Pakistan's Economy in Crisis: Failed Policies, No Solutions

Pakistan's Economy in Crisis: Failed Policies, No Solutions

( Jahanzaib khan / Published Aug 29, 2023)

Maybe you've noticed the rising prices at the grocery store or the higher utility bills coming in. As a Pakistani citizen, your wallet is probably feeling the pinch from the economic crisis gripping the country. For years, the government has failed to implement effective policies to strengthen the economy. Instead, they've relied on temporary measures like adjusting the interest rate or devaluing the rupee. These misguided moves have only fueled inflation, making everything more expensive without actually solving the underlying issues. And with the political turmoil roiling the country, stability feels out of reach. The powers that be don't seem to grasp how their shortsighted actions are hurting average Pakistanis like you every single day. How did we get into this mess, and when will someone step up with viable solutions? The road ahead remains unclear, but one thing's for sure—the status quo just isn't working.

The Interest Rate Hike Has Failed to Curb Inflation

The government increased interest rates again, claiming it will curb rising inflation. But all it's really doing is slowing the economy and making life harder for average Pakistanis.

When interest rates go up, the cost of borrowing money increases. Businesses find it more expensive to fund their operations and expand, so they're less likely to invest in growth or hire new employees.  For a country already struggling with low growth and high unemployment, raising interest rates is the last thing we need.

Rather than controlling inflation, the policy is mainly contributing to it. Higher interest rates drive up the cost of living as businesses pass on their increased costs to consumers through price hikes. Meanwhile, the Pakistani rupee has lost over 30% of its value this year, and as imports become more expensive, that high inflation gets worse.

The government claims they had no choice, that the rate hike was necessary to secure a bailout from the International Monetary Fund. But the IMF's medicine is only making the patient sicker. Pakistan's economy needs stimulation, not austerity. Lower interest rates, currency stability, job creation programs, debt relief for small businesses, and targeted subsidies for the poor would do far more to turn things around.

Instead of failed policies that favor wealthy creditors over working people, we need solutions that actually address the root causes of economic crisis in Pakistan. Our leaders must find the courage and compassion to change course, or the suffering of millions will be on their heads.

Rupee Devaluation Has Led to Imported Inflation

The government’s decision to devalue the rupee by over 180% against the dollar in multiple rounds since December 2017 has led to a rapid increase in inflation, especially for imported goods. When the rupee drops, it costs more to buy things from other countries.

Prices of Imports Skyrocket

Depreciation of the rupee means you’re paying a lot more for anything imported like oil, vehicles, mobile phones, electronics, and machinery. The higher prices are then passed onto consumers. It’s a vicious cycle.

The State Bank of Pakistan claims rupee depreciation will boost exports and remittances, but the reality is quite different. Exporters can’t instantly switch to locally made raw materials and components. They still rely heavily on imports, so their profit margins get squeezed. As for overseas Pakistanis, the majority send money for family needs, not because of currency rates.

An Ineffective Measure

Rupee devaluation was meant to correct economic imbalances and make Pakistani products cheaper for foreigners. Instead, it has stoked inflation, widened the trade deficit, and weakened public finances. The policy isn’t working.

There are no quick fixes, but the government must take action. They could reduce the trade deficit by curbing nonessential imports and encouraging “Made in Pakistan” goods. Tax reform and privatization of state-owned companies could boost revenue and investment. And political stability would reassure businesses and investors.

Tough decisions need to be made, but rupee devaluation alone will not solve Pakistan’s economic woes. A comprehensive set of integrated policy measures is required to truly set the economy on the path to sustainable growth. The future remains uncertain, but one thing is clear: the status quo will only make the crisis worse.

Money Supply Expansion Is Fueling Demand-Pull Inflation

The government has been recklessly expanding the money supply to finance its budget deficits, fueling demand-pull inflation in Pakistan.

When there are more rupees in circulation, it means people have more money to spend. This excess demand bids up prices for the available goods and services in the economy. The law of supply and demand kicks in. More money chasing the same number of goods results in higher prices overall, eroding your purchasing power.

The government relies heavily on borrowing and printing money to fund its overspending. It's an easy fix but a dangerous habit. Each time the government prints more rupees to pay its bills, it makes the money in your pocket worth a little bit less. The value of your cash savings and fixed income also declines. Anyone on a fixed income or pension suffers the most.

The government's money creation scheme works for a while until people start expecting higher prices. Workers then demand higher wages to keep up with inflation. Business owners raise prices to afford the higher costs. It creates an inflationary spiral that's hard to contain. Taming runaway inflation often requires slashing government spending, raising interest rates or both - painful choices politicians prefer to avoid.

