What’s wrong with Pakistan’s economy?

There are several ways to diagnose what ails Pakistan’s economy. But one place to start is at the Office of the Protectorate of Emigrants for the answer. That’s where people get their passports stamped before travelling abroad for work. 

Very often expats are turned away from the airport right before their flights because they don’t have the protectorate’s ‘seal’. Many of them don’t even know such a requirement exists. 

Set up in the 1970s, the protectorate’s job was primarily to regulate recruiting companies, which were not trusted with looking after the welfare of unskilled construction workers moving to Saudi Arabia and the United Arab Emirates.

A lot has changed since then as most applicants find jobs directly, however, the rules are unchanged.

The protectorate office in Karachi is tucked behind commercial high-rises off its busy Shahrah-e-Faisal road. Usually, it takes some asking around to find the premises, as I found out on a visit last year. 

It’s a place emblematic of how excess regulations frustrate people sending home crucial remittances while at the same time giving others an opportunity to exploit the bureaucratic red tape to earn some cash. 

Last year, overseas Pakistanis wired home more than $19 billion, a lifeline of foreign exchange in a country crippled by international debt. But successive governments have failed to address the broken system. 

At the protectorate, the real problem is going through the hassle of arranging a dozen documents including a medical certificate from a designated doctor, filling out complicated forms and paying registration fees at two different bank branches. 

That’s also where some people use jugaad, an improvised solution or ‘hack’, to monetise the bureaucratic labyrinth and fuel what’s known as the informal economy, where money changes hands away from the official tax net.

It’s not only a part of the informal economy, estimated to make up at least one-third of the country’s GDP of more than $300 billion, but also a place the taxman can’t reach. 

Take for example one Gul Khan who drives a three-wheeled rickshaw and offers his services to people coming to the protectorate office in Karachi, Pakistan’s biggest city and its commercial capital. For a few hundred rupees, Khan will fill in the forms for you, deposit the fee at the bank and get all the photocopies.

While some may benefit from the hack, too much regulation is discouraging private businesses from investing. 

“It’s really all about the ease of doing business. A lot of our time is wasted in dealing with bureaucratic issues,” says Ikram Elahi, CEO of a Lahore-based food company. 

It’s also about incompetence. 

“For instance, food department officials will take samples from raw milk and complain about the bacterial count. We tell them the sample is bound to have bacteria because it’s not even pasteurised,” says Elahi. 

Pakistan can least afford such legal and tax loopholes at a time when its economic growth has slowed down to its lowest rate in seven years, inflation is running high and the government is short of funds to pay its debt and the salaries of employees. 

The resignation of Finance Minister Asad Umar on April 18, just months after taking office, has complicated the situation. 

Worrying signs

Hascol Petroleum is one of Pakistan’s leading companies in terms of growth. From a nonentity, it has emerged as the country’s second largest supplier of petroleum products over the last 10 years. 

But its share price has plummeted by more than two-thirds in the past 12 months. 

“Right now, the problem for most businesses is uncertainty,” says Hascol’s CEO Saleem Butt. “You don’t know where the growth is headed, you don’t know the direction of interest rates, and you don’t know by how much inflation is going to increase.”

Country-wide sales of diesel fuel are widely considered a barometer of economic activity as it is used to run tractors in farms and factories in the cities, he says. 

“Its sale is down 23 percent. This just shows where things stand right now.” 

Pakistan’s current economic problems can also be traced to decisions made by the previous government to artificially inflate the value of the country’s currency, the rupee. 

That strategy hurt exporters as they were unable to compete in international markets especially in the textile sector, which remains the country’s key export. 

“They have lost market share to countries such as Laos, Vietnam and Bangladesh. And once you lose market share in textiles, then it’s very hard to regain it,” says Asad Sayeed, an economist. 

A buyer's paradise

Prime Minister Imran Khan’s government, which came to power last year, made a mistake by delaying negotiations with the International Monetary Fund (IMF) on a bailout package. 

“An IMF agreement brings certainty, gives access to the capital markets and restores confidence. Right now no one is investing and the stock market is in free fall,” says Sayeed. 

Pakistan is seeking billions of dollars from the international lender to boost its depleted foreign exchange reserves. 

The failure to bring more individuals and businesses into the tax net, people like Gul Khan and millions others, handicaps the government’s ability to spend on new hospitals and roads. 

“I don’t remember such a large reduction in tax to GDP ratio in my 24-year-long career,” says Sayeed. 

But amid this gloom, there’s also an opportunity. 

“Yes, it’s a buyer’s market right now. Whoever buy [assets] today, will benefit tomorrow. Prices are down and returns are going to be high for anyone who invests today,” says Butt of Hascol Petroleum.