Structural Problems in the Pakistan's Economy: The Way Progressive

What are the structural problems of the economy? These are essentially structural imbalances that act as imperative obstacles to sustainable economic growth and development. In the case of Pakistan, the structural problems include: disproportionate government involvement in economic activities, large informal economy, agriculture remains major employer, focus on related cotton production, import substitution policies, neglect of economic services in public policies, low savings rate and therefore insufficient investment in human resources and infrastructure development, government inability to collect sufficient tax revenues, neglect of small and medium-sized enterprises, ineffective governance and institutional structures, lack of accountability, etc.

Photo : MTV 

Therefore, deep economic reforms are needed to address these structural imbalances, increase productivity, improve competitiveness, encourage entrepreneurship and technological progress. We see that when cyclical macroeconomic activity fails to produce results, the only option left for economic managers is to initiate fundamental structural reforms. Pakistan now stands at this crossroads. 

The Pakistani economy is currently mired in low growth, high inflation and unemployment, falling investment, excessive budget deficits and a deteriorating external balance. Foreign exchange reserves are steadily declining due to weak foreign capital inflows, high debt repayments and slow external revenue growth. At present, Pakistan has foreign exchange reserves to only pay about a month's import bill. These are the consequences of not promptly addressing the structural problems of the 1 economy. Failure to ensure inclusive growth, in turn, threatens the social stability of society. Pakistan's savings rate is consistently low relative to investment needs. This is one of the main reasons why we depend on foreign capital. When foreign capital is not available, the investment rate falls further, with negative effects on growth and employment. The main reasons for low personal savings in Pakistan are: low or negative real interest rate, unstable income, large family, low education, high inflation, lack of savings culture, etc. 

Photo : ANI 

The country's energy crisis would be mainly caused by recurring debt, untargeted subsidies, distribution problems and theft. The government gives significant subsidies due to the high production costs compared to the prices of the distributors. Why are electricity costs high in Pakistan? We often see arguments that it's high because oil prices are high and online losses, including theft, are high. But I think there's more to it than that, and it can be traced back to power generation inefficiencies caused by energy companies using outdated technology, wasting it and causing frequent outages of power plants and outdated transmission systems.On the demand side, the government is not taking any action to limit electricity demand. Demand-side measures should be implemented in Pakistan. Unlike what has been seen in Pakistan, sales grew by 60% in just one year in 2012, according to a report by a major international home appliance manufacturer. What is the political answer to such an uncontrolled question? Probably none.

Photo credit: btTV 

Much of the informal economy eludes national laws and regulations. Due to the fact that the informal economy is not recorded, it is not included in the official statistics. As a result, most official economic indicators paint a depressing picture. The informal economy needs to be documented.

In addition to high levels of debt, loss-making SOEs consume large sums of budgetary funds, affecting public finances and economic growth. Public company losses are mainly due to corruption, inefficiency, overstaffing and staff incompetence. The government provides resources to public companies to ensure the continuity of their operations. However, SOEs do not make effective efforts to improve their productivity, efficiency, etc. to be sustainably profitable. As a result, every year the government allocates a huge sum to the survival of public companies.

Poorly planned tax reforms have not produced the expected results. Tax reforms are introduced on an ad hoc basis, with no obligation to make difficult decisions. The frequent easy imposition of withholding taxes demonstrates the government's lack of competence or willingness to collect taxes directly. It is difficult to imagine why the tax system grants exemptions for certain activities without public debate. Why is most of the service and corporate sector outside the tax network?Why isn't the farmers' income tax levied by the center like other sectors' income taxes? Why don't formal sector industries pay in full the sales taxes they collect from consumers on behalf of the government? Why are all other governments introducing amnesty programs with the clear understanding that tax evaders and tax evaders will engage in such practices again? Do you accept our failures? The answers and solutions to these questions can significantly increase your tax base.

Many of the problems plaguing the economy stem from a weak regulatory system. Conversely, lax enforcement of laws and regulations reflects weak institutional capacity. This becomes particularly clear when applying tax law and competition law. In the case of taxes, people evade and evade taxes with the connivance of tax officials and loopholes in the system. Failure to enforce competition laws generally makes it easier for sellers to cheat not only on price but also on quality.

The business environment should be facilitated by simplifying start-up procedures, internationalize companies, educating entrepreneurs, reducing administrative burdens and introducing an award for excellence in entrepreneurship promotion. 

Urgent policy action is needed to place Pakistan on a higher and more inclusive growth path, including: 

1. Strengthening public finances through revenue mobilization, reducing unnecessary and low-priority spending, and a decentralization framework to strengthen the budget; 
2. Reform the energy sector to eliminate capacity gaps and untargeted subsidies; 
3. Reduce government involvement in the economy; 
4. Implement fiscal policy to curb inflation, protect external position and protect financial sector stability; 
5. Address market failures by strengthening competition law and enforcement; 
6. Remove superfluous controls so that resources are reallocated in the desired direction; and 
7. Eliminate political bias towards the private, non-agricultural and non-textile sectors. An important structural change would be to reduce the economy's dependence on foreign aid to support growth. It may take some time, but the process must begin now. In this context, measures should be introduced to encourage all economic agents to make greater savings.

The private sector is the engine of economic growth in any economy. Unfortunately, most economic policies, particularly fiscal policies, are aimed at the private sector. As a result, the industry has not made the desired contribution to the economy. The private sector should be allowed to control all economic activities; naturally in a well-functioning regulatory environment. The primary role of government should be limited to providing social and physical infrastructure and social protection to the poor.