3.7 Supply side policies Questionbank

Pakistan’s Economic Recovery Challenges

Pakistan faces persistent economic challenges as a developing nation with a rapidly growing, youthful population. The country’s fiscal position remains precarious, characterized by a large budget deficit fueled by rising defense spending and debt servicing costs, with interest payments consuming approximately 40% of total government revenue. This fiscal strain is further aggravated by persistent current account deficits and a dependence on external financial assistance from international institutions.

In response, the Pakistani government has engaged with the International Monetary Fund (IMF) and other multilateral lenders. Under its latest IMF bailout program, Pakistan has committed to a set of structural reforms, including the privatization of state-owned enterprises to improve efficiency, reforming energy subsidies to lower government expenditure, enhancing tax collection mechanisms to increase revenue, tightening monetary policy to control inflation, and maintaining a market-determined exchange rate to stabilize the external sector.

Government officials stress that international financial support is critical for economic recovery, as it restores investor confidence, attracts Foreign Direct Investment (FDI), and facilitates access to additional funding from institutions like the Asian Development Bank (ADB) and World Bank. However, critics argue that IMF programs often lead to austerity measures that can slow economic growth and disproportionately impact low-income households.

Pakistan has a long history of engagement with the IMF, having participated in more than twenty IMF programs since the 1980s. A recurring pattern has emerged: temporary improvements in external balances followed by economic reversals, raising questions about the effectiveness of IMF-led reforms and Pakistan’s ability to sustain long-term economic stability.

Beyond macroeconomic stabilization, development economists emphasize the need for human capital investment to unlock Pakistan’s demographic dividend. Key policy recommendations include expanding education and vocational training programs to improve workforce productivity, promoting gender equality in labor markets to increase economic participation, and encouraging youth employment initiatives to leverage Pakistan’s young population.

While multilateral development banks support initiatives like green energy projects, infrastructure development, and digital transformation, concerns remain about policy implementation, governance challenges, and environmental sustainability. Some critics argue that economic stabilization efforts often overshadow long-term development goals, leading to an ongoing policy dilemma: how should Pakistan balance short-term fiscal stability with long-term economic development?

Table 1: Pakistan’s Government Expenditure and Debt Servicing

Table 2: Foreign Direct Investment and Current Account Balance in Pakistan

Current account deficit poses a challenge to Pakistan’s economy

Pakistan’s president has raised concerns about the increasing current account deficit, which grew to USD 12.12 billion in 2016/17 from USD 4.86 billion in 2015/16. This deficit is driven by rising imports and declining exports. Due to low prices of the imported goods in foreign markets, the president has proposed restricting the import of luxury, non-essential goods through quotas, aiming to mitigate the issue and reduce dependence on external borrowing.

The governor of Pakistan’s central bank supports the president’s concern, emphasizing that excessive non-essential imports contribute to the deficit and require borrowing from abroad. However, he noted that 32% of imports consist of capital goods essential for the growth of small and medium enterprises (SMEs), agriculture, and construction.

Central bank advisors have suggested depreciating the rupee to address the trade deficit. The currency operates under a managed exchange rate system and is estimated to be overvalued by 20%. However, the central bank governor warns of the negative effects of depreciation, such as higher inflation.

Pakistan’s economic growth reached 5.3% in 2016, its highest in a decade, with an estimated increase to 6% in 2017. The government believes that boosting SME loans from 7-8% to 15-17% of total business loans will further enhance economic growth.

In addition to the current account deficit, fiscal policy decisions have led to a budget deficit, increasing public debt to 62% of GDP in 2016. The central bank recommends limiting public debt to 60% of GDP.

Table 1: Pakistan’s Current Account Data

Table 2: Key Economic Indicators

Indonesia’s Path to Economic Reform

Indonesia is undergoing a period of economic transformation, with ambitious reforms aimed at fostering long-term growth. The government has prioritized infrastructure expansion, streamlining regulations, and reducing corruption to attract investment. Additionally, tax incentives are being introduced to boost emerging industries such as transportation, telecommunications, metal production, and agricultural processing.

