According to mass media, Pakistan is under default risk, and in the coming days, we’ll see a shortage of products. Foreign exchange reserves are depleting day by day as per State Bank of Pakistan’s current report. To get petroleum, medicine and other necessary items, a country needs foreign exchange reserve. Foreign exchange reserves are the international currency (i.e., US dollar), received through exports.
Pakistan has availed IMF facilities 22 times in the past (highest number in the world). IMF is the last resort lender to help states under default risk. Moreover, a state has to agree under the strict terms of the lender.
A state is said to be in default, when it is unable or unwilling to pay its debt. Companies face economic stagnation and lay off their works. Banks go under bankruptcy and could return amount to their users. Foreign lenders, banks and bond holders put pressure to pay their amount back. In case of non-compliance, international sanctions are imposed and foreign assets are seized. A shortage of medicines and other necessary items took place all over the country. As a result, a country faces economic meltdown.
According to majority of economic experts, Pakistan would not default because of:
- The IMF instalment is due in more than one year.
- Muslim states, especially Saudi Arabia, Iran, Turkey would come forward to help.
- China has a long term interest in Pakistan.
- Import & export balance could be achieved easily
- A short-term issue due to Covid-19 and floods, and will recover soon
But, it is feared that in near future Pakistan could default due to the given reasons:
- Pakistan foreign debt is constantly increasing.
- Global inflation
- Unbalanced consumption vs production (fiscal deficit)
- Low tax to GDP rate (below 10% since last 40 years)
- Less exports in respect to imports
- Bad governance and short-term remedies
- Elite capture
Suggestions:
- All the projects should be financed through self-generated revenue.
- Tax to GDP ratio must be minimum 17% - 20%
- Balance in imports and exports
- Use of technology in the field of agriculture
- Promotion of medium and small level businesses
- Vocational training at educational institutes
- Promotion of IT and facility of PayPal, Amazon, etc.
- Encourage foreign investment and provide a safe and secure environment for it.
- Balance in consumption vs production
We should not compare the contemporary time with past history, because the global scenario has been totally changed due to the Russia-Ukraine war, US-China conflict, global trade war, and the US Federal Reserve tightening. Moreover, the internal situation of Pakistan is worse than ever. Above all, Political uncertainty has put the final nail in the coffin of the economy of Pakistan.
It has been observed that cotton industry is prioritised overs and subsidised. We could see India, being a larger exporter of Information Technology related products. Therefore, IT should also be prioritised as other industries to boost the economy of Pakistan.
Till now 12-15 commissions have been made to investigate the reasons behind low Tax to GDP ratio and submit recommendations for its improvement. But, all these commissions proved fruitless, because the recommendations were not implemented in letters and spirit due to elite capture. Therefore, elite capture has dragged Pakistan's economy to the brink of collapse. To break this elite stranglehold, it is necessary to bring economic reforms through political activism by the common man.