Policy priorities for the new government

There was expectation that the elections held on February 8 would significantly clear the political air. They would bring into being a government in Islamabad and administrations in the provincial capitals that would begin to address the many economic and social crises that have hit the country in the past few decades. That did not happen for two weeks after the elections were held. The air of political uncertainty has not been cleared. It is unlikely that Pakistan would achieve political clarity even after a government takes office in Islamabad. Pakistan has performed poorly compared to the countries at its level of development. Poor political performance is a major reason for this. That was not the case a couple of decades ago.

I will begin this short essay by quoting from a report written by the World Bank 22 years ago. “In the first 20 years after independence in 1947, Pakistan had the highest growth rate in South Asia,” wrote the authors of the Bank report. “In 1965, it exported more manufactures than Indonesia, Malaysia, Philippines, Thailand, and Turkey combined. It would have made anyone’s list of the Asian countries most likely to miracle-level growth rates over the ensuing decades. This did not happen. While the growth rate in the 1980s was still over 6 percent per year, after the early part of the 1990s it fell to around 4 percent a year. Pakistan became the slowest growing country in South Asia, an exact reversal of its previous role. Chronic fiscal deficits fed into mounting debt and rising interest spending, which combined with defense expenditures to cut sharply into development spending. The incidence of poverty, which declined from 46 percent in the mid-1980s to 34 percent in the early 1990s, has largely stagnated since, especially in rural areas, leading to a further widening of the rural urban gap.”

Reports written by the World Bank staff are a good source for understanding the evolution of the economies in which it has been engaged in, providing both financial resources and technical advice. It regularly produces documents on the state of the economies in which it is engaged. The latest report was made available to the public in October in 2023. Titled ‘Pakistan Development Update: Restoring Fiscal Stability’, the report provided data on real GDP growth and some other indictors over the period covering financial year 2020 to the financial year 2024. According to the report the growth rate recovered from the abysmally low figure of -0.9 percent to 8 percent in FY21 and remained high at 6.1 percent in FY22. However, there was a sharp decline in FY23 when the Bank estimated that the growth rate declined to - 0.6 percent in FY23. There might be a slight recovery in FY25 with the growth rate increasing to between 1.7 and 2.2 percent. “Economic growth is expected to remain below potential over the medium term with limited improvements in investment and exports. With depleted policy buffers, the economy’s capacity to overcome any fresh domestic or external shocks remain limited; downside risks to the outlook are therefore very high,” wrote the authors of this more recent report.

The Bank offered this assessment before the political chaos that resulted from the elections on February 8, 2024. The institution’s cautious view of the future was based on negative rates of growth of current account and fiscal balances. The former was estimated at -1.4 percent and the latter at -7.7 percent. In discussing risks and priorities, the Bank wrote: “Pakistan has sizable upcoming domestic and external payments for the remainder of FY 2024. With limited fiscal space and foreign reserves amounting to only $9.8 billion at end of August 2023, the country faces substantial liquidity risks. Capacity to meet the high gross and external financing needs depends heavily on achieving necessary fiscal consolidation, the materialization of expected rollovers of regional deposits and commercial loans, and remaining on track with the IMF Standby Arrangement (SBA) program.”

With the attention of the interim government that took office after the cabinet headed by Imran Khan, then Prime Minister, was voted out by a move in the national assembly in April 2002 turning towards political matters – including the holding of national and provincial elections – economic management was of low priority. In the report World Bank wrote in October 2023, titled ‘Pakistan Development Update’ and issued in October 2023, the institution told a depressing story about the economic situation in the country. Wrote the Bank: “Pakistan’s post-pandemic recovery came to a halt in fiscal year 2023 with the delayed withdrawal of COVID 19-era policy stimulus leaving large accumulated economic imbalances.” Pressures on domestic prices, external and fiscal balances, the exchange rate, and foreign exchange reserves mounted amid surging world commodity prices, global monetary tightening, recent catastrophic flooding, and domestic political uncertainty. Confidence and economic activity collapsed due to import and capital controls, periodic exchange rate controls, creditworthiness downgrades and ballooning interest payments. Amid shrinking economic activity, price shocks, and the impacts of flooding, poverty increased significantly. The approval of the IMF Stand-By Arrangement (SBA) in July 2023 unlocked new external financing and averted a balance of payments crisis. The Bank expressed considerable concern about the country’s immediate economic situation. The Executive Summary of the cited report identified several factors that should worry the policymakers who will take office after elections held on February 8, 2024.

Once the new governments in Islamabad and the provincial capitals settle down – if they ever settle down – they need to define their policy priorities. Reading their election manifestoes does not reveal how the parties that would be governing would address Pakistan’s many and growing economic and social difficulties. Let us first focus on the economic situation. In reading the background material, I chanced upon a report written by the staff of the World Bank in 2002 titled ‘Pakistan Development Policy Review: A New Dawn?’. A conclusion one would reach reading the document prepared more than two decades ago is how much has changed in the way the country was managed then and is managed now. We have fallen a long way to go but with good governance we could recover some of what has been lost. The meaning of good governance is a subject I will take up next week.

Published in The Express Tribune, February 26^th, 2024.

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