economy of pakistan essay 2022

The World Bank In Pakistan

Pakistan has important strategic endowments and development potential. The increasing proportion of Pakistan’s youth provides the country with a potential demographic dividend and a challenge to provide adequate services and employment.

Poverty reduction has slowed amid recent shocks, as economic growth has remained volatile and slow. Pakistan made significant progress towards reducing poverty between 2001 and 2018 with the expansion of off-farm economic opportunities and increased inflow of remittances. However, rapid poverty reduction has not fully translated into improved socio-economic conditions, as human capital outcomes have remained poor, with high levels of stunting at 38 percent and learning poverty at 78 percent. Critical constraints, including persistent fiscal and current account deficits, protectionist trade policies, unproductive agriculture, a difficult business environment, a heavy state presence in the economy, and a financially unsustainable energy sector, have remained unaddressed, leading to slow and volatile growth. Progress with poverty reduction has recently slowed amid macroeconomic instability, the COVID-19 pandemic, and the catastrophic 2022 floods. The estimated lower-middle income poverty rate is 40.1 percent (US$3.65/day 2017 PPP) for the year 2023-24, virtually the same as the poverty rate in 2018, but with 7 million more Pakistanis living below the poverty line.

Pakistan experienced heavy monsoon rains in 2022 leading to catastrophic and unprecedented flooding with enormous human and economic impacts. Roughly 33 million people were impacted, and many permanently displaced. More than 13,000 kilometers of roads were destroyed, 2.2 million houses damaged, around 3.8 million hectares of crops were flooded, and an estimated 1.2 million livestock were killed. Limited access to input and output markets and temporary disruptions to supply chains subsequently drove up food prices and added to existing price pressures resulting from reduced agricultural yields and the global rise of food prices. The Government’s Post-Disaster Needs Assessment estimated that the need for rehabilitation and reconstruction is at US$16.3 billion.

Pakistan has made recent progress towards macroeconomic stabilization, but risks remain extremely high and faster growth will require substantial reform. Real GDP growth contracted by 0.2 percent y-o-y in fiscal year FY23, after growing by 6.2 percent in FY22 and 5.8 percent in FY21. Accumulated economic imbalances, including high fiscal deficits and increasing debt, depleted Pakistan’s policy buffers resulting in high vulnerability to the catastrophic floods, high world commodity prices, and tight global financing conditions. Repeated delays in implementing the International Monetary Fund (IMF) Extended Fund Facility (EFF) program and the associated decline in external financing inflows saw foreign reserves fall to critically low levels, amid high inflation and sharp currency depreciation. Following the expiry of the incomplete EFF program, a nine-month Stand-By Arrangement (SBA) was approved by the IMF, with staff level agreement reached on its final review in March 2024. Under the SBA, exchange rate flexibility was restored, import controls were eased with some recovery in foreign exchange reserves and economic growth, and new measures were introduced to contain the FY24 fiscal deficit. Nonetheless, risks remain high. Short-term stability depends on remaining on track with the SBA, continued fiscal restraint, and new external financing inflows. Robust economic recovery over the medium term will require the steadfast implementation of much broader fiscal and economic reforms.

Economic activity is expected to remain subdued, with real GDP growth estimated at 1.8 percent in FY24, reflecting continued tight macroeconomic policy, import controls, high inflation, and continued policy uncertainty. Output growth is expected to increase to around 2.5 percent over FY25-26, remaining below potential. Poverty reduction is projected to stall with the poverty rate at around 40 percent in the medium term, owing to weak growth, limited increase in real labor incomes, and persistently high food and energy inflation. Inflation is projected to remain elevated at 26.0 percent in FY24 due to higher domestic energy prices, with little respite for poor and vulnerable households with depleted savings and lower real incomes. With high base effects and lower projected global commodity prices, inflation is expected to moderate over the medium-term. With continued import controls, the CAD is expected to remain low at 0.7 percent of GDP in FY24 and to further narrow to 0.6 percent of GDP in FY25 and FY26. The fiscal deficit is projected to widen to 8.0 percent of GDP due to higher interest payments but gradually decline as fiscal consolidation takes hold and interest payments fall over time.

The Government continues to face a challenging macroeconomic environment while maintaining progress towards macroeconomic stabilization and critical structural reforms. Significant downside risks include: i) policy uncertainty, which may undermine a coherent and timely policy response; ii) worsening external conditions, including unforeseen increases in global commodity prices and interest rates; and iii) risks associated with large domestic and external financing needs, especially in the context banking sector liquidity constraints. To manage these risks, it will be critical to adhere to sound overall economic management and buttress market sentiment, including through articulating and effectively implementing a clear strategy for economic recovery; constraining fiscal expenditures to the extent possible and carefully targeting any new expenditures; maintaining a tight monetary stance and flexible exchange rate; and remaining on-track with critical structural reforms, including those in the energy sector.

Last Updated: Apr 02, 2024

The Country Partnership Strategy (CPS) for Pakistan for FY2015-20 is structured to help the country tackle the most difficult—but potentially transformational—areas to reach the twin goals of poverty reduction and shared prosperity.

The Pakistan team continues to engage with stakeholders on the next Country Partnership Framework (CPF). The CPF will draw from several analytical works, including Pakistan Systematic Country Diagnostic: Leveling the Playing Field , and the recently published Country Climate Development Report and Country Economic Memorandum .

The four results areas of the current CPS are:

Transforming the energy sector: WBG interventions are supporting improved performance of the energy sector by supporting reforms and investments in the power sector to reduce load shedding, expand low-cost generation supply, improve transmission, improve governance and cut losses.

Supporting private sector development: A mix of budget support, investments and analytical work supports improvements in Pakistan’s investment climate, in overall competitiveness, agricultural markets and productivity, and skills development.

Reaching out to the underserved, neglected, and poor: Investments support financial inclusion, micro, small and medium enterprises (MSMEs), women and youth (including through enrollment outcomes), fragile provinces/regions and poorer districts, social protection, and resilience and adaptation to the impact of climate change.

Accelerating improvements in service delivery: At the federal and provincial levels the Bank supports increasing revenues to fund services and setting more ambitious stretch targets for areas that are not producing change fast enough (especially education and health). At a provincial level, this involves support to better service delivery in cities.

Cross cutting themes for the program include women’s economic empowerment, climate change and resilience, and regional economic connectivity.The WBG has fourth-largest portfolio of $14.7 billion in Pakistan ($10.7bn IDA, $3.8bn IBRD, $0.2mn in Trust funds and co-financings). The portfolio is supporting reforms and investments to strengthen institutions, particularly in fiscal management and human development. Partnerships are being strengthened at provincial levels, focusing on multi-sectoral initiatives in areas such as children's nutrition, education and skills, irrigated agriculture, tourism, disaster risk management, and urban development. Clean energy, and social/financial inclusion, both remain major priorities.

ENHANCING DISASTER RESILIENCE

Being one of the most vulnerable countries to climate change Pakistan is recurrently affected by catastrophes, including the unprecedented 2022 floods which affected an estimated 33 million people and resulted in US$14.9 billion in damages and US$15.2 billion in economic losses . Pakistan’s economy continues to suffer chronic strain from prevailing and likely future threats of hazards. Since the 2005 Pakistan earthquake, which led to nearly 73,000 deaths and caused damages to over 570,000 houses, the Bank has been supporting the Government of Pakistan in shifting to an anticipatory risk management approach. Initially, the Bank provided technical assistance to the government to highlight physical and fiscal risks from hazards, including risk assessments of federal and provincial capitals. In parallel, the Bank also used grant resources to build the capacity of Provincial Disaster Management Authority of Balochistan.

Following the floods of 2014, at the request of Government of Pakistan, the World Bank prepared the US$125 million IDA-funded Disaster and Climate Resilience Improvement Project (DCRIP) to support the restoration of flood protection infrastructure and strengthen government capacity to manage disasters and climate variability in Punjab. The project was successfully concluded in November 2021,achieving its intended development objectives and surpassing the targets for several key results indicators. DCRIP directly benefitted more than 8 million people, half of which are women. The project also repurposed US$7 million to support the Government of Punjab in the pandemic emergency response through procurement of personal protection and healthcare equipment.

