Pakistan has been facing recurrent economic crises since its independence. In the past seven decades, Pakistan has faced multiple episodes of economic downturns with low gross domestic product growth coupled with a balance of payment crisis being the perennial features of Pakistan’s economy. The successive regimes, both civilian and military, failed to place the economy on the path of sustainable development.

Whenever an economic crisis surfaced, every government, instead of fixing the fundamental structural flaws in the economy, resorted to short-term measures just to stave off the crisis for that particular period. This postponement of indispensable reforms by successive governments brought Pakistan today to the point where the default seems inevitable, if external finances are not injected into our economy in the immediate run.

What is unique about this economic crisis is that it appeared at a time when the socio-political fabric was irrevocably polarized, and the climate of uncertainty has inundated the entire state structure.

The current economic crisis is characterized by dwindling foreign exchange reserves, massive current account deficit, fiscal deficit, skyrocketing inflation, declining volume of exports and remittances, mounting debt, massive devaluation of currency, and millions of people moving deep into poverty. This ‘crisis like no other’ demands extraordinary measures that have been avoided in the past, or else complete economic collapse seems inevitable.

Two perennial issues with Pakistan’s economy have always hindered sustainable economic growth. One is a Current Account Deficit (CAD), and the other is a Fiscal Deficit (FD), collectively called ‘twin deficits’. Current Account Deficit arises when foreign exchange outflows are greater than inflows.

Inflows can be earnings from exports, remittances, foreign investment, or foreign aid. Outflows are largely in the form of debt repayments and payments for imports.

This is where Pakistan is incessantly on the losing side, as today, earnings from exports are barely sufficient to pay only 40 percent of the import bill. As per the report of the International Monetary Fund released in July 2023, in the Fiscal Year (FY) 2021-22, Pakistan faced a massive current account deficit of around 17 billion USD, the second highest in the past five fiscal years. This drives us to two logical conclusions. The first one is that whenever growth accelerates, consumption increases and gives rise to more imports. As our external account is unable to cope with this import bill pressure, we always end up with a balance of payments crisis.

The cycle does not stop here; when foreign exchange reserves decline, it leads to rapid devaluation of currency and, hence, inflation. To facilitate this pressure on the current account, the government has to resort to austerity measures, which are counterproductive as these measures slow down the engine of economic growth. Similarly, the government strives to acquire more loans to maintain foreign exchange reserves. These loans add up to the existing stockpile of debt (78% debt to GDP ratio) and create a debt servicing issue, as the federal government spends more than half of its collected revenue on debt servicing, per the Pakistan Bureau of Statistics.

Thus, Pakistan begins with one balance of payment crisis and ends with another. This is the story of Pakistan’s economy over the past several decades. The budget or fiscal deficit is another point of Pakistan’s dismal economic performance. This deficit refers to a situation when a state’s expenditures in a given fiscal year surpass its total revenues.

Over the past few decades, the fiscal deficit has become a matter of great concern for policymakers in Pakistan.

According to the Ministry of Finance, in FY 2022-23, state expenditures reached Rs 16,154 billion against the total revenues of Rs 9,633 billion, creating a fiscal deficit of 7.7 percent of GDP. Inefficient schemes of untargeted subsidies, the growing burden of pensions, and privileges accorded to the elite all contributed to the present state of the economy. Another fact that highlights the appalling state of affairs in Pakistan’s economy is the fact that appeared in the recent report of the United Nations Development Program (UNDP) according to which every year powerful elite acquires economic privileges worth $17.4 billion. This indicates deep-seated structural fault lines in the fundamental fabric of Pakistan’s economy.

Furthermore, another area where Pakistan has been underperforming is its tax collection, where the country has a tax-to-GDP ratio of around 10 percent, much lower than the regional competitors, where the same ratio is above 15 percent. According to a recent report from the World Bank, Pakistan has the potential to raise the tax-to-GDP ratio to 22 percent, but that requires broadening the tax network. Hence, all these factors are responsible for the persistent economic decline.

