akistan’s economic trajectory since its independence in 1947 has been influenced by a complex interplay of political, social and global dynamics. In 1947, the economy was predominantly agrarian. The government initially adopted import substitution industrialisation strategies to reduce reliance on foreign goods and foster domestic industries.

The 1950s and 1960s are frequently hailed as the “golden era” of economic growth as GDP grew at an average annual rate of approximately 6 percent. This period was characterised by state-led industrialisation, substantial public investments in large-scale industries and the development of infrastructure. However, the growth was uneven, leading to significant regional disparities and socio-economic inequalities.

The 1970s witnessed a paradigm shift in economic policy with the nationalisation of key industries under Zulfikar Ali Bhutto. This move was aimed at asserting state control over the economy and redistributing wealth. It inadvertently led to inefficiencies, bureaucratic expansion and a marked decline in industrial productivity.

The 1980s saw a policy reversal under Zia-ul Haq, who introduced deregulation, privatisation and economic liberalisation. Despite these reforms, the benefits were unevenly distributed and the economy remained susceptible to external shocks like fluctuations in global oil prices and geopolitical tensions.

The 1990s presented a tumultuous period for Pakistan’s economy. It was characterised by political instability, economic mismanagement and growing fiscal deficit. The early 2000s marked a resurgence of economic growth under Pervez Musharraf, driven by robust economic reforms, an influx of foreign investment and a favourable global economic environment. During this period, GDP growth rates peaked at over 7 percent, signaling a brief period of economic optimism. However, the momentum could not be sustained due to subsequent instability and the global financial crisis of 2008.

Current landscape

Currently, the economy is encumbered by a multitude of challenges, including structural deficiencies, external vulnerabilities and socio-political instability. The Covid-19 pandemic exacerbated these issues, leading to a contraction in GDP by 0.4 percent in FY2020. While there was a moderate recovery, with GDP growth rebounding to 5.6 percent in FY2021, the outlook remains precarious due to persistent structural weaknesses.

Economic performance

The recent years have been marked by volatility in GDP growth, reflecting the underlying structural challenges. The economy has struggled after the pandemic to regain consistent momentum. Growth prospects have been hampered by chronic energy shortages, inadequate infrastructure and a narrow tax base. The tax-to-GDP ratio of 9.5 percent is one of the lowest in the region.

Inflation and currency depreciation

Persistent inflationary pressures, driven by global commodity price shocks, supply chain disruptions and currency depreciation, plague the economy. The consumer price index (CPI) inflation surged to 24.5 percent in July 2022, exacerbating the cost of living crisis. Concurrently, the rupee experienced significant devaluation, losing over 30 percent of its value against the US Dollar in FY2022 alone, largely due to external debt obligations and political instability.

Fiscal and external deficits

Fueled by low tax revenues, high subsidies and substantial debt servicing costs, which account for over 40 percent of federal expenditures, Pakistan continues to be challenged by large fiscal deficits. The fiscal deficit stood at 7.9 percent of GDP in FY2022. The current account deficit remains a persistent challenge too. It widened to 4.7 percent of GDP in FY2022, reflecting the structural imbalance between imports and exports and the heavy reliance on external financing to bridge this gap.

Debt and IMF programmes

Pakistan’s growing dependence on external debt has necessitated repeated engagements with the International Monetary Fund. The most recent IMF Extended Fund Facility programme aims to stabilise the economy through fiscal consolidation, structural reforms and monetary tightening. However, the implementation of these reforms has been fraught with challenges, including political resistance and socio-economic implications.

Key sectors

The agriculture sector, which employs approximately 40 percent of the work force suffers from low productivity and inefficiencies. The industrial sector has potential but is constrained by infrastructural bottlenecks, energy shortages and a lack of technological innovation. The services sector, particularly IT and telecommunications, has shown promise. The IT export sector grew by 18.5 percent in FY2022. It requires more investment and supportive policy frameworks.

The future trajectory of Pakistan’s economy will depend on its ability to address deep-seated structural issues and harness emerging opportunities.

The dependency on indirect taxation must be systematically reduced, with a strategic pivot towards bolstering direct taxation mechanisms. This shift is essential for achieving a more equitable and efficient tax structure. 

Structural reforms

Achieving sustainable economic growth requires an array of structural reforms, with an emphasis on fiscal policy, energy sector efficiency and institutional governance. To fortify long-term macroeconomic stability, a multi-pronged strategy should be implemented, focusing on broadening the fiscal base, mitigating over-reliance on external financing and fostering a more conducive business environment through a dynamic, continuous economic development framework, rigorously monitored for efficacy.

The transition towards an enhanced sales tax system is paramount. This needs to be accompanied by expansion of the tax net to incorporate the substantial informal sector, which currently constitutes approximately 35 percent of the national economy. The formalisation is critical to augmenting fiscal revenues and reducing the fiscal deficit.

Also, the historic dependency on indirect taxation must be systematically reduced, with a strategic pivot towards bolstering direct taxation mechanisms. This shift is essential for achieving a more equitable and efficient tax structure. To stimulate economic activity and attract capital investment, the introduction of targeted tax holidays should be considered, providing incentives that not only catalyse investment but also facilitate job creation and economic inclusion for the populace. The focus on direct taxation, aligned with fiscal incentives is critical for generating sustainable economic momentum and fostering inclusive growth across Pakistan.

Investment in human capital

With 64 percent of the population under the age of 30, Pakistan is at the cusp of a demographic dividend. To leverage this potential, substantial investments in education, vocational training and healthcare are necessary to build a skilled work force capable of driving economic growth. Currently, Pakistan spends 2.4 percent of its GDP on education, far below the global average.

Regional integration

The China-Pakistan Economic Corridor offers substantial opportunities for infrastructure development and regional connectivity, with an estimated $62 billion in investments. However, maximising the potential of CPEC will require prudent management of associated debt, transparent governance and ensuring that the benefits are equitably distributed across the society.

Technological advancements and digital economy

The digital economy represents a promising avenue for growth, particularly in sectors like e-commerce, fin-tech and IT services. With a projected market size of $7 billion by 2025, government support for innovation, entrepreneurship and digital infrastructure will be crucial to unlocking this potential.

Climate change and sustainability

Pakistan is one of the countries most vulnerable to climate change. The estimated annual economic loss due to climate change disasters is 3 percent of its GDP. Integrating climate resilience into economic planning and pursuing sustainable development practices will be essential for long-term stability and prosperity.

Geopolitics

The geopolitical environment in South Asia will continue to influence Pakistan’s economic prospects. Relations with neighboring countries, particularly India and Afghanistan, as well as global powers, will play a crucial role in shaping trade, investment and security dynamics.

Pakistan’s economic narrative is complex. It has had periods of quick growth interspersed with significant challenges. The current economic landscape is fraught with vulnerabilities. With strategic reforms, investment in human capital and effective utilisation of regional opportunities, Pakistan can navigate its way toward sustainable growth and prosperity. Achieving this will require strong leadership, political stability, and an unwavering commitment to addressing the structural issues that have historically impeded economic progress.

The writer is Taxation- Pakistan & Middle East Cluster lead at Roche
Pakistan Limited