In 2016, the Bank also prepared and delivered the US$100 million IDA-funded Sindh Resilience Project (SRP) to mitigate flood and drought risks in selected areas, and strengthen Government of Sindh's capacity to manage natural disasters. About 5.75 million people across the province have benefitted from project interventions till date. The drought mitigation component of the project, comprising construction of small groundwater recharge dams, has already started generating strong development impacts for the target communities. In 2021, the Bank approved an additional financing of US$200 million to scale up the small groundwater recharge dams component and set up an emergency rescue service for Sindh.

The Bank has also prepared and delivered the US$188 million IDA-funded Pakistan Hydromet and Climate Services Project which aims to strengthen Pakistan’s public-sector delivery of reliable and timely hydro-meteorological services and enhance community resilience to shocks. The Contingent Emergency Response Component (CERC) was activated under this project to disburse US$150 million in response to the 2022 floods to provide cash assistance to 1.3 million flood affected families.

Furthermore, as part of comprehensive emergency response and rehabilitation support for 2022 floods, the Bank delivered two emergency projects for the province of Sindh, which was disproportionately affected by the catastrophe. The US$500 million IDA-funded Sindh Flood Emergency Rehabilitation Project aims to rehabilitate damaged infrastructure and provide short-term livelihood opportunities through cash-for-work in selected areas of Sindh affected by the 2022 floods. The project will also strengthen the capacity of the Government of Sindh to respond to the impacts of climate change and natural hazards through expansion of the Sindh Emergency Rescue Service (Rescue 1122) and enhancing the preparedness of relevant line departments. The Project is expected to benefit 2 million people through rehabilitated infrastructure while short term livelihood support will be provided to 100,000 households.

Similarly, the IDA-funded US$500 million Sindh Flood Emergency Housing Reconstruction Project aims to deliver beneficiary-driven, multi-hazard resilient reconstruction of core housing units damaged or destroyed in the floods of 2022 in selected districts of Sindh. The Project will support the provision of an estimated 350,000 housing subsidy cash grants and strengthen the capacity of the Government of Sindh by providing technical assistance for the overall housing reconstruction program.

The flood emergency response projects have made satisfactory progress till date. US$ 160 million has been utilized for infrastructure rehabilitation, benefitting more than 3 million people, and about US$100 million has been committed for tranche-based cash grants for housing support to 160,000 beneficiaries. Efforts are ongoing to ensure the inclusion of eligible beneficiaries and putting emphasis on infrastructure resilience in design standards, which represent important steps towards enhancing overall resilience and building back better.

The Bank has also launched the Country Climate and Development Report (CCDR) for Pakistan. The Pakistan CCDR provides analyses and policy recommendations on harmonizing efforts to achieve further economic growth and lower poverty rates, on the one hand, with the pursuit of a climate-resilient, low-carbon, and equitable development path, on the other. In light of the devastating 2022 heatwaves and floods and the country’s vulnerability profile, the CCDR strongly emphasizes the need to build long-term resilience. Further, it explores pathways for Pakistan to achieve deep decarbonization by 2050, and eventually reach net-zero emissions by 2070 without undermining its development ambitions.

Pakistan has made progress in mainstreaming the Sustainable Development Goals (SDGs) in national policies and strategies, however, there is a slow progress in improving health outcomes. According to the maternal mortality survey in 2019 [1], the country’s maternal mortality ratio was 186 deaths per 100,000 live births down from 276/100,000 live births in 2006-07. Large gaps exist across provinces with Sindh and Balochistan having twice the number of maternal deaths as compared to the national average. The country also has one of the highest infant and under-5 mortalities in the region (62 and 74 deaths per 1,000 live births, respectively). Twenty-two percent of the children born have low birth weight with variations across provinces.

On average, access to quality reproductive, maternal, newborn, child, and adolescent health with nutrition services in Pakistan is inadequate, with regional disparities. About 49 percent [2] of pregnant women do not receive the recommended four or more anti-natal care (ANC) visits essential for a safe and healthy pregnancy outcome. With 33.8 percent of births outside of health facilities, the risk of maternal and infant mortality and morbidity is high. 42 percent of women of reproductive age in Pakistan have anemia due to poor nutrition. At 3.6 births per woman [3], Pakistan’s fertility rate is still relatively high, and except for Punjab, adolescent fertility has increased, and modern contraceptive prevalence rate (mCPR) has been low in the last decade at 25 percent. High fertility rate and teenage pregnancies contribute to poor maternal and child health outcomes which pose risks of death and illness. Poor health affects all facets of women’s lives including delayed development milestones, education, learning skills and gainfully participating in the labor force.

Stunting rates for children under age 5 have dropped from 45% to 40.2% from 2013 to 2018 [4]. However, it is still high and large disparities exist among provinces. This prevalence varies from 36.4% in Punjab to 46.6% in Balochistan. The average annual rate of reduction since the last 2018 National Nutrition Survey has been estimated at only 0.5 percent, which is frighteningly slow to reach the national targets. Although the situation is worse in rural and poor households, more than 20 percent of under-5 children in the wealthiest income quintile are also stunted, meaning poverty is not the only driver of stunting.

Immunization coverage for children aged 12-23 months, increased considerably over the past 8-9 years from 54% in 2013 to 77% in 2022. In Punjab 89.5% of children are fully immunized while in Khyber Pakhtunkhwa, Sindh and Balochistan 60.5%, 68%, and 37.9% are respectively fully vaccinated [5].

The World Bank has been supporting the health sector in Pakistan through national and provincial projects. The “National Health Support Program”, approved in Fiscal Year 2023, supports the strengthening of equitable delivery and quality of essential health services at the primary level and the “Sindh Integrated Health and Population Project”, approved in Fiscal Year 2023, supports to improve quality health services in selected areas and restore and rehabilitate healthcare services impacted by floods. The “Punjab Family Planning Program” is aimed to improve modern contraceptive prevalence rate (mCPR) while simultaneously tackling the knowledge and cultural barriers that hinder access to family planning services in the province. Provincial “Human Capital Investment projects” are being implemented in Balochistan, Punjab and Khyber Pakhtunkhwa with the aim to improve utilization of quality health targeted and social services to the poor and vulnerable population.

The World Bank also invests in analytical work through “Programmatic Advisory Services and Analytics (PASA)”, aiming to generate evidence for reforms and provide technical support to the federal and provincial governments in implementing Universal Health Coverage in Pakistan. Additionally, the Bank is working with the Government of Pakistan, through analytics to build capacity of the country stakeholders of the human and animal sectors on health emergency preparedness and response from a one-health perspective. The Bank is also developing thorough and comprehensive analyses on nutrition that will contribute to the development of a nation-wide program to accelerate stunting reduction in under-five children in pursuit of accumulating human capital in Pakistan.

Sources: [1] Pakistan Maternal Mortality Survey 2019; [2] Universal Health Coverage Index 2023; [3] Demographic and Health Survey 2018; [4] National Nutrition Survey 2018; [5] Third-Party Verification Immunization Coverage Survey Round Two 2022.

Actions to Strengthen Performance for Inclusive and Response Education (ASPIRE) is a 5-year US$200 million program that became effective in August 2020. The program is aimed at enhanced targeting of COVID-19 education response, generating improved learning opportunities for out-of-school children (OOSC) and at-risk students, and enabling stronger federal-provincial coordination and management. To date, the Ministry of Federal Education and Professional Training (MoFEPT) and the provincial education departments have achieved four Disbursement-Linked Results (DLR): adoption of National School Health and Safety Protocols, approval of National Education Response and Resilience Plan, provision of distance learning kits to 50,000 students across the country, and provision of hygiene and cleaning kits to 20,000 public schools nationwide. The activities planned in in FY23 mostly focused on construction and rehabilitation, communication campaigns, teachers training, multi-modal programs, and specific intervention related to Out of School Children (OOSC). The ASPIRE program has also been successful at leveraging the Inter-Provincial Education Ministerial Conference (IPEMC) and the Technical Steering Committee (TSC) platforms for improved coordination between the Federal and Provincial Education Departments.

