Good things have started happening in Pakistan’s economy, but challenges remain and may even compound in the near future.

The Pakistani economy contracted by 0.21 per cent in the last fiscal year. However, it began recovering in the first quarter of this year. The pace of recovery remained at 2.7pc in the first quarter, followed by 1.8pc and 2.1pc in the second and third quarters.

The government has estimated GDP growth for this fiscal year at 2.4pc — let’s hope it turns out to be true. But that will not obscure the fact that a 2.4pc recovery is too slow to make any appreciable impact on employment and poverty levels.

According to the World Bank, 40pc of Pakistanis, around 96 million people, are living below the poverty line. Meanwhile, unemployment estimates vary depending upon the sources, but many analysts and economists agree on 8pc — meaning at least 6.6m Pakistanis are currently jobless.

Regardless of the much-needed respite, Pakistan’s economy maintains a pessimistic outlook with low growth expected

Can we imagine how these financially struggling Pakistanis are making both ends meet with average inflation at 26pc in the first ten months of this fiscal year? No wonder the country continues experiencing wave after wave of social restlessness and extremism growing in every sphere of our collective life.

The current hybrid government must resist the temptation of assuming the status of a repressive regime and focus all its energy on ensuring that national politics and economic policymaking become truly inclusive, with a supreme Parliament, independent judiciary, and media.

For many, this may sound too idealistic, but it cannot be any other way. The problem with the past hybrid regime was that it didn’t realise that it was essentially transitional in nature. The problem with this hybrid regime, too, is that it has not learned a lesson from the recent past.

The root cause of all socio-politico-economic problems is that we never allow democracy to work, the Parliament to become supreme and the judiciary and media to play their independent roles. The sooner the state realises this and lets hybrid regimes, born out of “necessity”, play a limited transitional role and allow true democracy to take root, the better.

Further delays will only complicate political problems and contribute to long-term damage to the economy, even if we see some short-term recovery and progress.

About 40pc of Pakistanis, around 96 million people, live below the poverty line, according to the World Bank

That said, the next fiscal year, beginning July 1 may pose even greater challenges than the country faced during this year. Revenue generation, containing inflation, keeping exchange rates stable, lowering interest rates to the desired level, and growing the industrial and services sector are a few.

Each of these challenges would remain stubborn even if the government sets the GDP growth target at just 3.7pc, as is expected, and even if it does not emphasise growth with massive jobs recovery and a dramatic cut in the poverty rate. Given that this fiscal year’s recovery is largely due to a huge 6.3pc growth in the agriculture sector, whereas the industrial and services sector only expanded by 1.2pc, what could one expect next year?

Agriculture would surely not grow as fast as this year for a few reasons: its high base, the proposed taxation of agricultural income, and the continued pass-through of higher general taxation and higher energy prices onto agricultural inputs.

Meanwhile, the industrial sector can be expected to grow a little more, but not too fast, due to its low base, pass-through of general and industry-specific taxation, and continued energy price hikes. The same holds true for the services sector.

One additional factor that may hinder the growth of the services sector is that next year’s proposed documentation and taxation drive is sure to hurt this sector more than others because most of the undocumented, low-paying businesses are in the services sector, followed by the agriculture sector.

At this stage, no one can deny the necessity of appropriately taxing agriculture or some segments of the services sector. For a long time, income from agricultural land, commercial and household properties, retailers, wholesalers, and even goods transporters has remained untaxed or undertaxed. Their once-strong political patronage is giving way to the International Monetary Fund’s increasing demands for appropriate taxation.

Financial and insurance businesses, information technology (IT), and IT-enabled services — two significant components of the services sector — undoubtedly hold promise for growth. The government now has to come up with solid, innovative ways of promoting tech services’ domestic and export growth.

The insurance sector can be expected to grow quickly next year as policymakers plan to expand crop coverage and other forms of agricultural insurance. However, the banking and financial sector’s fast-paced growth remains unpredictable because of very high taxation and uncertainty surrounding overall economic growth and the policies that may affect their net interest earnings from investing in government treasury bills and bonds.

What is encouraging, though, is that banks are now getting serious about offering liberal financing to small and medium enterprises, technology, and agriculture.

Published in Dawn, The Business and Finance Weekly, May 27th, 2024