Pakistan has been experiencing severe economic turmoil for the past two plus years now. The already challenging economic condition was further exacerbated by the socio-political unrest in the country. The General Elections, held in 2024, also remain shrouded in mystery, going contrary to expectations that they would bring some sort of stability amidst all this chaos.
Despite these series of worrying news for the country as a whole, we did get some sigh of relief – in the form of reaching a staff level agreement with the IMF, for a stand-by arrangement (SBA). This is normally considered as a green signal for provisioning or release of funds by the IMF, with rest of the matters being more of a formality.
In this post, we will try to outline the impact of this agreement on the country’s struggling economy, which is experiencing a severe financial crunch.
Financing Paves the Way for More Bi-lateral Funding
Due to the economic woes of Pakistan, a lot of donor countries have started to link their financial assistance, or Foreign Direct Investment (FDI) plans, with the IMF. Due to the extensive and in-depth involvement of the IMF in Pakistan’s Fiscal and Monetary affairs, a nod by the IMF is generally considered a green signal for other donor countries and institutions, like the World Bank and the Asian Development Bank, to provide financial aid.
However, it is not the funding which is more important. What we do with this funding is what makes most of the difference. Let us discuss some major challenges and risks to our economy:-
Import Dependency Keeps on Rising
It would be surprising for a lot of readers that despite being in such a severe financial crisis, Pakistan still remains a major importer of high-end luxury items like cars, fashion apparel, and cosmetics. These imports do little good to the economy, but eat-up valuable foreign exchange reserves of the country.
Tax Collection Remains Skewed Towards Imports
A very common argument given in favor of such un-necessary imports is that the country still earns hefty import duties from these items. Well, this is a flawed and dangerous tendency, as it fuels even more imports of such items. And the revenue collection comes at the cost of depleting valuable foreign exchange reserves.
The Gray Economy Flourishes Amidst Restrictions
In a bid to artificially stop the depletion of foreign exchange reserves, Pakistan has imposed bans on opening of Letters of Credit (LCs), a major step to formally import items in the country.
As a result, most of the purchases from other countries, regardless of their nature, are being done through gray or un-documented channels. While this step has done little to stop the import or influx of items in the country, it has given a new lease of life to the entities involved in the illegal movement of foreign exchange.
The authorities should be mindful that such restrictions or import bans are impossible to implement, and thus, end up hurting the economy even more, by further increasing the size of the black or un-documented / cash economy.
How Will the Latest IMF Funding Help Pakistan?
When it comes to outlining the positive impact of this latest agreement with the IMF, we should keep our hopes under check. This is nothing more than a temporary breathing space for our strangled economy, with a lot more left to be done in the follow-up to this development.
Foreign Direct Investment (FDI) – A Savior for Pakistan
At this stage, what Pakistan needs a lot more than financial aid is FDI, and we have plenty of sectors with very promising prospects. With a burgeoning population of 250 million or more, we by ourselves are a huge marketplace for international companies and brands, provided they localize their products or services.
Take the country’s power sector for instance, which is one of the major inhibitors of our economic growth. Although we have somewhat sorted out the problem of generation capacity, albeit with controversial and inefficient captive power plants, we still lack the power transmission infrastructure to utilize this installed capacity.
Export of Skilled Labor
Pakistan still remains a very rich country in terms of a young labor force. As employment opportunities in the country’s manufacturing sector are limited, the Government needs to invest in upskilling our youth with specialized skills, and “exporting” this young, energetic talent to other parts of the globe.
In due course, this initiative will result in improving our remittances from expat Pakistanis, relieving the pressure from our weakening Rupee. This will also help alleviate the rising cost of living in the country, fueled by persistent double-digit inflation.
Reducing Extravagant Government Spending
Being an under-developed country with multi-faceted challenges, the Government needs to clamp down on its lavish spending tendencies, whether its public servants, or our public representatives that grace the Federal and Provincial Assemblies of the country.
Conclusion
Pakistan is a country with tremendous promise and explosive growth potential. What we lack is a futuristic vision that is not restricted to just a few months or couple years in the future. We need to formulate and execute mid to long term plans, which will revive the basic structure of the economy.
Only then would we be able to truly achieve self-reliance, and truly exercise our sovereignty as a country. It is vital that every Pakistani shoulders his or her share of the responsibility, in whatever capacity possible, without worrying if the impact of their action would be big or small.
Contact Brick Marketing & Developers (Pvt.) Ltd. for professional advice on the country’s promising real-estate sector, and top quality up-coming projects, with strong potential for growth.