Pandemic Response Effectiveness in Pakistan project (PREP) , initiated in April 2020, was closed in June 2023. Different donor organizations extended their support in the form of grants and loans to overcome the pandemic situation all over the world, especially to support the education sector. PREP was a USD187 million project of which USD17 million is the education component. The education component introduced distance-learning activities and the development and implementation of plans to ensure the continuity of learning including remote learning options, at all levels of education. These included TV /radio broadcasts, virtual networks of teachers, and other means of distance delivery of academic content at primary, secondary and higher secondary levels. The key activities that are being procured under PREP included: i) Teleschool initiative through Allama Iqbal Open University (AIOU), ii) Content procurement for Teleschool, iii) Strengthening of E-Taleem portal including Virtual Teacher Training (VTT) and Learning Management System (LMS) modules, iv) Development of VTT Training Modules/Courses v) Smart classrooms vi) Procurement and distribution of hand-held devices vii) Communication campaign viii) School on wheels, and ix) the monitoring and evaluation activities.

Data and Research in Education (DARE) is a US$10 million Bank Executed Trust Fund (BETF) provided by the Foreign, Commonwealth & Development Office alongside the ASPIRE program. The project supports Pakistan education sector’s response and recovery by providing technical assistance to the Federal Government, in order to strengthen the education data infrastructure and coordination mechanisms between the federal and provincial governments, enhance evidence-based decision making and improve targeting of programs to reduce inequality and gender-gap. The main components under DARE include strengthening the provincial-Federal education data management processes, enhancing sector coordination on student learning outcomes and improvement of sector monitoring, evaluation and decision making by supporting policy research and impact evaluations.

COVID 19 Response, Recovery, and Resilience in Education Project (RRREP) - a Global Partnership for Education funded grant of US$19.85 million was successfully closed in November 2022. The project ensured learning continuity through a) broadcasting the digital content on National TV and Radio which reached around 2.7 million children across 58 lagging districts in Pakistan; b) contributed to the evolving EdTech ecosystem at the Federal level by enhancing the Ministry’s digital content library (6000 lessons for grades K-12) and mapping them to the National and Provincial Student Learning Outcomes; and c) providing adequate infrastructure for the delivery of digital content. Moreover, to ensure safe school reopening post COVID-19, around 1.8 million children in over 12,000 primary schools received sanitizing and hygiene kits, as well as learning materials to lower barriers for re-enrollment and attendance. The Bank has also supported the government’s communication campaign on safe school practices as well as re-enrolment campaigns to encourage families to send their children back to schools once schools re-opened. The project also supported National strategic policy dialogue on strategies to mainstream Out of School Children (OOSC).

Under the 5-year Higher Education Development in Pakistan (HEDP) the World Bank supports research excellence in strategic sectors of the economy, improved teaching and learning and strengthened governance in the higher education sector. The project has been successful in bringing some key reforms in the sector, including: introduction of an Undergraduate Education Policy which established the criteria for Associate Degree and transition of all Bachelor’s Degree programs from two-years to four-years; research capacity development by providing competitive research, innovation, and commercialization grants, such as the Rapid Research Grants, for research on critical COVID-19 related topics and Innovative Seed Fund to support startups and entrepreneurs; expansion of digital connectivity and remote learning systems to ensure continuity of education during COVID-19 and capacity building trainings of faculty, especially females under the newly established National Academy for Higher Education.

The World Bank supported Punjab with an reform program through the Punjab Education Sector Project-III program (US$300 million), which closed in June 2022. The Bank also supports interventions in the education sector in Punjab through the Human Capital Investment project (US$200 million, with US$30 million supporting strengthening and scale-up of early childhood education in 11 districts in South Punjab). The project supports the development of a 2-year early childhood education (ECE) curriculum and strengthening of ECE services in Punjab. Currently a minimum of 11,000 ECE classrooms meet new quality standards, which include the presence of a trained teacher and caregiver as well as a kit with instructional material. In addition, content for teaching and learning materials is being updated to ensure alignment with evolving curricula and standards.

The 5 year Sindh Early Learning Enhancement through Classroom Transformation (SELECT) project of $155 million, financed in part by the Global Partnership for Education grant ($55 million) supports the Sindh Education Sector Plan & Roadmap (SESPR) 2019–2024, focusing on 12 of 29 districts in Sindh, with the lowest performance on educational outcomes. Prioritized areas under SELECT include foundational literacy; teaching quality; classroom and provincial assessments improving access to elementary schools and enhancing the school learning environment, including in 250 flood-affected schools; proactive dropout mitigation (especially for girls) and transition from primary to secondary schooling through the development of a student attendance monitoring and redress system; and improved school and district-level governance which contribute to the achievement of its targets.

Balochistan

The Balochistan Human Capital Investment Project (BHCIP), which became effective in 2021, is implemented together with the health sector. The education component (US$17.75 million) focuses on the improved utilization of quality education services in selected refugee hosting districts. BHCIP funds the rehabilitation of schools and upgrading of primary schools to middle and high schools, merit-based hiring of additional teachers and strengthening of the education sector stewardship. To date, BHCIP has initiated the procurement of supplies for schools, including basic furniture, ECE classroom materials, science, and IT laboratory equipment. The project also aims to improve student assessment and teacher training across the province by supporting the Balochistan Assessment and Examination Commission and Provincial Institute of Teacher Education. Use of data for decision making and schools’ capacity to contribute to generating reliable data is another important element of the project that strengthens governance at school and district levels.

Khyber Pakhtunkhwa

In March 2021, the Government of Pakistan approved the US$200 million Khyber Pakhtunkhwa Human Capital Investment Project (KPHCIP) – a five-year project that aims to improve the availability, utilization, and quality of primary healthcare services and elementary education services in 4 districts of Khyber Pakhtunkhwa. The districts were selected because they have some of the highest refugee populations in the province. This financing includes a grant of USD $62.5 million from the IDA18 regional sub-window for refugees and host communities (IDA-18 RSW). The education component (US$115 million) of the project will focus on improving the availability, utilization, and quality of education services in selected districts for all children, especially refugees and girls. Approximately US$19M from the education component are being reallocated for flood rehabilitation and reconstruction in the original districts as well as 9 additional flood-affected refugee-hosting districts.

OPERATING IN CONFLICT AREAS

In the aftermath of the militancy crisis in Pakistan, the Multi-Donor Trust Fund (MDTF) for Khyber Pakhtunkhwa (KP), Federally Administered Tribal Areas (FATA), and Balochistan was established in August 2010. The aim was to support the reconstruction, rehabilitation, reforms, and other interventions needed to build peace and create the conditions for sustainable development in the affected regions. After more than a decade of implementation, the MDTF officially closed on December 31, 2023.

In two rounds, the MDTF supported a range of projects to help build state-citizen trust in KP, FATA, and Balochistan. Round I of MDTF projects was implemented from August 2010 to March 2017 and focused on helping the provinces come out of the militancy crisis and take strides towards conflict prevention and peacebuilding. Subsequently, Round II was implemented from April 2017 to September 2023, achieving results towards reconciliation, peacebuilding and enhancing state- citizen trust by focusing on three pillars: (i) Growth and Jobs Creation; (ii) Improved Service Delivery; and (iii) Policy Reforms and Improved Governance.

The MDTF has aimed to build peace and create the conditions for sustainable development, but it has also helped address an array of immediate emergencies in Pakistan. For example, the MDTF has responded to unforeseen and immediate needs by supporting livelihood improvement measures in Balochistan in the aftermath of the 2022 floods. Furthermore, the fund was among the first to respond to the COVID-19 pandemic in Pakistan, providing much-needed resources.

The MDTF was closed on December 31, 2023, after the activities were completed and the targeted results were achieved. Of the funds of around USD 283 million, which included USD 11 million in investment income, USD 279 million (98 percent) was used for results, resulting in savings of around USD 3.6 million.

The MDTF achieved noteworthy results under its three results areas. The World Bank will continue to engage with the Governments of Khyber Pakhtunkhwa and Balochistan through several projects that build on the results achieved under the MDTF.

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What is happening in Pakistan’s continuing crisis?

Subscribe to the center for middle east policy newsletter, madiha afzal madiha afzal fellow - foreign policy , center for middle east policy , strobe talbott center for security, strategy, and technology @madihaafzal.

May 20, 2022

Even by the standards of Pakistan’s perpetually unstable politics, the last ten weeks in the country have been exceptionally turbulent. Pakistan has a new government as of April 11 after Imran Khan was forced out via a vote of no confidence. The weeks leading up to the vote, from the filing of the motion on March 8 to the vote on April 10, were dramatic and full of intrigue. Now, the country is in economic and political crisis. Shahbaz Sharif’s new government has been in a state of decision paralysis and is struggling to find its footing, while the ousted prime minister is leading rallies across the country attacking the government’s legitimacy and calling for fresh elections. At the same time, Pakistan is also in the grip of an acute climate emergency. It’s not only political temperatures that are spiking: an unprecedented heat wave has enveloped Pakistan for weeks.