To fund infrastructure projects, which are projected to cost USD 22 billion, the government has reduced fuel subsidies, despite their role in making energy affordable for low-income households. While this move is expected to free up government funds, it has contributed to inflation, which has surged to 7.26%, exceeding the central bank’s target of 3–5%.

Indonesia’s economy also faces external challenges. Falling global prices of coal, gold, and palm oil, its major exports, have put downward pressure on export revenue. Meanwhile, economic growth has slowed, leading to declining consumer confidence. The Gini coefficient, which measures income inequality, has risen in recent years, reflecting concerns about income distribution.

To strengthen its economic foundation, the government is focusing on education and vocational training, aiming to reduce unemployment by upskilling its youthful workforce. Moreover, efforts to support small businesses include expanding access to micro-credit and making loans more accessible to entrepreneurs.

In response to economic pressures, Indonesia has also introduced trade protection measures, including tariffs and import restrictions, to shield domestic industries and encourage local production. However, critics argue that such policies may reduce efficiency and competitiveness in the long run.

Figure 1: Indonesian Development Statistics

Figure 2: Indonesia’s Economic Growth and Trade Statistics

Ghana to Seek Help from International Monetary Fund

Ghana has said it will seek financial aid in the form of a loan from the International Monetary Fund (IMF) to help stop the rapid decline in the value of the cedi, Ghana’s currency, and close a large budget deficit. Ghana’s transformation from one of Africa’s fastest-growing economies to the home of the world’s worst-performing currency has become a concern. The exchange rate depreciated by 40% against the US dollar in 2014. The fall in the currency has led to increases in the price of consumer goods such as sugar and fuel; inflation is at an unacceptable 15%.

Despite being a major exporter of gold, oil, and cocoa, Ghana’s current account deficit has risen sharply to 12% of its gross domestic product (GDP). This is partly due to a rapid increase in demand for imports and falling gold prices. Additionally, oil revenues have not been as strong as expected.

The government is also struggling with a wide budget deficit, which stood at 10% of GDP last year. Ghana’s good reputation for fiscal responsibility has worsened considerably as the government tripled salaries for police officers and soldiers.

It is expected that the news of talks with the IMF will be positively received in international financial markets. The finance minister has said the step would help to stabilize the currency, to bring domestic prices under control, and also to restore investors’ confidence in Ghana’s economy.

A Ghanaian spokesperson noted that the IMF would insist on the government introducing measures to tackle inflation and reduce its budget deficit. The IMF says that Ghana needs to tighten its budget immediately, by reducing public sector wages, lowering subsidies, and increasing taxes. The IMF is likely to demand a limit on borrowing and perhaps some privatization of power and water companies.

Earlier this year, problems in the economy had led to nationwide protests, with thousands of workers across the country protesting in the streets about the rise in the cost of living. The country’s largest trade union says the government has been mismanaging the economy. In response to the protests, a government minister said that the government would work very hard to achieve economic development to make life easier for the working people of Ghana but that all Ghanaians would have to make “some sacrifices for the economy to recover.”

Table 1: Ghana’s Macroeconomic Indicators

Table 2: Selected Macroeconomic Data for IMF Evaluation

Nigeria and Ghana

Nigeria and Ghana are neighboring countries in West Africa.

Nigeria

Nigeria's economy is dominated by its oil sector. It is Africa's largest oil producer. Oil production and related activities contribute about 65% of gross domestic product (GDP), approximately 75% of government revenue and over 90% of the country's exports. Natural gas contributes an additional 7% to exports. Subsistence agriculture remains crucial for most Nigerians' livelihoods, yet the country imports significant quantities of its food.

Since 2007, the Nigerian government has secured substantial loans from China, the World Bank, African Development Bank, and various international partners to develop its infrastructure. The global oil price crash of 2014-2015 severely impacted economic growth. Particularly, declining oil prices during this period reduced GDP growth to 2.7% in 2015, causing numerous infrastructure projects to be suspended.

