Our senior analyst Mozimamal Hussain recently visited Pakistan and provides his views on the state of the south Asian nation
Whilst shopping for tiles or in fact any other products in Pakistan one notices the distinct absence of any Pakistani brands or manufactured goods. Formerly, Master tiles and Sonnex tiles were the most popular brands produced in Gujranwala, a gritty industrial town in northern Punjab. Both facilities now lie dormant, mothballed due to exorbitant gas prices and unreliable supply, with the collective loss of 8000 employees the market is now dominated by Chinese suppliers. Whatever product one seeks to purchase the same holds true, Pakistani manufacturers have been replaced with items imported from China. From hobs to cars the market is dominated by imported alternatives to Pakistani produced goods. The only exceptions being items too big and bulky to make efficient transport possible. Decades of underinvestment in man and machine have led to little development of Pakistan’s products despite the obvious cost advantage. As a significantly better product, marginally more expensive is always available as an alternative to most Pakistani products.
The state of Pakistan’s economy is often discussed through the lens of debt, inflation and poverty and although some blame for its dismal state can be placed on the ongoing US-Iranian war, there lies a more fundamental problem: the gradual erosion of the country’s productive economy. From manufacturing and agriculture to real estate and labour exports, many of Pakistan’s traditional engines of growth are declining in both quantity and quality, which raises some very difficult questions about the country’s long-term economic and political viability.
Factory closures, reduced production, and significant job losses are the norm mow. The ceramics sector is not alone. Textile manufacturers, steel producers and other energy-intensive industries have similarly faced declining competitiveness, with many firms reducing operations or relocating investment elsewhere. Every factory that closes represents not only lost jobs but also a weakening of Pakistan’s productive capacity at a time where due to demographic changes in both China and the rest of the world should have made Pakistan the go to destination for high volume low tech production.
Compounding these difficulties is a tax system that many economists argue has become increasingly extractive towards those already within the formal economy. Rather than substantially widening the tax base, successive governments have largely relied on imposing additional taxes on existing taxpayers. Where an increasingly small number of salaried individuals and small businesses are burdened with a disproportionate share of the national tax bill
Rather than substantially widening the tax base, successive governments have largely relied on imposing additional taxes on existing taxpayers
The reasons are not difficult to identify. A friend recollected an anecdotal incident where Bandial Nawab’s multi-million tax bill simply evaporated with a single phone call to the director of the local FBR branch. Elite capture has long distorted economic policymaking. Powerful landowners, politically connected businesses and influential interest groups have often succeeded in protecting themselves from meaningful taxation. Agricultural income taxation remains limited, property valuations frequently fail to reflect market realities, and large segments of the economy continue to operate informally. Consequently, governments repeatedly resort to raising indirect taxes, utility charges and levies that affect the broader population whilst sparing those that in fact have the means to pay .
Indirect taxation, whilst easy to collect, disproportionately harms lower and middle-income households whose incomes are largely spent on essentials. Consumers ultimately bear the burden through higher prices for electricity, fuel and everyday goods, as manufacturers and importers simply pass on taxation to the ultimate consumer.
For decades, Pakistan has been sustained by another unusual economic pillar: remittances. Overseas Pakistanis send tens of billions of dollars home each year, providing vital foreign exchange and supplying the actual purchasing power that millions of households rely upon. In effect, Pakistan’s people have become one of its most valuable exports and the mainstay of its economy.
However, this model faces growing challenges, with the rise of right wing political parties in Europe opportunities for emigration are fast evaporating. Furthermore most Pakistani workers are employed in sectors vulnerable to automation and artificial intelligence. As advanced economies and Gulf states increasingly adopt labour-saving technologies, demand for low and medium-skilled migrant labour is declining . While human capital will remain valuable, future labour markets are likely to reward specialised technical skills, advanced education and adaptability skills that Pakistan’s defunct education sector cannot provide.
