An important milestone on the journey

Pakistan has just completed its three-year IMF-supported economic reform programme. This is a notable achievement in itself, but particularly so for a country that has had to resort to IMF support regularly and often abandoned its reform programmes before completion. Significant headway has been made under this programme. That said, a lot also remains to be done to put the economy on a more resilient footing and create conditions for more job creation and higher living standards for wide segments of society.

It is easy to forget that just three years ago, Pakistan’s economy was running out of steam and resources. Economic growth was subdued, the State Bank of Pakistan (SBP) was fast losing reserves, tax revenue collection was low, and the fiscal deficit was very high and partially financed by the SBP, fuelling inflation. The power sector saw massive load shedding and build-up of arrears. Foreign commercial lenders were beginning to turn away from Pakistan. Fiscal policy turned to shoring up resources by closing loopholes in the tax system, adopting a more systematic approach towards widening the tax net, and reducing energy subsidies, which were disproportionately benefiting the more affluent. This freed additional resources for public investment and social assistance, which, among other things, made a vital difference for one and a half million new beneficiaries of the Benazir Income Support Programme (BISP). It also allowed for reducing the budget imbalance by 2.5 per cent of GDP, not counting a large payment for power sector arrears in 2012-2013. In parallel, helped by the oil windfall and an improving external sentiment, Pakistan was able to triple its foreign reserves buffer, through SBP foreign exchange purchases and foreign borrowing. This has much strengthened Pakistan’s shield against economic shocks.

While not yet completed, headway has been made in the energy sector reform. The annual increase in power sector arrears declined from about Rs 200 billion to just Rs 8 billion last year, though the accumulated stock of past arrears still remains to be resolved. Combined with efforts to line up additional sources of energy, these improvements reduced though did not eliminate power outages and normalised operations. Increased independence of the SBP helped strengthen the monetary policy framework. Greater contributions of non-filers and the real estate sector to budgetary resources paved the way for further investment in priority areas. Prohibition of benami transactions, an improved anti-money laundering framework, and risk-based audits should further improve tax compliance. A comprehensive strategy has been developed to improve the business climate.

With stronger buffers, improved sentiment, gradually recovering growth, and the prospects of more energy supply and an additional impetus from the China-Pakistan Economic Corridor (CPEC), there is hope that Pakistan’s economy will set on a new and sustainable course, breaking from past cycles of near-crises and aborted stabilisation programmes. To make this a success, there needs to be consensus that economic reform needs to be an ongoing process and difficult reforms that have been embarked upon need to be completed. While a lot of progress has been made in strengthening Pakistan’s economic resilience, more is needed to adequately prepare Pakistan for future economic shocks. Continuing to build international reserve buffers will be important given future debt repayment obligations and contingent liabilities, helping to safeguard against risks to exports, remittances, oil prices, and international capital flows. In addition, sufficient exchange rate flexibility will be needed to support the competitiveness of the export sector and contain the trade deficit.

There is also a need to continue pursuing reforms to strengthen Pakistan’s growth potential and ensure that the gains in living standards are widely shared across society.This will require a multi-pronged strategy. First, higher public spending on public investment, health, education, and BISP will be needed to support the country’s growth potential and social outcomes. But at nearly 65 per cent of GDP, public debt remains high, with debt servicing costs absorbing a significant share of scarce public resources. Further reduction in the fiscal deficit is clearly needed. More needs to be done to bring people into the tax net by fostering a culture of tax compliance and by a principled stance of even-handed but determined tax collection at both federal and provincial levels. In addition, freeing taxpayers and banks from covering losses in ailing public sector enterprises through restructuring or privatisation would allow directing scarce resources to higher priority uses. It is telling that the combined losses of PIA, PSM, and the Pakistan Railways still amount to more than two-thirds of the spending on BISP. Second, exports and private investment fall significantly short of average levels seen in emerging markets, and reform progress is needed to catalyse better outcomes. The energy reform needs to be completed by eliminating power outages and the stock of accumulated power sector arrears. The business climate needs to be strengthened by continuing to implement the national strategy focusing on areas such as simplifying tax payment and trade procedures, facilitating contract enforcement and property registration, and improving access to credit. Steady improvements in governance will also be needed to improve Pakistan’s ability to attract investment, as will a drive to make institutions stronger, including by completing reforms to strengthen the State Bank of Pakistan’s autonomy.

Swift progress on the economic policy agenda will be needed to create an environment in which a dynamic private sector can generate sufficient jobs to absorb new labour market entrants and where living standards improve for wide segments of society. Achieving all this will take time and effort. It will also require a national consensus on the country’s priorities. Breaking with history is never easy. But it can be done.

Published in The Express Tribune, September 29^th, 2016.

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