Economic Priorities

Dr. Zafar Mahmood
The economy of Pakistan is not in good shape, it is trapped in a low economic growth (predicted growth rate for FY2024 is 2% as compared with -0.5% in FY2023), persistently high inflation (30%), high open unemployment rate (8.5%), falling investment rate (13.6% in 2023 compared with 15.7% in 2022), excessive fiscal deficit (7.7% in FY2023 well above the targeted 4.9%), and a deteriorating external balance position. Currently, Pakistan has foreign reserves to pay only about 6 months’ import bill. Foreign exchange reserves are low owing to low foreign capital inflows, heavy debt repayment, and slow growth in foreign earnings.

The gross savings rate in Pakistan is persistently low (6% compared with 30% in India) as compared with the investment rate (13.6% compared with 30.6% in India).

This is one of the main reasons why the country has to rely on foreign capital. When foreign capital is not available then the investment rate slows down, which dampens economic growth and employment. Private savings are low due to low or negative real interest rates, unstable income, large family size, high inflation, lack of culture to save, etc.

Currently, the poverty rate in Pakistan is 37.2%. Since 2018, 3 million new persons have been added to the pool of poor. This is the outcome of a difficult macroeconomic environment, a deteriorating labor market, a very sharp rise in food prices, and the effect of natural disasters. In the absence of higher social spending, these factors add misery to the poor.

This precarious situation is the outcome of the failure to timely address cyclical and structural problems faced by the economy. Perpetual failure to deliver ‘inclusive’ growth is threatening the social stability of the society. It needs to be underscored that when cyclical macroeconomic measures stop producing results then the only way left is the introduction of fundamental structural reforms. To tackle the deep-rooted structural issues, the new government needs to introduce strategically planned economic reforms.

Challenges

Pakistan’s economic problems are not new; their intensity has increased. The new government will face many economic challenges. Immediate challenges are preventing the flat growth in exports, addressing the issues of high inflation and unemployment, reducing the risk of debt distress via proactive debt management, and fiscal consolidation. Pakistan must address these challenges promptly to minimize the social cost of these imbalances.

Concomitantly, without addressing enduring structural imbalances that act as binding constraints to sustained economic growth and development, the new government will not achieve the promised targets it has set in its manifesto. The structural problems include disproportionately higher involvement of government in economic activities, State-Owned Enterprises (SOEs) consuming large sums of budgetary resources that constitute a drag on the public finances as well as on economic growth, large informal economy sheltering escape from all sorts of laws and regulations, agriculture remains a major employer of the workforce, policy bias toward import-substituting activities, policy bias against the private sector, neglect of the services economy in public policies, low rate of savings and consequently inadequate investment to develop human resources and infrastructure, the inability of the government to collect enough tax revenues as reform program lacks the commitment to take the hard decision, neglect of export-oriented small and medium enterprises, ineffective governance and institutional structures, lack of accountability, etc.

Many of the problems being faced by the economy are due to a weak regulatory system. In turn, the lax enforcement of laws and regulations is due to weak institutional capacity. This can be seen especially when it comes to the application of tax laws and competition law. In the case of taxes, people evade and avoid taxes with the connivance of tax officials and loopholes in the system. Inapplicability of competition law allows sellers to cheat on account of price and quality.

The Way Forward

While introducing reforms, the government must keep in front social implications of reforms such as unemployment, economic dislocation, and environmental degradation. Reforms should be designed so that they do not create any disparity among provinces. Specifically, the government needs to incorporate the following policy actions in its sustained-inclusive growth strategy:

1.            Allow the private sector to play the leading role in all economic activities; of course, within a well-functioning regulatory environment. To create the private sector’s trust in reforms and policies, build strong & effective institutions to remove bottlenecks in governance. Mistrust in policies and resistance to reform measures by the private sector should be offset by a strong private-public partnership. This would induce the private sector to accept even tougher reform measures. The government’s role should be limited to providing an enabling business environment and developing foundations to effectively implement a dynamic growth strategy.