The recent volatility in oil prices and sluggish growth in non-oil sectors have dampened growth prospects. Nigeria has responded with various policy measures, including reducing fuel subsidies and implementing import restrictions. Fuel subsidies have been significantly reduced, though not eliminated. Corruption, particularly in the oil sector, remains a persistent challenge.

Ghana

Ghana's economy relies heavily on mining and mineral processing for export revenue. The mining sector accounts for 14% of GDP but generates over 45% of foreign exchange earnings. Ghana is Africa's largest gold producer. Additionally, Ghana has significant reserves of bauxite, manganese, and recently discovered offshore oil deposits. Despite its mineral wealth, the mining sector employs only about 1.5% of the population. Ghana typically imports about 45% of its food requirements.

A relatively high per capita GDP for the region masks significant income inequality. The Ghanaian economy maintains strong ties with regional partners through the Economic Community of West African States (ECOWAS).

Ghana's economy remains susceptible to global commodity price fluctuations and climate-related challenges. Rising costs in the mining sector, particularly in deep-level gold mining, have squeezed profit margins. Ghanaian authorities acknowledge these challenges and emphasize the need for economic diversification.

Table 1: Economic Indicators of Nigeria and Ghana

Table 2: Trade and Economic Indicators

Trade strategies in the Philippines

For more than 20 years, the Philippines has been limiting the volume of rice it imports. However, the agreement with the World Trade Organization (WTO) that permitted these restrictions expired in 2017. In early 2019, the government replaced the quantity restrictions with tariff protection. A 35% tariff on imported rice from the Association of Southeast Asian Nations (ASEAN)* was imposed to protect the domestic rice industry in the Philippines. Following the replacement of the quota with a tariff, rice prices are expected to fall significantly. However, urban households want the president to allow rice to be imported without any tariffs to reduce food bills even further.

The poorest quintile of households in the Philippines consumes nearly twice as much ordinary rice and 20 times more National Food Authority (NFA) rice compared to the richest quintile. Rising food prices are pushing up inflation as a result of increasing salaries in urban areas. The daily minimum wage in Manila, the Philippine capital, will increase by 4.9%, the highest hike in six years, to the equivalent of US$10.11. Farming and fishing provide the livelihoods for around one-third of the labour force in the Philippines. Land reform programmes are slowly being implemented to change the current situation of unfair ownership of land and resources by a few individuals. However, uncertainty continues to discourage investment in adequate irrigation systems in the countryside. As an agricultural country, irrigation in the Philippines is very important. Improvements in the quality of infrastructure services will help cut the cost of doing business, attract more investment, and enhance productivity around the country. Food manufacturing, including food and beverage processing, remains the most dominant primary industry in the Philippines. This has become a focus in the hope of increasing farm incomes, because this part of the economy is currently dominated by big international companies. Major exports of processed fruits and nuts include mangos, pineapples, bananas, and peanuts.

The Philippine Export Development Plan (PEDP) 2018–2022 calls for boosting the export of services, increasing export competitiveness, and exploring new markets. Efforts have already been made to harmonize the country’s standards, testing, certification, and quality accreditation of products to improve trade and comply with standards in the European Union. The PEDP aims to increase the volume and value of exports by encouraging investment in production processes and supply chains. Another strategy to achieve the plan’s objective is to exploit existing and new opportunities from trade agreements.

The Philippines lacks the infrastructure needed to attract export-oriented manufacturing. To support the PEDP, the government needs to increase its spending on new airports, roads, and bridges. These public works are critical to boosting the incomes of people in poorer areas by connecting them better to Manila. To allow for this extra spending, a series of tax reforms was started: the income tax for the highest income earners has been raised from 30% to 35%, and indirect taxes have been increased.

Table 1: Trade and Economic Data for the Philippines

Table 2: Wage and Export Data