Pakistani workers are employed in sectors vulnerable to automation and artificial intelligence
All of this presents a particular challenge for Pakistan, whose population continues to grow rapidly. A large youthful population is an economic asset, but only when accompanied by policies that encourage investment and training sufficiently in demand for job creation. The real estate sector, once regarded by many Pakistanis as a safe store of wealth, has experienced an extended period of stagnation. In dollar and sterling terms the last decade has seen no growth, a plot of land bought a decade ago commands the exact same price in terms of dollars and pounds as it did when bought. Repeated scandals, regulatory uncertainty, speculative bubbles and high-profile controversies involving housing developments that although initially allowed by authorities are subsequently deemed illegal a decade after completion. This has damaged investor confidence. Property markets thrive on trust and predictability; both are in very short supply in Pakistan.
Although for years real estate speculation has attracted capital that might otherwise have been invested in more productive sectors such as manufacturing or technology, real estate has nevertheless provided employment to a multitude of skilled and unskilled workers. With the war in the Gulf raising the prices of raw materials only those desperate to finish projects are building, all others have been postponed, leaving millions without work or sustenance.
Yet as confidence weakens and returns become less certain, the sector no longer offers the same sense of security it once did. This has left investors searching for alternatives in an economy where few attractive options exist.
Although agriculture has historically been the backbone of Pakistan’s economy, it too faces its own crisis. Water scarcity has become increasingly severe, driven by climate pressures, inefficient irrigation practices and growing demand. Simultaneously, rising energy costs have increased the expense of operating tube wells, transporting produce and processing agricultural goods. On top of these issues the cost of fertilizer and pesticides has risen exponentially with the closing of the hormuz straits and nitrogen based fertilisers being manufactured from methane fertiliser, an essential component of modern farming has become unaffordable for large numbers of small farmers, affecting yields for the coming season.
The sector also suffers from chronic underinvestment from mangoes to bananas. Underinvestment and poor agricultural practices have resulted in infestations of diseases that are decimating Pakistan’s agricultural industries. Mechanisation remains limited in many areas, research and development spending is insufficient, and modern farming techniques are not widely adopted.
Underinvestment and poor agricultural practices have resulted in infestations of diseases that are decimating Pakistan’s agricultural industries
A lack of technical expertise and extension services further constrains productivity. As a result, agricultural yields often lag behind those achieved by comparable countries including India, reducing profitability for farmers and weakening national food security. The malaise is such that Pakistan’s world renowned cotton research institute has been earmarked for demolition and conversion to a housing scheme.
Taken together, these trends paint a troubling picture: manufacturing struggles with high energy costs. Agriculture faces declining productivity and water shortages. Real estate has lost some of its appeal as a destination for investment. The tax system continues to place increasing pressure on a narrow formal sector while leaving large pockets of economic activity lightly taxed. Meanwhile, remittances remain essential, even as global technological change threatens the labour-export model on which they depend.
Pakistan’s challenge is therefore not merely one of short-term economic mismanagement but rather is the result of a deeper and more fundamental issue that impacts on all aspects of Pakistani society. Pakistan has a political and social culture which is built upon individual and family interests, to the extent that a principled stand or the adoption of firm values and principles is deemed the actions of an idiot and fool. Hence individual interests are always prioritised over any collective interest. Hence to skim from the budget, a useless metro bus scheme where a special concrete track is constructed costing billions of rupees is initiated between Gujranwala and it provincial neighbours when simply increasing the number of existing buses would have sufficed. This is simply an example where decisions are made for personal interests not the collective good. Although cheap and plentiful energy is available from Iran, Pakistan continues to import more expensive energy from others, because Pakistan’s elites value the green cards of their children more than the fate of the economy. All in all, Pakistan’s policies and decisions are not designed to benefit the nation but rather are held hostage to the petty interests of the elite.
To remedy this situation Pakistan requires a change in culture and politics, where values, principles and ideology are given their due importance and political parties based on values principles and ideologies can form and take power, without such, Pakistan will continue to suffer poor decision making and undue influence from foreign powers.
Without such reforms, Pakistan risks finding itself trapped between a rapidly growing population and an economy increasingly unable to generate the opportunities that population requires. The country’s greatest asset remains its people. The question is whether the economy can evolve quickly enough to harness their potential before demographic pressures and technological change overtake it.