It's no surprise then that Pakistan has struggled with bouts of high inflation for decades. According to economic experts, demand-pull inflation from excess money supply growth is a primary culprit. The government's fiscal mismanagement and unwillingness to cut spending has repeatedly put the economy in a vulnerable position.

Until the government takes meaningful steps to limit money supply expansion and rein in deficit spending, inflation will likely remain an ongoing threat to Pakistan's economy and your financial well-being. The people of Pakistan deserve responsible leadership and practical solutions to these issues.

Political Instability Is Deterring Investment and Growth

Political instability in Pakistan has severely hampered economic growth and discouraged foreign investment. When governments are volatile and policy changes are frequent, businesses cannot plan effectively or confidently invest in the country.

Frequent Changes in Leadership

Pakistan has seen multiple changes in leadership over the past several years. Nawaz Sharif was removed as Prime Minister in 2017 over false corruption charges and Imran Khan took over. However, Khan’s government has also struggled and he faces a no-confidence vote. These power struggles create uncertainty and a lack of policy continuity.

Investors look for stable governments and regulatory environments before allocating funds. With Pakistan’s current political turmoil, many investors are hesitant to take the risk. They have no guarantee current incentives and policies will still be in place after the next election or leadership change.

Inconsistent Economic Policies

Pakistan’s economic policies often change whenever a new party comes into power. One government may privatize state-owned enterprises and reduce business regulations to encourage foreign investment, while the next may reverse course and implement more socialist policies. These policy reversals make it difficult for companies to plan long-term growth strategies.

If Pakistan wants to solve its economic woes, political stability and consistency are desperately needed. A unified government with a shared vision for progress could help build investor confidence, attract foreign capital, and support stronger economic expansion. People would likely feel more secure in their jobs and spending if policy changes were not constantly looming overhead. Stability is the foundation required before Pakistan’s economy can start moving in a positive direction.

Lack of Focus on Export Promotion and Import Substitution

The Pakistani government’s inability to promote exports and substitute imports has severely hampered economic growth. For decades, leaders have failed to implement effective trade policies or incentivize domestic industries.

Lack of Export Diversification

Pakistan’s exports remain concentrated in a few low-value sectors like textiles, rice, and leather goods. There have been no concerted efforts to diversify into higher-value products with more potential for growth. Compare this to Bangladesh, which now exports pharmaceuticals, jute goods, and IT services in addition to garments.

Uncompetitive Import Substitution

Rather than supporting domestic producers to make high-quality, affordable alternatives to imports, the government has relied on high tariffs and import bans. This has bred inefficiency and led to the proliferation of low-quality, overpriced goods. Consumers suffer from lack of choice and competition.

Some steps that could revitalize Pakistan’s trade performance include:

•Providing tax incentives and subsidies to promote investment in new export sectors like light engineering, IT, and tourism.

•Improving trade facilitation by cutting red tape, simplifying customs procedures, and upgrading infrastructure at ports and borders. This can reduce costs for exporters and importers.

•Negotiating more preferential trade deals to open up foreign markets for Pakistani goods and encourage FDI inflows. The China-Pakistan Economic Corridor is a start but more can be done.

•Liberalizing import restrictions in a phased manner while protecting local producers. This can push industries to become more competitive over time.

•Investing in workforce development and technical skills training to produce the human capital required for more advanced, value-added sectors.

• streamlining bureaucratic processes to reduce the cost of doing business in Pakistan and make the country a more attractive destination for investors.

Political instability and short-term thinking have prevented meaningful action on these fronts. For Pakistan’s economy to thrive, its leaders must take a long view and make export promotion and import substitution key pillars of policy. The future prosperity of the nation depends on it.

Conclusion

So where does this leave you, the average Pakistani citizen? The truth is, in a pretty difficult spot. Failed policies, political turmoil, and economic mismanagement have collided and the result is crisis. Inflation is up, growth is down, and solutions seem scarce. The government continues to stumble in the dark, grasping at straws with temporary fixes that do little to address the root causes.

While the future remains uncertain, one thing is clear - substantive policy changes are urgently needed. The status quo will only lead to further economic hardship for millions of citizens struggling to get by. New leadership with a bold vision for reform may be required to change course. The road ahead won't be easy, but Pakistan's citizens deserve transparent, pragmatic solutions to these systemic issues, and they deserve them now. Here's hoping those in power start delivering real results. The time for excuses is over.