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Indeed, 30.7 percent of Pakistan’s government expenditure is earmarked for debt servicing, which cannot be supported by its decreasing revenues.Already on the Financial Action Task Force’s (FATF) grey list, and with the current Pakistan Tehreek-e-Insaaf (PTI) government enjoying internal institutional consensus on the national agenda, Pakistan must focus its attention on resolving its economic woes before it finds itself on the shores of bankruptcy.Pakistan’s poorly regulated financial system facilitates tax evasion, which contributes significantly to the growth of the fiscal deficit.
With its domestic industry in ruins, Pakistan has not been able to rely on consistent foreign investment for more than stopgap measures.
It did recently receive $2 billion from the United Arab Emirates (UAE) through the Abu Dhabi Fund for Development (ADFD), which provides concessionary development loans.
The Way Forward: Steps for the Pakistan Government To make a significant impact on the current account deficit, Pakistan needs to ensure an investment-friendly environment that attracts more foreign direct investment (FDI), instead of relying so heavily on foreign aid.
According to the World Bank’s Ease of Doing Business report, Pakistan ranks 136th out of 190 economies.
The major driver of this rising current account deficit is an expanding trade deficit, which is mostly due to the rising imports under new China-Pakistan Economic Corridor (CPEC) projects and low exports in general.
The previous government focused more on import-led growth strategy to finance large scale projects under CPEC.Similarly, the previous government failed to make any significant progress in enhancing exports: in fact, Pakistan’s total exports fell in real terms during the PML-N’s tenure.In its recent report “Pakistan @100: Shaping the Future,” the World Bank held weak governance responsible for the fiscal deficit.However, relying only on foreign aid and friendly countries for loans is not enough.If Pakistan is to tackle its current account deficit in the long run, the government must take substantial steps to improve the macroeconomic conditions of the country and modernize its industrial sector to become more competitive in international markets.It can do this by investing in research and development (R&D) to encourage product innovation and enhance labor productivity.On top of these issues is the larger question of Pakistan’s failure to expand its export portfolio beyond a few low value-added products, such as textiles, rice, surgical goods, carpets, sports goods, and leather items, which is one of the largest factors behind its balance of payments deficit.This inflow has increased Pakistan’s foreign reserves from .956 billion at the start of March 2019 to .398 billion.In February, the Crown Prince of Saudi Arabia, Mohammad bin Salman, signed seven Memorandums of Understanding (Mo Us) with Pakistan, pledging up to billion worth of investment over the next six years.Such measures would reposition Pakistan on the international stage as stable, competitive ground for foreign investment.Pakistan also needs to focus on building its domestic industry to expand its export portfolio and enhance its competitiveness in the international markets.