The fall of Khan’s government

Crucial to the current crisis is understanding how Khan’s government fell. While Khan was Pakistan’s first prime minister to be ousted via a no-confidence vote, he joined each of his predecessors as prime minister in not lasting five years — the length of parliament’s electoral term — in office. Pakistan’s major opposition parties had been clamoring for Khan’s exit since he came into office — calling him “selected” by the military as opposed to “elected” — and had formed an alliance, the Pakistan Democratic Movement (PDM), in the fall of 2020 for that purpose. This spring, the opposition gained traction. On the surface, the opposition blamed governance and economic failures under Khan. But the underlying reason their maneuvers were successful was that Khan had lost the support of Pakistan’s military, which helped him rise to power.

Several factors were responsible for the fracture between Khan and the military, who previously had functioned on a much-touted “same page.” The biggest was an impasse over the transfer of the director general of the Inter Services Intelligence (ISI) in October 2021. Khan refused to sign off on the director general’s transfer, already approved by the military, for weeks. The then-ISI chief was a Khan loyalist, and speculation was that Khan wanted him to be around for the next election (or perhaps even to appoint him the next army chief).

Once Khan lost the military’s support — though the military said it had become neutral — space was allowed to the opposition to make their moves. Two small parties allied with Khan in the ruling coalition switched to the opposition, enough to deprive him of his razor-thin majority in the National Assembly.

Khan hatched a conspiracy theory to blame for his government’s collapse — alleging , without evidence, U.S. “regime change” for following an “independent foreign policy,” and claiming “local abettors” were responsible — claims that Pakistan’s National Security Committee has rebuffed . But Khan and his allies have also alluded to the military being responsible for his exit — sometimes in veiled language and sometimes pointing fingers more directly at the “neutrals,” as they now refer to the military. In so doing, they are testing the limits of political confrontation with the military, receding only when it pushes back on their claims.

An intense polarization

Khan has used his ejection to galvanize his supporters. Day after day, in huge rallies across the country, he calls the new government an “imported government” and the new prime minister a “crime minister.” Khan has used his rallies and interviews to command media attention, and argues that his government’s fall returned to power the corrupt politicians that are responsible for Pakistan’s problems. His supporters, many of them middle class, young, and urban, and furious at what they see as Khan’s unceremonious, orchestrated ousting, repeat his words on social media. With this narrative of grievance, Khan aims to undermine the new government’s legitimacy; his party resigned from parliament and he is calling for fresh elections. He now plans to lead a “freedom march” to Islamabad, likely later this month , to further pressure the government for elections.

By contrast, supporters of the parties that constitute the government see Khan’s exit as having occurred democratically and see his politics as dangerous. Pakistan today has echoes of the post-January 6 moment in the United States, a polarization so deep that each faction sees no validity in the other’s arguments. Khan’s supporters in particular distrust anything the new government or the military says. In recent weeks, politicians from each side have also resorted to using religion to attack the other side, dangerous in a country where the weaponization of religion can spell a death sentence.

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The new government

The new government, led by the PML-N’s Shahbaz Sharif, faces formidable challenges — and not just from Khan. Shahbaz’s brother, three-time former prime minister Nawaz Sharif, who was deposed in 2017 on corruption charges and now lives in London, still exercises outsized control over the party, and indeed the government. Shahbaz, a three-time former chief minister of Pakistan’s largest province of Punjab, has throughout his political career played second fiddle to the more charismatic Nawaz. Last week, the prime minister and key members of his cabinet made a sudden trip to London to consult with Nawaz on the direction of the new government. While they were overseas, Pakistan’s economy continued its downward spiral. The rupee continued its precipitous slide relative to the dollar; the stock market also lost value.

The government faces a key decision on whether to continue costly, unsustainable fuel subsidies that Khan’s government installed, and that the International Monetary Fund wants removed as a precondition for renewing Pakistan’s loan program. Removing subsidies would certainly be unpopular, which worries a government with limited time in office before the next election. So far the government has stalled, announcing earlier this week, against its own finance minister’s advice, that it would maintain subsidies (for now).

Shahbaz’s overall hesitancy likely reflects deference to Nawaz and his team, who may have different views, and the fact that he commands an unwieldy coalition of rival parties, who will be competing against each other in the next election. But part of the indecision has to do with the fact that the main goal of the PDM was to oust Khan; they did not actually devise an alternate governance plan or economic strategy before coming into power. That lack of a plan is now showing in the face of Pakistan’s economic crisis.

The next election

A major question contributing to the political uncertainty in Pakistan is the timing of the next election, which must be held by the summer of 2023. Khan has made clear that he wants to ride his present momentum to immediate elections. In the days preceding his downfall, he aimed to deprive the then-opposition of a runway in government by extra-constitutionally dissolving parliament, a decision Pakistan’s Supreme Court (correctly) reversed. The new government, for its part, can use its time in power to turn things in its favor, including resolving outstanding corruption cases.

There is the question of whether Nawaz can or will return to Pakistan before the next election. If he does, that could boost the PML-N’s base, but if he does not face prosecution on his return, that will bolster Khan’s argument that the Sharifs have politically manipulated the corruption cases against them. The PML-N also faces considerable hurdles, including an economic crisis that is partially shaped by exogenous factors, a tussle over power in Punjab, and a president who belongs to and is loyal to Khan’s party. The coalition government this week has said it will not go to early elections; former president Asif Ali Zardari has insisted that elections not be held before parliament can undertake electoral reform.

Whenever the next election is held, it’s far from clear what the outcome will be. What matters in Pakistan’s parliamentary system is which party can get the most “electables” — powerful politicians in local constituencies — on their side. Large urban rallies may attest to Khan’s personal popularity, but will not necessarily define how his party does in parliamentary elections. The other factor, one that has historically determined which party electable politicians align themselves with, is where the powerful military’s support is leaning.

The bottom line

That brings us to the bottom line. The fundamentals of the system in Pakistan, beneath the intense ongoing political tug of war, remain the same. What matters for political success is whether you have the support of Pakistan’s military. Political parties now directly point to the military’s interference in politics, but only when they are in opposition; when they are in government and enjoy that support, they do little to challenge it. This was true of Khan’s party when it was in power, and it is true of Sharif’s government now.

In the end, what Pakistan’s soaring political tension amounts to is an opportunistic struggle for power. It has left the country a political tinderbox. And in all of it, little regard is displayed on either side for the ongoing suffering of ordinary Pakistanis, who continue to pay the price for the country’s long history of political instability.

Pakistan Grapples with Economic Challenges in 2022–23 Budget

By G.B. Sahqani

In fragile economies, a small political shake-up can disturb a country’s entire development process, slowing down the pace of economic activity, creating a sense of insecurity in the financial sector, and diverting the nation’s progress toward economic security. All of this can result in another set of problems. This is exactly what happened in Pakistan almost three months before the announcement of the federal budget for 2022–23.

Economic and Political Background to the Budget

The coalition government faces mountainous issues: spiraling inflation, massive devaluation of the Pakistani rupee against major world currencies, increasing fuel prices, and the drying-up of foreign currency reserves. Surrounding all of these challenges is the fear of a debt default.

According to recent data from the State Bank , Pakistan has:

Net reserves of $8.8 billion;
Commercial bank reserves of $5.67 billion;
A current account deficit for the financial year 2021–2022 of $17.41 billion and for July 2022 of $3.13 billion; and
A balance of trade defici t for the financial year 2021–2022 of $44.71 billion and for July 2022 of $3.35 billion.

In July 2022, national Consumer Price Index inflation increased to 24.9% (from 21.3% in the previous month). So far this year, GDP has grown at a rate of 5.97% (against a target for 2022–2023 of 5%).

Much of Pakistan’s political history consists of decisions that were made without considering the economic consequences. Moreover, many previous governments could not succeed in the economic realm because they did not have a good team of economists who could formulate sustainable economic policies. Governments relied mostly on bankers or chartered accountants to run the Ministry of Finance and failed to put the country on a sustainable development track.

The continuing economic problems have been caused by inconsistent economic policies, pursuit of the wrong priorities, and bad governance. This is why Pakistan has not significantly developed over the last 75 years. Fiscal policies have also lacked consistency—subsequent governments changed policies to prioritize certain sectors, resulting in unstable economic conditions.

