Strategies for Sustainable Economic Growth in Pakistan Amidst Rising Debt
SPOTLIGHT
Empirical evidence from scientific research reveals that external debt has a positive impact on economic growth in the short term, but high debt services can hinder growth in the long term. Specifically, data shows that a 1% increase in external debt leads to a 0.69% increase in economic growth, indicating a short-term positive relationship between external debt and economic growth. However, this comes at a cost: a 1% increase in debt services results in a 0.43% decrease in economic growth, highlighting the long-term negative impacts of debt servicing.
Pakistan's economic growth has been volatile over the past few decades, with periods of high growth followed by significant downturns. This instability is exacerbated by the country's rising foreign debt, which has seen a notable increase since 2018. For instance, Pakistan's external debt surged from $95 billion in 2018 to over $113 billion by 2021, reflecting a troubling trend. To break this debt cycle, Pakistan must implement structural reforms, improve governance and transparency, and attract foreign investment. Additionally, adopting a comprehensive debt management strategy, developing a domestic bond market, and focusing on fiscal discipline, monetary policy reforms, and investments in human capital and infrastructure are essential steps.
Structural reforms, such as privatization and deregulation, are necessary to improve the business environment and attract foreign investment. For example, Pakistan's telecommunications sector experienced significant growth following deregulation in the early 2000s, attracting foreign investors and boosting economic activity. Simplifying the regulatory framework, reducing bureaucracy, and increasing investment incentives are crucial to replicate such successes across other sectors.
Governance and transparency are essential for reducing corruption and increasing accountability. Strengthening institutions to reduce corruption and increase transparency can improve the business environment. The implementation of the China-Pakistan Economic Corridor (CPEC) has shown the potential benefits of improved governance, where increased transparency and better management practices have led to substantial foreign investment and infrastructural development.
Foreign investment is crucial for Pakistan's economic growth. Creating a conducive business environment to attract foreign investors involves increasing investment incentives, simplifying the regulatory framework, and reducing bureaucratic interventions. For example, Pakistan's automotive industry saw an influx of foreign investment following policy reforms in 2016, which streamlined regulations and provided attractive incentives for international car manufacturers.
A comprehensive debt management strategy is vital to reduce the debt burden and increase debt transparency. This includes negotiating with creditors, restructuring debt, and enhancing debt transparency. Pakistan's successful negotiation with the International Monetary Fund (IMF) for bailout packages in recent years underscores the importance of strategic debt management in stabilizing the economy.
Fiscal discipline is necessary to reduce the fiscal deficit and increase revenue collection. Reforming the tax collection system, reducing unnecessary expenditures, and promoting a cashless economy are essential steps. For instance, the implementation of the Federal Board of Revenue's (FBR) tax reforms has aimed at broadening the tax base and improving tax compliance, which is crucial for enhancing revenue collection.
Monetary policy reforms can help reduce inflation and stabilize the economy. Controlling interest rates, reducing the money supply, and improving monetary policy transmission are key measures. The State Bank of Pakistan's (SBP) recent steps to hike interest rates to curb inflation demonstrate the impact of proactive monetary policy.
Investing in human capital and infrastructure is critical for increasing productivity and economic growth. This includes boosting education and healthcare expenditures, improving infrastructure, and increasing investment in technology. For example, investments in the Benazir Income Support Programme (BISP) have shown positive outcomes in improving education and health indicators among the poorest segments of the population.
In conclusion, the relationship between external debt and economic growth in Pakistan is complex. To achieve sustainable economic development, Pakistan must focus on structural reforms, governance and transparency, and attracting foreign investment. By addressing these key areas, Pakistan can break the debt cycle and set the foundation for long-term economic stability and growth.
Please note that the views expressed in this article are of the authors and do not necessarily reflect the views or policies of any organization.
Dr. Tahira Sadaf in an Assistant Professor at the Institute of Agricultural and Resource Economics, University of Agriculture, Faisalabad, Pakistan
Touseef Anwar, Komal Azhar, and Ayesha Rouf are postgraduate students at the Institute of Agricultural and Resource Economics, University of Agriculture, Faisalabad, Pakistan