After considering the issues facing our economy, the question arises: is there any way to rescue this moribund economy? The answer is certainly ‘yes,’ as many countries facing similar economic challenges took necessary measures and successfully transitioned their ailing economies into vibrant, sustainably growing economies. But it all requires commitment and courage to take necessary but unpopular measures to lift the economy out of this precipice. The economy of Pakistan in its contemporary state requires a complementary set of both short-term and long-term measures.

As far as measures in the immediate run are concerned, it is the need of the hour that all stakeholders, including political parties, business elite, Election Commission of Pakistan, judiciary, and powers-that-be must sit together to end this ongoing political and constitutional crisis. Nothing has hit Pakistan’s economy more than this political uncertainty. This climate of uncertainty has undermined investors’ confidence and compelled international creditors to pursue a policy of ‘wait and watch’ as evident by the delayed procurement of funds from the IMF in the recent past.

Therefore, instead of further deepening uncertainty, all stakeholders must decide to go for elections as soon as possible. Once the election results are announced, all stakeholders must respect the mandate given to any political party by the masses.

The strong national government-backed massive public mandate can take measures indispensable for rescuing the country in the throes of impending economic collapse.

Once a national government is established, another immediate measure it has to take is to sign a swift deal with the lender of last resort (IMF) for an immediate bail-out package. It will bring manifold advantages. On the one hand, it will sustain dwindling foreign exchange reserves; on the other hand, it will encourage other creditors like the World Bank and bilateral partners to provide necessary financial assistance either in the form of rescheduling the existing debt or injecting new loans.

This financial assistance is mandatory as per the recent report of the Pakistan Institute of Development Economics (PIDE); for the next four fiscal years, Pakistan has to pay USD 25 billion annually on debt repayments and USD 10 billion for sustaining current account, making total requirements to the tune of $35 billion a year. Thus, it is imperative to secure a deal with these creditors.

After salvaging the economy from looming default fears by pursuing immediate policy measures, the government should begin the structural economic reforms process by adhering to the policy of ‘now or never.’ The first and foremost reform is that the government must endeavor to widen its tax base. The tax-to-GDP ratio in Pakistan is still low in sharp contrast to its collection capacity. There is massive tax evasion and tax-exemption in Pakistan. The World Bank, in its recent report, recommended Pakistan to eliminate exemptions on income tax, sales tax, and customs duties. It also suggested setting up a standard tax regime vis-à-vis income in the agriculture sector, real estate, property, and other economic parasites.

The government must take robust measures against all the tax evaders and bring them into the tax network.

Another long-term measure that policymakers need to adopt is shifting the economic model from a loan-based economy to an exports-based economy. Today, Pakistan’s economy relies on a small volume of primary commodities with a narrow export base. Thus, instead of relying on primary agricultural commodities, Pakistan should promote the culture of industrialization because without exporting manufactured goods, Pakistan cannot earn the required revenue from exports.

Pakistan spends billions of dollars on imports of heavy machinery, manufactured goods, and fossil fuels, ultimately leading to a massive trade deficit. Thus, instead of imposing bans on imports, Pakistan should pursue a import substitution policy to lessen the import bill. Pakistan should remove bureaucratic bottlenecks from its administrative fabric to promote an investment culture for national and international investors.

It is appalling that a country with a population of over 240 million has an investment-to-GDP ratio of around 15 percent, much less than the regional and global average. Thus, to encourage investment, the government should adopt measures for ease of doing business (currently ranked 108/190), such as removing unnecessary licensing barriers, ensuring property rights to the investors, and, above all, warranting security to all and sundry.

Finally, the government should pursue a privatization policy in letter and spirit. These ailing state-owned enterprises must be gradually privatized, from the power sector to railways and from Pakistan Steel Mills to Pakistan Air Lines. The World Bank reports that the total liabilities of loss-making public sector enterprises are around 8 percent of GDP. Thus, transparent privatization will save billions of rupees that the government must spend yearly to bail them out. Furthermore, untargeted and unbudgeted subsidies that apply to the rich and poor equally must be replaced with targeted subsidies. Besides that, the financial privileges accorded to the elite must be abolished.

Above all, the concerted action of all stakeholders and the national resolve can place Pakistan on the path of sustainable economic development. It is high time that everyone played their part.