Some of these facts were highlighted by the new finance minister in his budget speech :

“Every year, a different person used to present budget and every year … economic policies of the government would change due to which confidence of investors and development partners was shaken.”

“In emerging market countries, tax-to-GDP ratio is around 16%, but in Pakistan it is 8.6% at the moment.”

Each new government has blamed the previous one for the bad economy, but none of them has been serious about pulling the country out of the economic crisis. Governments have joined the International Monetary Fund program to overcome fiscal problems and reduce the budget deficit, but they then spend more (and earn less), using most of their revenue to repay the national debt.

In the fiscal year 2022–23, Pakistan’s total debt servicing payment is estimated to be 3.95 trillion Pakistani rupees ($17.9 billion). Public debt (as of March 2022) was 4.44 trillion rupees (72.5% of GDP).

Pakistan’s tax governance remains weak. The state has never been able to create an iron will to collect revenue through good governance, better policies, and a strong tax culture. There is no serious documentation initiative to register retail businesses, even in large cities, and tax them according to their income.

Total tax collected in financial year 2021–22 is 6.125 trillion Pakistani rupees. The revenue target for the year 2022–23 is 7 trillion rupees. Most of the time, the Federal Board of Revenue meets the revenue targets, but that does not mean that the collected amount is the tax due from a nation of 220 million. According to an estimate, tax theft has amounted to around 3 trillion rupees.

Successive governments have failed to improve tax governance, despite funding from the World Bank and other international institutions established to help reform and restructure tax systems. Instead of stopping tax evasion and increasing the number of taxpayers, the government has increased taxes on those who already pay them. This has further burdened businesses and slowed down economic activity. Less than 2% of Pakistan’s population of 220 million people file tax returns.

Fixed Tax Regime for Retailers

This year, the government proposed introducing a special fixed tax regime for retailers, through the Finance Bill 2022, whereby retailers, other than tier one and specified service providers, would pay fixed amounts of income tax, ranging from 3,000 to 10,000 Pakistani rupees, through their commercial electricity bills.

The coalition government estimated that more than 30 billion rupees of tax would be collected from retailers through these measures. Millions of retailers operate in Pakistan and successive governments, despite several attempts, have failed to bring them under the tax net. Various schemes, including fixed tax schemes, have been tried, but every time retailers have threatened strike action that would shutter businesses until the disputed tax laws were withdrawn. Consequently, the government has withdrawn every tax scheme that would have applied to small retailers.

However, this time the government, after initially postponing the proposed fixed tax levy, then decided to reduce its tax impact. Now, tax on retailers other than those falling in the tier one category is chargeable at the rate of 5% where the monthly electricity bill does not exceed 20,000 rupees, and 7.5% where the monthly bill exceeds 20,000 rupees.

Sector-Based Relief

The 2022–23 budget contains a number of measures designed to relieve various sectors of the economy. They include:

Energy: exemptions from sales tax for the import and local supply of solar panels, to encourage the use of renewable energy;
Agriculture: exemptions from sales tax for the supply of tractors, agricultural implements, and various seeds including wheat, rice, maize, sunflowers, canola, and rice;
Health: exemptions from sales tax for imports or donations to charitable hospitals and local supplies, including electricity to charitable/non-profit hospitals with 50 or more beds;
Agri-based industry: exemptions from customs duties for agricultural machinery for irrigation, drainage, harvesting/post-harvest handling and processing, greenhouse farming, plant protection equipment, and machinery, equipment and other capital goods for agri-based industries;
Industry: reduced duties for various industrial manufacturing sectors;
Textiles: decreased tariffs for synthetic filament yarn;
Pharmaceuticals: exemptions from customs duties for over 30 active pharmaceutical ingredients;
Oil: reduced minimum tax on turnover of oil marketing companies (from 0.75% to 0.5%).

Revenue Measures

The budget contains various proposals. They include:

The rate of advance tax will be increased from 1% to 5% of the fair market value of any immovable property purchased by persons who are not active taxpayers.
The rate of advance tax on registration of vehicles for non-filers will be increased by 200%.
Advance tax rate on private vehicles with engine capacity of 1600cc and above will be increased.
On the direction of the Federal Board of Revenue, gas and electricity distribution companies will discontinue the supply of gas and electricity of any person, including tier one retailers, not registered for sales tax or, in the case of notified tier one retailers, registered but not integrated with the Board’s computerized system.
The Board has already started the integration of the point of sale system to document the retail sector. A total of 4,563 tier one retailers are now connected to the Board and a number of point of sale computerized lucky draws have been held. Prize money of 318 million Pakistani rupees has been paid out to 6,042 winners.
The petroleum levy will be increased to 50 rupees per liter on several petroleum products, including high speed diesel oil, motor gasoline, superior kerosene oil, and light diesel oil. On locally produced/extracted liquefied petroleum gas, the levy will be increased to 30,000 rupees per metric ton.
For the 2023 tax year and onward, the income of banking companies earned from investment in federal government securities will be taxed at 55%, 49% and 39% if the gross advances to deposit ratio is up to 40%, 40–50%, or above 50%, respectively.
For the 2022 tax year and onward, a super tax ranging from 1% to 4% (based on graduated income slabs) will be levied on persons earning more than 150 million Pakistani rupees. The top rate of 4% applies to income exceeding 300 million rupees. However, for the tax year 2022 only, where the annual income of a person engaged wholly or partly in the business of airlines, automobiles, beverages, cement, chemicals, cigarettes and tobacco, fertilizer, iron and steel, liquefied natural gas terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceuticals, sugar, and textiles exceeds 300 million rupees, it will be taxed at a rate of 10%.
For the 2023 tax year, banking companies will pay 10% super tax if their income for the year exceeds 300 million Pakistani rupees.
For the 2022 tax year and onward, a resident person will be treated as deriving income equal to 5% of the fair market value of any capital assets situated in Pakistan on the last day of the tax year. Such income will be chargeable to tax at the rate of 20% provided certain exclusions (for example, self-owned property) do not apply. Also, where the fair market value of the capital assets in aggregate does not exceed 25 million Pakistani rupees, the tax will not be imposed.
The whole amount of any capital gain arising on the disposal of immovable property will be subject to tax at rates ranging from 0% to 15%, depending on the length of time that the property has been held.
For the 2023 tax year and onward, capital gains arising on the disposal of securities acquired after July 1, 2022, will be taxed at graduated rates ranging from 2.5% to 15%, depending on how long the securities were held. Gains resulting from securities acquired on or before June 30, 2022, will continue to be taxed at the flat rate of 12.5% (regardless of the holding period).
Poverty Alleviation Tax: Tax has been imposed on higher earning persons for poverty alleviation for tax year 2022 and onward.
Tax has been imposed on income from unutilized property above 25 million rupees, including luxury farmhouses but excluding one self-occupied house.
Tax exemption on income payment plans invested out of pension/annuity account/plans has been withdrawn.

Pakistan’s economy is under pressure due to a current account deficit of around $10 billion and principal repayments on its external debt of around $24 billion. From April to July 2022, the rupee devalued by more than 10%. Due to the political uncertainty, demand for US dollars increased, the money markets fluctuated, and reserves decreased day by day. Inflation also rose, due to the increases in fuel and energy prices. The government is clearly in a bind; how should it meet the multiple challenges facing it, including the trade and current account deficits and inflation?

In April, the State Bank of Pakistan took some extreme measures by imposing 100% cash-margin requirements against 177 import items to minimize the gap between imports and exports, and requiring the bank’s prior approval before automobiles, mobile phones, and machinery could be imported. However, after four months, it relaxed such requirements. Currently, if the terms of payment for imports are 91 to 180 days, the cash margin requirement will be 25%. It will be 0% if the terms exceed 180 days. The cash margin requirement measures have had a positive impact on the import bill. It decreased from $7.9 billion Pakistani rupees in June 2022 to $6.1 billion in July 2022.

The International Monetary Fund ’s 23rd program for Pakistan has been approved and the first tranche of around $1.2 billion has been received. Bearing in mind the country’s foreign exchange reserves position, Pakistan needs extra support of $4 billion. A funding arrangement is being planned from different sources, including loans from friendly countries.

