to-GDP ratio when compared to other nations in its region. Key institutions like the Federal Board of Revenue (FBR) and other financial departments have failed under all counts relating to broad basing and economic stabilization.

The revenues of Pakistan have three main sectors: agriculture, services, and manufacturing. The country, however, could not extend the tax net deep enough to these sectors. For example, agriculture employing a workforce of 50% contributes not more than 21% of GDP and contributes to only 0.03% in tax. The services sector, in contrast, accounts for 60% of GDP and uses only 25% of the workforce, equal to a 30% contribution to the tax-to-GDP ratio. However, several professionals rest outside the tax net as a result of the government’s prohibition of cash transactions.

Meanwhile, the salaried class pays more than its share of tax. This year, the salaried class is raising 367 billion rupees from tax collections compared to elites and feudal landlords largely exempt from the burden. Thus, this disparity shrinks the masses’ purchasing power, fuelling a rise in CPI-based inflation. The difference in revenue contribution from different sectors points to the need for specific reforms.

For instance, half of the population is engaged in agriculture, although barely contributing anything to the economy due to a lack of skills. However, due to collecting a huge revenue with only a fraction of the population, the service sector, on the other hand, shows a huge contrast.

State-owned enterprises, like PIA, have accumulated trillions in losses, emphasizing the urgent need for privatization to reduce fiscal burdens.

Sustainable development programs must be put in place by the government in rural areas for skill enhancement, enabling the workers to contribute in more sectors. The industrial sector has 21% of the GDP, but it can be said to contribute around 70% in the case of the tax-to-GDP ratio. So, the taxation mechanism should be balanced among these sectors, including all into equivalent proportions. Not only that, the exemption caused bias against a specific sector causing ineffective revenue generation and economic instability.

The fiscal deficit has remained consistent with the gap of revenue and expenditure. The government cannot increase its revenue; therefore, it has opted for borrowing as well as foreign loans. Most burdens come from government-owned enterprises (SOEs). For instance, PIA has remained loss-making only, to about $7.1 billion since the year 2012. Collectively, the SOEs have accumulated trillions of rupees in losses. Privatization of these must be done urgently.

The Thatcher privatization model in the UK gives a strong basis for this venture. When UK businesses became liabilities for the government, privatization made sense and saved the government long-term economic advantages. Something of that nature must be done for Pakistan so that the government does not have to carry the burden of the failing SOEs.

The incorporation of modern technology is always necessary for industrial development. Artificial intelligence can play a different role in different sectors to pile revenues and build their efficiency. It is a sector that must be motivated by the government since it contributes the least of all to the tax-to-GDP ratio. Landlords of feudal must be brought within the tax net, and there should be a government fact check on land ownership and use.

Educational reform is equally needed. One would declare an emergency in education to make out-of-school children come to learn and prepare them for the market trends of the future. Their entry into the services and industrial units contributes to economic growth.

Educational reforms are crucial for equipping future generations with skills aligned with market demands and technological advancements.

Similarly, here, provincial governments need to empower local governments for the expansion of the taxation system. Article 140-A of the 18th Amendment bears devolution of powers to local government. Empowering the local governments makes it possible to widen the tax base in rural as well as urban areas, following the successful example of China.

The devolution of powers and responsibilities has made a significant contribution to economic development. The revenue generated through tax collection and budget preparation at the local governments emboldens efficiency and accountability.

Beyond that, one critical component of the reform legal structure. The existing laws and economic orders are meant to be exploited by the vested interests of the economy as a whole. It needs revisiting and reforming these laws to establish a legal framework that will support institutionalized growth and economic stability.

It cannot be denied that there are tremendous roles of the elite in economic development. Like Tatas and Ambanis in India, Pakistan elites have contributed quite significantly to the social and economic well-being of the country: India has become the world’s fifth-largest economy because of such contributions. On the contrary, Pakistan oligarchs have hardly cared for social welfare-based functions as they look to monopolize and narrow down their interests. When brought in nation-building elements, these raises would work wonders in economic indicators for the nation.

Empowering local governments through Article 140-A can expand tax bases and promote accountability in both rural and urban areas.

It remains clear that the other aspect is the less ambitious contribution of provincial governments in revenue collection. Most rich persons and entities do not pay provincial taxes. Besides, Article 160 of the 18th Amendment disallows the federal government from reducing its share in the turnout from the National Finance Commission (NFC) Award to the provinces. So, the federal government cannot finance such critical areas as defense due to this provision. For this reason, Article 160 has to be revisited to give fiscal space to the federal government.

Last, but not least, is the problem posed by deep-rooted, structural challenges which all, indeed, have economic challenges for Pakistan. For this, all of the factors like tax reform, the privatization of SOEs, technological integration, education reforms, and empowering local governments need to be in place.

Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.