2.            Revitalize the existing agricultural and industrial complex towards value-added growth by relying on new technology applications to meet the globalized tastes of domestic and international consumers. In this regard, minimizing waste, maximizing productivity, and forging market linkage can unlock new growth opportunities without a big investment.

3.            Restructure/ privatize SOEs to help restore fiscal stability and boost investors’ confidence.

4.            High fiscal deficit exacerbates the need for fiscal consolidation. The government should start planning to reduce debt accumulation and minimize fiscal deficit. Streamline subsidies and provide targeted subsidies to low-income groups. To boost tax revenues, focus on increasing the tax base and reducing tax exemptions to increase the tax-to-GDP ratio. Prepare a roadmap whereby the operating expenditures are fully financed by total revenue and government borrowing, if any, is solely used to finance development expenditures.

5.            Contain food inflation and ensure food security through boosting agricultural productivity. This can be achieved by focusing on research and extension services, farm mechanization, and ensuring high-yielding variety seeds’ access to all sizes of farms.

6.            Dynamic and efficient export-oriented small and medium enterprises (SMEs) should play an important role in the growth strategy. Specifically, ensure access to finance with SMEs perspective through banking channels which normally prefer large-scale firms.

7.            An export-oriented strategy will give constructive signals not only to local exporters but also to the global markets indicating that our policies will be for export promotion and not at the cost of imports from trading partner countries. Local export firms should be ensured that anti-export bias in policies will be eliminated.

8.            Rising cost-of-doing business, red-tapism and bureaucratic hurdles have forced many Pakistani firms to fly their capital to other countries, both legally and illegally. These countries offer better infrastructure, inexpensive land & warehousing facilities, cheaper labor and utilities, a business-friendly environment, and attractive tax incentives than Pakistan. This poses a pertinent question; why can’t we create such an ecosystem in Pakistan to bring our capital back home?

9.            Create a business-friendly environment to attract foreign direct investment (FDI), especially in intermediate inputs and high-value-added industries.

10.         The recent advances made in information technology and telecom apparatus, communications, genome and biotechnology, medical sciences, defense products, AI, and space technology have put Pakistan in a distinctive club of nations. This opportunity needs to be successfully harnessed and expanded.

11.         Illegal trade should not be tackled in isolation. The implications of illegal trade activities must be integrated with the trade policy. In this context, reduce implicit tariffs (equivalent of explicit tariffs and non-tariff barriers) to the level of cost of smuggling (5-15%), and increase the cost of smuggling by strict enforcement of laws to render smuggling uncompetitive. Moreover, the government should take strict measures to control under-invoicing of imports, which uses Hundi-Hawala-generated foreign exchange and largely ends up in the unrecorded segment of the economy.

12.         Finally, with the evident vulnerability of Pakistan to climate change, the government must account for impending economic loss and damage by supporting climate financing from domestic and international sources, including an emphasis on investment from the private sector, and capitalizing on carbon markets and grants in place of debt.

Sustained-inclusive growth is the most desirable option for Pakistan to harness its massive untapped economic growth potential. The government should commit a paradigm shift to bring back the manufacturing and agriculture sectors’ lost weightage in the GDP. It is, therefore, essential to make industrial and agricultural development the top priority in the overall economic growth strategy. It needs committed application of policy measures to realize the economic growth potential for prosperity, well-being, and to emerge as one of the faster-growing and promising global economies.

Last but not least, any plan of sustained-inclusive growth is bound to fail if the government does not ensure institutional quality and inter-institutional harmony, one platform for all government-related interactions with robust support, such as the Special Investment Facilitation Council (SIFC) a platform to fast-track decision-making to promote and facilitate FDI, bringing e-payments to the mainstream by moving away from the paper money, reducing human interaction with the public, and minimizing the discretionary authority.