In view of the economic problems of developing countries such as Pakistan, effective and sustainable policy making and reform can only be done on the basis of proper data analysis. If Pakistan’s economy is not growing at the required pace, then policy makers must find out the causes and prepare a comprehensive development plan to implement sustainable growth without political interference. On the administrative front, there are various issues which need to be addressed; implementing the best policies will not work if there is weak enforcement—that is one of the biggest problems in Pakistan.

At the same time, Pakistan needs stability. Political instability ruins the process of economic development and creates bad governance, which ultimately takes over all the civil institutions, resulting in recurring financial crises.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

G.B. Sahqani is an international trade and tax consultant.

The author may be contacted at: [email protected]

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Pakistan is a very dosed economy compared to other emerging and developing economies, with net exports often acting as a drag on growth. Complicating the outlook is that only a small number of firms export, primarily of low value-added textile products, while the country has also relied heavily on import tariffs to boost tax revenue, undermining trade integration and further weakening export competitiveness. Comprehensive reforms will be needed to boost competitiveness and support exports.

Trade as a Source of Growth and Economic Development 1

A. Stocktaking

1. Pakistan is a very closed economy . Openness—as measured by the sum of exports and imports—is very low compared to other regions as well as other emerging and developing economies (EMDEs). Moreover, compared to 1990, Pakistan’s openness has barely changed, standing in stark contrast to EMDEs which have experienced large gains in the degree of openness. 2

(Share of imports and exports in percent of GDP)

Citation: IMF Staff Country Reports 2022, 027; 10.5089/9798400200212.002.A006

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2. This is mirrored in Pakistan’s level of exports and share of world exports ( Figure 2 ). Pakistan’s exports, which peaked at about 15 percent of GDP in 2003, have been on a declining trend since 2011 and currently stand at about 11 percent of GDP, which is much lower than peer countries. At the same time, export volume growth has stagnated since FY 2007 amid de-industrialization, resulting in a widening export volume growth gap compared to EMDEs. This has contributed to Pakistan’s share of global exports declining by almost 40 percent since the early-1990s to only 0.13 percent of world exports in 2020.

3. At the same time, Pakistan’s export product mix has stagnated ( Figure 3 ). In terms of broad export product categories, Pakistan’s main exports are textiles and clothing, agriculture (vegetables, food products, animal hides), and services, which have all seen limited growth in value during the last decade. The current export basket lacks technological sophistication—products are concentrated in primary products or low-tech undifferentiated products that entail a low level of technology to produce and are on the lowest rungs of the value chains. 3 Simultaneously, the number of unique products exported has declined. Measured at a HS 6-digit level, Pakistan exported 2,824 unique products in 2019 compared to 2,987 unique products in 2009. This contrasts with many other countries (e.g., Sri Lanka, Vietnam) that have expanded the number of products they are exporting while also moving up the quality and sophistication ladders. While Pakistan is showing some nascent signs of growing its non-traditional exports since 2020–21, they remain a small share of overall exports.

Export Products

4. Consequently, net exports have frequently been a drag on growth . This has contributed to Pakistan’s weak medium-term growth prospects, due to the current unsustainable model’s over-reliance on consumption and debt-financed investment. Pakistan’s low level of economic complexity suggests that low growth rates will continue unless the country is able to create an environment where a greater diversity of productive activities and more complex activities can prosper, including through exports.

5. Although the exchange rate is now broadly in line with fundamentals, due to a challenging external environment it is unlikely to have a very large impact on exports in the short run . Historical experience in advanced and EMDEs suggests that exchange rate movements typically have sizable effects on export (and import) volumes. IMF (2015) found that a 10 percent real effective depreciation in an economy’s currency is associated with a rise in real net exports of 1.5 percent of GDP, on average, with much of the effect materializing in the first year. However, the benefits accrue mainly when there is slack in the economy and the financial sector is operating normally. Yet, the benefits accruing to Pakistan are likely to be less, largely due to weak global demand and structural bottlenecks: (i) global trade remains weak, raising price competition, particularly for primary products and low-tech undifferentiated products; (ii) presently only a limited number of firms have export experience, with small and/or potential exporters unsure of how to access new markets; (iii) some input prices have risen as part of the government’s stabilization plan (e.g., energy prices); and (iv) many firms are also financially constrained and credit is scarce (limited trade credit), which makes it costly for firms to expand production or to begin exporting.

Net Export Contribution to GDP Growth

6. Exported values tend to be small, but concentrated . In FY 2021, the number one exporting firm exported goods valued at less than US$450 million, or 1.6 percent of total exports. At the same time, exports were concentrated with 198 firms contributing 50 percent of total exports. Less than 3000 firms exported more than US$1 million of goods and services, while the median value of exports by a firm were only about US$105,000.

Value of Exports by Firm

(US$ millions)

7. Export financing has long been available . The State Bank of Pakistan has operated an export finance scheme (EFS) with the objective to boost exports since 1973. The EFS provides short-term financing to exporters via banks (commercial and Islamic) for exports of manufacturing goods under two separate facilities: (i) transaction-based facility; and (ii) revolving facility based on the previous year’s exports. The financing is offered at highly concessionary fixed interest rates, for up to 180 days. However, the lending is a commercial decision made by the banks, which are assuming the credit risk. In FY 2021, PRs 700 billion was allocated to EFS—with an additional PRs 90 billion also allocated toward export-oriented investment under the Long-Term Financing Facility—with PRs 565 billion outstanding as of end-June 2021.

8. Pakistan has relied heavily on import tariffs to boost tax revenue, undermining trade integration and further weakening export competitiveness . With limited revenue mobilization and weak tax administration capacity, the government has relied on import duties and related taxes to raise revenue. As a result, tax revenue collected at import stages stands at about ½ of total tax revenue. Although Pakistan has reduced tariffs during the last decade, its tariffs remain relatively high compared to most EMDEs. The high effective protection has resulted in long-protected “infant” industries preventing their development, reducing the incentive to compete with imports and need to export given their protected, privileged domestic market position.

Import Tariff

(Percent, simple average of most favored nation)

9. Pakistan has only signed a limited number of free trade agreements (FTAs) . While Pakistan has signed FTAs with China, Sri Lanka, and Malaysia, has preferential trade agreements with Iran, Indonesia, and Mauritius, and is part of the South Asian Association for Regional Cooperation (SAARC), a number of FTAs remain under negotiation or consultation. However, most of Pakistan’s exports are to countries with whom Pakistan does not currently have a FTA. For example, in FY 2021 trade with the United States 4 , United Kingdom, Afghanistan, and Germany 5 (Pakistan’s first, second, fourth, and fifth most important export destinations, respectively) comprised about 37 percent of total merchandise exports, while exports to Pakistan’s 3 FTA markets were about 10 percent 6 The absence of permanent FTAs with the major export market destinations hurts Pakistani exporters’ competitiveness as they face higher tariffs than other exporters. 7

B. Policy Recommendations and Conclusions

10. External trade has not been a significant driver of growth in Pakistan due to limited trade integration, weak export competitiveness, and a low-tech product mix . Pakistan’s exports as a share of GDP have declined over the past decade as exports volume growth has stagnated amid considerable de-industrialization. Consequently, Pakistan’s share in global trade has steadily declined. The export basket lacks technological sophistication, concentrated on primary goods at the lowest rungs of the value chain. Pakistani exports are moreover susceptible to high volatility from terms of trade shocks and face growing competition from lower-cost economies. Exports are hampered by multiple factors, including the legacy of an overvalued exchange rate, an unsupportive tax and business environment, and a restrictive and non-transparent trade regime. High levels of protection have contributed to an anti-export bias, undermining trade integration and stifling the development of export-oriented and viable import competing industries.

11. Some actions that should be considered in the short- and medium-term are :

Continue to work to further rationalize the tariff structure as part of implementing the approved national tariff policy, based on time-bound strategic protection . As domestic tax revenue mobilization strengthens, there will be space to rationalize tariffs in line with international practices, which should aim for low tariffs at uniform rates.

Support new and small exporters . A key supporting mechanism would be for the government to facilitate market discovery and entry because a major cost for exporters is learning about markets and demand. This is where a well-developed country strategy supported by embassies and a strengthened Trade Development Authority can help. Financing for new and small exporters is also important and consideration should be given to develop new export financing instruments, while also reevaluating existing financing instruments. The authorities should also advance their efforts to establish the Ex-lm Bank.

