PAKISTAN’S economy has faced severe challenges over the decades and now teeters on the verge of economic default—a situation it could scarcely have imagined in earlier times. Once regarded as a promising developing economy, question arises: what went wrong in past three decades? Multiple factors contributed to this decline, with structural problems playing a significant role.
Structural issues remain a critical topic in public discourse, often accompanied by calls for reforms. These issues stem from inefficiencies and weaknesses within Pakistan’s institutions. Strong, effective institutions are essential for sustainable economic growth. However, political instability and security challenges have hampered efforts to address these weaknesses.
One glaring example is Pakistan’s low tax-to-GDP ratio compared to regional peers. Institutions like the Federal Board of Revenue (FBR) have failed to broaden the tax base and stabilize the economy. Pakistan’s main revenue sectors—agriculture, services and manufacturing—remain underutilized in terms of taxation. Agriculture, employing 50% of the workforce, contributes only 21% to GDP and a negligible 0.03% in taxes. In contrast, the services sector, which contributes 60% of GDP and employs 25% of the workforce, accounts for 30% of the tax-to-GDP ratio. The salaried class disproportionately bears the tax burden, contributing 367 billion rupees this year, while the elite and feudal landlords enjoy significant exemptions.
This disparity reduces purchasing power and fuels inflation. Half the population works in agriculture, yet their contribution to the economy remains minimal due to a lack of skills. Conversely, the services sector generates significant revenue from a smaller workforce. To address this imbalance, sustainable development programs should be implemented in rural areas to enhance skills and expand opportunities across sectors. The industrial sector, contributing 21% to GDP, plays a vital role in taxation, accounting for around 70% of the tax-to-GDP ratio. Taxation mechanisms must be restructured to ensure equitable contributions across all sectors.
The fiscal deficit persists due to the gap between revenue and expenditure, forcing the government to rely on borrowing and foreign loans. State-owned enterprises (SOEs) like PIA, which has incurred losses of $7.1 billion since 2012, exacerbate the issue. Privatization, following the Thatcher model in the UK, could alleviate this burden and provide long-term economic benefits.
Incorporating modern technology, including artificial intelligence, is crucial for industrial development and revenue generation. Feudal landlords must be brought into the tax net, with government oversight on land ownership and usage. Educational reforms are equally critical, with an urgent need to address out-of-school children and prepare them for future market demands. Provincial governments should empower local governments under Article 140-A of the 18th Amendment to expand the tax base. China’s successful devolution model offers valuable lessons.
Finally, the legal framework must be revisited to curb exploitation and support institutional growth. Reformed laws are essential for ensuring economic stability and fostering long-term development.
—The author is a research analyst with a keen interest in foreign policy, history, geopolitics and international relations.
