The current state of Pakistan’s economy is appalling. Several factors are said to be responsible for such precarious economic conditions both at the micro and macro levels, that include depleting reserves, inflation, low tax to GDP ratio, rampant corruption and ad hoc foreign policies. There is no doubt that all the aforementioned factors are somewhat responsible for the current unfortunate circumstances, but the five major challenges faced by Pakistan’s economy are as follows;

Political Instability

The economy of Pakistan has historically been hampered by political instability. Prolonged political turmoil, repeated changes of government, judicial interventions and military coups, all have plagued the nation. Pakistan’s government has undergone numerous changes in the last decade, including a (near) military takeover in 2007, where the GDP growth rate dropped from 4.8% to 1.7% as a result of the political uncertainty brought on by the delayed elections. A protracted political crisis in 2013 where the GDP growth rate was 4.4% and political stability index at -2.6%. The developments following the Panama leaks also led to economic losses worth PKR 610 billion.

In 2019, the country’s economy was at a downward trajectory due to volatile market conditions, and an unfavorable political climate. GDP growth rate dropped from 5.8% to 3.3% in just one year. The situation worsened in 2020 with government-opposition face-offs and frequent arrests and prosecutions by NAB. The sudden change of government in 2022 after a vote of no confidence further forced the country into political unrest having substantial negative impacts on the already crumbling economy. The Business Confidence Survey (BCI) conducted by Overseas Investment Chamber of Commerce and Industry (OICCI) indicated that the business sector was severely impacted by the political turmoil with a negative decrease of 4% in the first half of 2022 and a negative decrease of 17% in the second half of 2022.

Security Concerns

Since its inception, Pakistan has had to cope with border security issues with its neighbors. As a result, a significant portion of the military budget had to be set aside, burdening the economy. However, never before had Pakistan suffered as much as it did in the aftermath 9/11 attacks and the subsequent American invasion of Afghanistan. Apart from human loss of over 21,485 civilians and more than 7000 security forces personnel, the National Counter Terrorism Authority’s data indicates that estimated losses attributable to direct and indirect terrorist activity in Pakistan have cost PKR 1200 billion ($7.6 billion) in the last decade. According to a report by the Institute of Conflict, Cooperation, and Security (ICCS), due to the impact of terrorist attacks, the country’s economic growth rate has decreased by 1.5% each year with economic losses of up to PKR 2.2 trillion.

One of the profound impacts of these activities on economy was the downfall of Foreign Direct Investment (FDI’s). A study by Beijing Institute of Technology found that terrorist operations escalated and presented a serious threat to investors’ security after 2007. Pakistan has a GTI score of 7.541, placing it seventh in the 2020 Global Terrorism Index report. This coupled with the country’s name on the FATF grey list.

Currency Devaluation  

Statistics show that since 1990, the value of the Pakistani Rupee (PKR) has declined relative to the US dollar by about 131%. One of the primary reasons for currency devaluation in Pakistan is its chronic trade deficit and balance of payment crisis. Due to a dramatic spike in oil costs and increased food imports, the nation’s imports have increased considerably during the past year. This has significantly strained the nation’s current account balance, necessitating a depreciation of the rupee to restore the balance of payments. This, coupled with Pakistan’s reliance on foreign loans to meet its fiscal deficit, has led to a decline in the value of the Pakistani Rupee.

The COVID-19 epidemic and its economic repercussions have severely affected Pakistan, which has resulted in a major depreciation of the currency. Data shows that during 2021, the Pakistani rupee has lost value relative to the US dollar by more than 9%. In an effort to stabilize its faltering economy, Pakistan asked the IMF for a $6 billion rescue package in 2019.

Energy Crisis

Pakistan has experienced severe energy crisis in the last two decades, which has had a substantial influence on a number of different economic sectors. The installed power producing capacity in Pakistan is currently over 34,000 MW, but the actual demand is twice that amount. The energy infrastructure is deteriorating and is unable to meet these demands and as a result, during the busiest summer months, the shortfall may rise to 7,000 MW. The energy problem reduces GDP by almost 2% annually, according to a report by the Pakistan Institute of Development Economics. It also adversely impacts people’s living standards and running businesses.

Debt

Pakistan’s debt history is one of the crucial aspects of the country’s economic conditions as it upsets both micro and macro levels of the economy. Ever since its inception, the nation has been dependent on foreign and domestic loans which has led to a never ending debt cycle. The cycle started in 1950 when Pakistan received its first loan from the World Bank. The situation had gotten worse by 1978 as a result of Zulfikar Ali Bhutto’s socialist policies, and the nation’s external debt had reached $5 billion, or nearly 33% of its GDP. The external debt of Pakistan in 1998 was $39.1 billion, or around 60% of its GDP. The nation’s government did, however, implement significant debt relief and reforms between 2001 and 2008, which assisted in lowering the debt load. Despite these measures, the stock of external debt was $58.9 billion in 2007.

In recent years the situation has only worsened as the total foreign debt on the country is estimated around $130 billion. According to state bank of Pakistan, in terms of rupees, Pakistan’s public debt growth surged during FY22, mostly as a result of a large fiscal deficit. Public debt increased from 71.5 percent in FY21 to 73.5 percent in FY22 in terms of GDP. At present, the debt-to-GDP ratio has surpassed 87%, with China being the country’s largest lender. The country’s economy has been significantly impacted by the dramatic increase in debt over such a brief period, which has had an effect on everything from the value of its currency to the cost of necessities while also forcing the government to reduce spending on important public services and infrastructure.

Conclusion

To achieve sustainable economic growth and development, Pakistan must address key economic difficulties at the earliest. Debt restructuring is required with consistent economic policies. To enhance its residents’ well-being and equitable economic growth, the nation must diversify its exports, manage inflation, remove policy bias against its private, non-agriculture and non-textile sectors. There is dire need for better economic governance because with the right policies in place, Pakistan may develop into an economic powerhouse that offers opportunity not only its residents but to the region at large.