nalysing Pakistan’s economic situation in his paper, Pakistan Economic Freedom Audit, Dr Waseem Shahid Malik presents a comprehensive audit of economic freedom, focusing on sound money. Utilising the Fraser Institute’s Economic Freedom of the World Index, this audit evaluates Pakistan’s economic policies and institutions.

Founded in 1974, the Fraser Institute ranks countries, based on their economic freedom level, assessing the degree to which policies support economic independence. This assessment spans five key areas, examining various indicators to provide insight into the economic framework.

As government intervention increases through elevated spending, taxation and control over enterprises, individual autonomy diminishes, consequently curtailing economic freedom. Safeguarding individuals and their property rights form the cornerstones of both economic liberty and civil society, which is a fundamental responsibility of a government.

Inflation, particularly when volatile, undermines the value of earned income and savings, underscoring the vital role of stable currency in upholding property rights. Unstable inflationary trends impede effective economic planning, thereby limiting the efficacy of economic freedom. Essential to economic liberty is the freedom to engage in exchanges, encompassing transactions, contracts and commercial activities.

Restrictions on international trade and burdensome regulations not only impede the freedom to exchange goods and services but also restrict access to credit, employment opportunities, and entrepreneurial activities, thereby eroding economic freedom.

According to the Fraser Institute’s report, Pakistan scored 6.03 and was placed 130th in the ranking. The breakdown for five key categories is as follows: Government Size: 18, Legal System and Property Rights: 138, Monetary Stability: 151, International Trade Freedom: 132, and Regulatory Environment: 129.

Within the domain of “sound money,” several sub-components contribute to its assessment, including factors such as money growth, standard deviation of inflation, inflation rate of the most recent year and freedom to own foreign currency bank accounts. The underlying methodology emphasises that heightened and erratic inflation rates introduce volatility into the relative prices of goods and services, disrupting economic fundamentals and impeding effective long-term planning for both individuals and businesses.

Therefore, preservation of stable currency values plays a pivotal role in upholding economic freedom, as inflation gradually erodes the value of assets denominated in monetary form. Hence, maintaining currency stability is imperative for safeguarding individual rights and promoting sustainable economic growth.

The Policy Research Institute of Market Economy has recently released a comprehensive economic freedom audit of Pakistan, with specific focus on sound money as a case study. Authored by Dr Waseem Malik, this study delves into intricate details and offers intriguing insights.

Dr Malik’s analysis highlights a notable aspect: five decades ago, the purchasing power of the typical consumer’s basket, as measured by the Consumer Price Index, was remarkably low in Pakistan. For instance, the cost of this basket amounted to merely Rs 3, implying that with just three rupees, consumers could afford an array of goods and services encompassed in the CPI.

Policymakers must adopt a comprehensive strategy encompassing prudent fiscal management, policy rate reductions and implementation of structural reforms to bolster productivity and competitiveness. Urgent attention is warranted towards prioritising debt restructuring.

However, as time progressed, driven by various discernible factors, the purchasing power of money witnessed a steady decline. By the year 2001, marking the midway point of this journey, the basket that could be acquired for Rs 3 in 1974 now commanded Rs 29.7, signalling a significant loss in value over three decades. Consequently, consumers found themselves able to afford only a fraction of the goods and services they once could acquire.

This trend intensified over the ensuing two decades, culminating in 2023, when the same CPI basket carried a price tag of Rs 204.7, reflecting a depreciation in value by approximately one-seventieth. This analysis illustrates the substantial erosion of monetary value over the past fifty years, underscoring the pressing need for sound monetary policies and economic reforms.

There is an intriguing correlation in the realms of real GDP and nominal GDP. In academic discourse, the fundamental connection between these two metrics resides in the fact that real GDP stems from nominal GDP subsequent to inflation adjustments.

By accounting for the inflation, real GDP furnishes a more precise gauge of shifts in an economy’s output across periods. This nuanced analysis aids in discerning whether economic expansion is fuelled by a genuine uptick in production or stems from mere escalations in prices. The distinction between nominal and real GDP is paramount for disentangling the underlying drivers of economic growth and assessing the true value generated in an economy.

In the insightful analysis provided by the PRIME, the status of money in Pakistan is depicted as “a deficient unit of account.” Examining the period from 1974 to 2023, the report unveils a striking contrast in the nation’s economic metrics. While Pakistan has experienced commendable average GDP growth of 4.7 percent, resulting in a remarkable tenfold increase in GDP, the nominal growth measured at current prices has surged by a staggering 644 times during the same timeframe.

This profound disparity between real and nominal growth signals a troubling phenomenon, where substantial real economic advancement coincides with an alarming escalation in nominal figures, accentuating the pronounced depreciation of currency value over the years. Such findings highlight the pressing need for comprehensive monetary reforms and strategic fiscal interventions to rectify this concerning trajectory and fortify Pakistan’s financial stability.

Pakistan’s underperformance across these categories demands robust policy interventions aimed at reinvigorating the economy. A paramount concern raised in the analysis is the alarming escalation of inflation and its adverse repercussions on economic stability. To counter this challenge, policymakers must adopt a comprehensive strategy encompassing prudent fiscal management, policy rate reductions and implementation of structural reforms to bolster productivity and competitiveness.

Urgent attention is warranted towards prioritising debt restructuring and management strategies to alleviate the economic strain caused by debt servicing obligations. Concurrently, the significant expansion of the M2/ Broad Money supply, contrasted with nominal GDP growth, emphasises the imperative for enhanced transparency and accountability in financial transactions. Strengthening regulatory frameworks and governance mechanisms is pivotal in combating illicit financial activities and upholding integrity of the financial system.

Moreover, fostering financial inclusivity and advocating for digital financial services can facilitate the efficient allocation of resources to productive sectors, fostering inclusive growth and sustainable development.

Overcoming the systemic challenges outlined in the economic audit calls for collaborative efforts from both the public and private sectors.

By prioritising sound monetary policies, reinforcing regulatory frameworks and cultivating an enabling business environment, Pakistan can unleash its full economic potential and embark on a trajectory towards enduring prosperity and stability.

Dr Ikramul Haq, writer and advocate of the Supreme Court, is an adjunct faculty at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.