Facilitate integration into the global supply chains . Including through improving product quality, reliability of the firm, and registering the firm with all necessary entities for tax and business purposes.

Negotiate new Free Trade Agreements (FTAs) . Pakistan’s exporters are facing higher tariffs in Pakistan’s major export markets compared with competing economies, which restricts Pakistani exporters’ competitiveness. While some FTAs are already in effect (including China, Malaysia, and Sri Lanka), Pakistan would benefit from pursuing high-standard, permanent FTAs with large, important trading partners to secure market access.

Invest in education and human capital . Raising the average skill level of employees will be crucial to support the production of more complex products.

Reduce red tape and improve the overall business environment . This is needed to reduce uncertainty, simplify the complicated tax and business environment, and support private sector investment. In particular, a disproportionate GST burden falls on exporting manufacturing industries compared to those in peer countries.

Remove exchange restrictions to facilitate trade . The authorities should remain committed to phasing out existing exchange measures-when conditions permit-and eliminate them by the end of the current EFF (September 2022).

Develop an export strategy . This would allow the authorities to articulate and expand on many of the recommendations listed here in greater detail.

Fenochietto , Ricardo , Aqib Aslam , Juan Carlos Benitez , Svetlana Cerovic , and Maude Lavoie , 2019 , “ Redesigning Pakistan’s Tax System ,” Fiscal Affairs Department Technical Report , ( Washington : International Monetary Fund ).

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Export Citation

IMF , 2015 , “ Exchange Rates and Trade Flows: Disconnected? ” World Economic Outlook , ( Washington : International Monetary Fund ).

World Economic Forum , 2019 , The Global Competitiveness Report . ( Geneva, Switzerland : World Economic Forum ).

Prepared by Christine Richmond (MCD).

The World Economic Forum’s 2019 Competitiveness Index ranked Pakistan as 138 (out of 141 countries) in terms of trade openness, with weaknesses in trade tariff rates, border clearance efficiency, and prevalence of non-tariff barriers.

Note that cascading taxes will deter firms from producing more complex products that require more stages of production due to a high tax burden. The high taxes translate into higher export prices and hinders their price competitiveness.

Pakistan is a beneficiary of the United States’ GSP scheme for developing countries. However, most textiles and apparel are excluded from these benefits.

Under GSP Plus, a 10-year preferential trade arrangement with the European Union (EU) in effect since 2013, certain products can be imported by the EU at zero duty.

IMF staff calculations based on SBP export receipts by all countries.

New FTAs are being negotiated with Turkey, Thailand, Uzbekistan, and Afghanistan.

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Pakistan: 2021 Article IV Consultation, Sixth Review Under the Extended Arrangement Under the Extended Fund Facility, and Requests for Waivers of Applicability and Nonobservance of Performance Criteria and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for Pakistan
Pakistan: Staff Report for the 2021 Article IV Consultation, Sixth Review Under the Extended Arrangement Under the Extended Fund Facility, and Requests for Waivers of Applicability and Nonobservance of Performance Criteria and Rephasing of Access—Informational Annex
Pakistan: Staff Report for the 2021 Article IV Consultation, Sixth Review Under the Extended Arrangement Under the Extended Fund Facility, and Requests for Waivers of Applicability and Nonobservance of Performance Criteria and Rephasing of Access-Supplementary Information, Revised Proposed Decisions, and Supplementary Letter of Intent
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Pakistan’s political crisis and the imperatives of economic reform

Photo by AAMIR QURESHI/AFP via Getty Images

Pakistan continues to reel from uncertainty as its political transition — ill-timed during a period of domestic and global economic tumult — has yet to consolidate.

Political volatility during the new governing coalition’s first two months in power has led to policy paralysis. But this paralysis has begun to ease as the army has signaled support for the government and the International Monetary Fund (IMF) continues to press for austerity measures.

The IMF has made clear that it will only release the next $1 billion tranche from Pakistan’s $6 billion Extended Fund Facility if Islamabad raises fuel and electricity prices and takes aggressive measures to reduce the fiscal deficit. And the resumption of the IMF program is essential to unlocking assistance from other bilateral and multilateral partners and staving off a balance of payments crisis. As a result, the coalition led by the Pakistan Muslim League (Nawaz) (PML-N) has finally started raising energy prices .

These measures will ease Pakistan’s twin deficit challenge, involving both fiscal and current account deficits, but they will also take a heavy toll on the average Pakistani. Inflation, which hit 13.8% in May , could rise to around 20% and remain in the double digits into next year. This will be a painful summer for Pakistanis as they're hit with a one-two punch of rising energy prices and electricity supply cuts .

Understandably, the PML-N would like other power brokers, including the army, to share the political burden of economic reform . Prime Minister Shehbaz Sharif has called for the adoption of a Charter of the Economy — a national consensus on economic reform.

The idea is sound, but politically infeasible right now. What is more important is for Pakistan’s current federal and provincial governments to go beyond firefighting and push forward essential reforms — including in agriculture, energy, and local governance — that are key to ensuring the country’s political and economic stability and long-term growth prospects. Indeed, it is in their political interest to do so.

Pakistan’s angry middle class

Pakistan’s power elite must recognize that this is an exceptional moment in the country’s history — an inflection point both politically and economically.

Former Pakistani Prime Minister Imran Khan, once backed by the powerful army and Inter-Services Intelligence agency, is taking on the new government and the army leadership. Khan is not just backed by what one might call the “anti-elite elite,” but also by much of the middle class.

Sixty-two percent of those with a full secondary education or higher said they were “angry” about Khan’s ouster in an April survey conducted by Gallup Pakistan. Given widespread anti-U.S. sentiment, Khan’s claims of being deposed by an American "regime change” campaign have resonated with this demographic. But it’s not the only reason why they support him. Khan is also tapping into their resentment of the status quo.

In recent years, Pakistan’s middle class has been hit hard by unemployment and inflation. According to the Pakistan Human Development Report 2020 from the United Nations Development Program (UNDP), the real growth rate of per capita income for Pakistan’s middle class from the 2013-14 and 2018-19 fiscal years trailed that of the rest of the population (1.2% versus 1.8%). The unemployment rate of those with a college degree or higher surged from less than 5% in 2007-08 to over 16% in 2018-19. Pakistan has a seen an expansion of higher education, but there remains a mismatch between the skill sets and preferences of college graduates and the demands of employers. As the current government reduces blanket subsidies, replacing them with targeted cash transfers for the very poor, macroeconomic stabilization may largely come at the middle class’s expense. And that could have political as well as geopolitical ramifications.

Khan has fused the issues of inflation and national sovereignty by alleging that the Sharif government is afraid of incurring Washington’s wrath by following through on an agreement he claims to have made with Moscow for importing discounted Russian oil. He notes that New Delhi has ramped up imports of Russian oil and, as a result, has been able to avoid fuel price hikes.

A focused reform agenda

The big picture is this: Pakistan’s economy is working, but only for its elite. Sustained, rapid, and equitable economic growth has remained elusive due to policy distortions that serve its civilian and military elite.

The aforementioned UNDP report , produced by a team of Pakistani researchers led by Dr. Hafiz Pasha, offers an exceptional deconstruction of Pakistan’s political economy. It assesses that in the 2017-18 fiscal year alone, Pakistan’s corporate, feudal, and military elite received the equivalent of $13 billion in current dollar terms in “benefits and privileges” — roughly 7% of the country's GDP.

Reform is a long-term process. But Pakistan must make use of this “shock” period to redistribute allocations toward social protection and incentivize greater productivity. Delay is not an option. In the coming years, Pakistan’s challenges will only deepen due to climate change and rapid population growth. Pakistan is already one of the world’s 10 most populous countries and it will remain among those ranks as its population surges over the coming decades.

Pakistan needs a path toward sustained, rapid, and equitable economic growth that incorporates its fast-growing population into the labor market. But Pakistan is a net energy importer with a narrow export base. Periods of economic expansion have been consumption-driven and import-dependent. As a result, Pakistan’s economy overheats once growth passes the 5-6% range . It is vital that the current government devote its energy and reallocate resources toward facilitating export growth, improving agricultural productivity, and addressing the domestic fuel production deficit.

