The long-standing structural weakness of Pakistan’s economy, aggravated by the global challenges of the COVID-19 pandemic and the Ukraine-Russia war, is scaring away the investors in the country, according to a media report.
In its recent ‘Pakistan Development Update’, the World Bank has highlighted the structural weaknesses of Pakistan’s economy which include low investment, low exports, and low productivity growth cycle. Further, high domestic demand pressures and rising global commodity prices would lead to double-digit inflation in the country, reported Islam Khabar.
Moreover, the growth momentum is not expected to pick up in Pakistan in the near future as a sharp spike in the import bill would also impact the Pakistani Rupee adversely. The World Bank report cites the financial sector’s inadequacy as one of the reasons for this low growth.
The Pakistan government, which has borrowed from the banks at a high-interest rate, earns nominal interest for its cash balance, which is forcing the exchequer into heavy indebtedness as well as a liquidity crunch for the private sector.
The investments in Pakistan are also derived from savings. The domestic investment potential in the country is demonstrated by the fact that less than 50 per cent of domestic savings find their way to the financial sector with the rest used in real estate, being intermediated through informal channels, or soaked up directly by the government through National Savings, according to the media outlet.
Further, the country has a gross NPL (non-performing liabilities) ratio of 8.9 per and a recovery rate of 41 cents/dollar against 70 cents/dollar for OECD countries.
Notably, the weak institutions in the country are also the cause of concern as Pakistan lacks transparent, predictable, and judicious insolvency and credit rights regime which is critical to lowering the cost of credit, expanding access to finance, and fostering entrepreneurship.
According to the Standard & Poor’s Ratings Global Financial Literacy Survey 2015 (S&P Global FinLit Survey), only 26 per cent of the adults in Pakistan are financially literate. Thus, limited financial literacy in Pakistan is concerning for the investors as it has exacerbated the informality challenge in the country.
While the International Monetary Fund (IMF) has agreed to extend the stalled bailout package to Pakistan by up to one year and to increase the loan size by USD 2 billion, meeting the stringent conditions of the fund would prove to be an uphill task for the new Pakistan government.
As the economy has failed to match up with the industrial advances, a huge gap in its infrastructure has been created which calls for a significant inflow of investments into Pakistan’s economy. However, the economy’s problems which are structural and deep-rooted poses a great challenge for the government, according to the media outlet.