Pakistan’s agricultural sector has grown at an average rate of less than 2% since the 2014-15 fiscal year. Declining agricultural productivity, a rapidly growing population, increasing water stress, and the worsening effects of climate change are all exacerbating an already-serious food security challenge. The agricultural industry also contributes to the massive electric power industry arrears. Pakistan provides hundreds of millions of dollars in annual electric power subsidies for agricultural tube wells. And edible oils are among Pakistan’s top imports .

Policy experiments in Pakistan in recent years have identified solutions to these challenges. For example, conditioning the provision of low-interest loans for solar tube well installation on the use of high-efficiency irrigation systems or allowing net-metering can promote water conservation, lower input costs, and help curtail power sector debt.

Pakistan’s federal and provincial governments should also incentivize innovation in the private sector seed development industry and the local production of edible oils.

With domestic gas and oil reserves in decline, Pakistan’s vulnerability to surges in global fuel prices will grow. It needs to ramp up domestic energy exploration, promote renewables, and assess the feasibility of green hydrogen and ammonia production, especially in southern Balochistan.

Finally, Pakistan must strengthen the “last mile” of governance. Pakistani politicians often hail China’s model of governance, but few recognize the role of decentralization of power and empowerment of local governments in China’s growth story.

To their credit, Pakistan’s politicians banded together to devolve power to the provinces under the 18th Amendment. Yet most have been averse to devolving power down to elected local bodies, with some provincial governments repeatedly delaying local elections. That has left large metropolises like Karachi orphaned when it comes to local governance and stunts their ability to grow and develop independent sources of revenue, including through the issuance of bonds.

Political stability in Pakistan cannot be ensured simply through intra-elite deals made in Islamabad. It also requires improving the last mile of governance and the responsiveness of the state to the needs of the public.

Arif Rafiq is the president of Vizier Consulting LLC, a political risk advisory company focused on the Middle East and South Asia, and a non-resident scholar at the Middle East Institute (MEI).

Photo by AAMIR QURESHI/AFP via Getty Images

The Middle East Institute (MEI) is an independent, non-partisan, non-for-profit, educational organization. It does not engage in advocacy and its scholars’ opinions are their own. MEI welcomes financial donations, but retains sole editorial control over its work and its publications reflect only the authors’ views. For a listing of MEI donors, please click her e .

Pakistan's economic conditions show improvement, says PM

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Reporting by Asif Shahzad; Editing by Himani Sarkar and Shri Navaratnam

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Shahzad is an accomplished media professional, with over two decades of experience. He primarily reports out of Pakistan, Afghanistan regions, with a great interest and an extensive knowledge of Asia. He also reports on politics, economy, finance, business, commodities, Islamist militancy, human rights

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PDF Pakistan Economic Brief 2022
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PDF The State of Pakistan's Economy 2022-23
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Monthly Performance of Pakistan's Economy Pakistan's economy is witnessing high inflationary and external sector pressure especially on PKR. However, the government is taking all possible measures to counter these pressures so that economy could achieve the growth target of 5.0 percent in FY2023. 2.1 Real Sector 2.1-a Agriculture
World Bank: Pakistan's Economy Slows Down While Inflation Rises Amid
ISLAMABAD, October 6, 2022 - Pakistan's economy is expected to grow by only 2 percent in the current fiscal year ending June 2023. According to the World Bank's October 2022 Pakistan Development Update: Inflation and the Poor, the slower growth will reflect damages and disruptions caused by catastrophic floods, a tight monetary stance, high inflation, and a less conducive global environment.
PDF Overview of the Economy
The overview of Pakistan Economic Survey 2020-21 contains three sub-sections i.e., Global Economic Review, Pakistan Economic Review and Executive Summary. ... The global economy is expected to rebound in 2021 and 2022, with an expected growth of 6 percent in 2021 and moderate growth of 4.4 percent in 2022. The rebound in 2021 and 2022 is ...
Pakistan Overview: Development news, research, data
The estimated lower-middle income poverty rate is 40.1 percent (US$3.65/day 2017 PPP) for the year 2023-24, virtually the same as the poverty rate in 2018, but with 7 million more Pakistanis living below the poverty line. Pakistan experienced heavy monsoon rains in 2022 leading to catastrophic and unprecedented flooding with enormous human and ...
Beyond Pakistan's 2021-22 budget: The economy and growth
Download PDF. On June 29, 2021, Pakistan's National Assembly passed the country's 2021- 2022 budget, which had been prepared and tabled by Finance Minister Shaukat Tarin. Recently appointed to his position, Tarin has positioned the budget as being growth oriented in focus, with significant increases to subsidies, public-sector development ...
Pakistan's prime minister on his drive to modernise the country
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PDF Monthly Economic Update & Outlook May 2022
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Pakistan Grapples with Economic Challenges in 2022-23 Budget
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PDF The State of Pakistan's Economy
On June 9, 2023, the Government of Pakistan (GoP) released its annual budget for FY 24. The federal government has set a GDP growth target of 3.5% and an inflation target of 21%. In addition, a revenue target of PKR 6.89 trillion and a target development expenditure of PKR 950 million are set.
Pakistan Economy to Slow in 2023 Amid Strong Climate Headwinds
ISLAMABAD, PAKISTAN (21 September 2022) — Pakistan's economy is forecast to slow to 3.5% in fiscal year (FY) 2023 (ending 30 June 2023) amid devastating floods, policy tightening, and critical efforts to tackle sizable fiscal and external imbalances, even as growth in FY2022 is expected to have reached 6.0%, the Asian Development Bank (ADB) said in a report today.
Pakistan: Selected Issues in: IMF Staff Country Reports Volume 2022
Pakistan is a very dosed economy compared to other emerging and developing economies, with net exports often acting as a drag on growth. Complicating the outlook is that only a small number of firms export, primarily of low value-added textile products, while the country has also relied heavily on import tariffs to boost tax revenue, undermining trade integration and further weakening export ...
Economic Fallout of Pakistan's Political Crisis
The IMF and China have given Pakistan $6.7 billion and $6 billion. respectively, with the rest of it coming from Saudi Arabia ($2 billion), UAE ($2 billion) and other assets. Due to the current ...
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Pakistan Economic Brief 2022
Economic Brief 2022 is a publication prepared by KPMG Pakistan to provide information and commentary on the performance of Pakistan's economy during FY22. This publication includes an overview of the economic performance of Pakistan during FY22, our analysis and commentary on key macro economic indicators. This publication is primarily based ...
PDF Economic Security of Pakistan: Challenges and Way Forward
1|P a g e web: Special Report Launch "Economic Security of Pakistan: Challenges and Way Forward" August 22, 2022 | www.issi.org.pk phone: +92-51-9204423, 24 fax: +92-51-9204658 Rapporteur: Mian Ahmad Naeem Salik, RF Edited by: Dr Neelum Nigar
Pakistan's National Security Policy Prioritizes Economic Security
Credit: Facebook/ Imran Khan. Pakistan's National Security Policy, 2022-2026, which Prime Minister Imran Khan made public last Friday, puts economic security at the forefront of its national ...
Economy of Pakistan
The economy of Pakistan is categorized as a developing economy.It ranks as the 24th-largest based on GDP using purchasing power parity (PPP) and the 46th largest in terms of nominal GDP. With a population of 241.5 million people as of 2023, Pakistan's position at per capita income ranks 161st by GDP (nominal) and 138th by GDP (PPP) according to the International Monetary Fund (IMF).
Pakistan Economy: GDP, Inflation, CPI & Interest Rates
Inflation averaged 8.1% in the decade to 2022. Go to our Pakistan inflation page for extra insight. Monetary Policy: Pakistan's monetary policy rate ended 2022 at 16.00%, up from 12.00% a decade earlier. See our Pakistan monetary policy page for additional details. Exchange Rate: From end-2012 to end-2022 the rupee weakened by 57.1% vs the U.S ...
Pakistani economic crisis (2022-present)
Pakistan has experienced an ongoing economic crisis as part of the 2022 political unrest.It has caused severe economic challenges for months due to which food, gas and oil prices have risen. The Russian invasion of Ukraine has caused fuel prices to rise worldwide. Excessive external borrowings by the country over the years raised the spectre of default, causing the currency to fall and making ...
Pakistan's political crisis and the imperatives of economic reform
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Pakistan's economic conditions show improvement, says PM
Pakistan's finance ministry expect the economy to grow by 2.6% in the current fiscal year ending June, while average inflation is projected to stand at 24%, down from 29.2% in fiscal year 2023/2024.
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