Stefan Dercon plan sees 6% growth

Targets $60b in exports by 2028, hinges on strict reform implementation

ISLAMABAD:

The United Kingdom-funded Stefan Dercon plan for Pakistan's "home-grown" growth agenda has linked sustainable 6% annual growth and $60 billion in exports with strict implementation of reforms and strong political will—elements that have long been absent from the nation's strategy for economic growth.

A draft of "A Home-Grown Reform Agenda for Growth with Stability" shows that UK Economist Stefan Dercon has not found a magic bullet to fix Pakistan's economy, which is controlled by elites. However, the report underlines the key factors that have been missing in Pakistan's economic plans.

Prime Minister Shehbaz Sharif enlisted the help of Stefan Dercon, a British economist and policy advisor to the Foreign Commonwealth and Development Office, with the assistance of UK authorities. The draft report is currently under review by Finance Minister Muhammad Aurangzeb before it is publicly released.

The Dercon Plan comes on top of the five-year draft plan approved by the National Economic Council and the three-year International Monetary Fund (IMF) programme. According to the Dercon Plan, the results of the proposed actions will be visible by 2028, one year after the end of the IMF programme.

"For decades, think tanks, academics, external agencies, and even government analysts have strongly advocated for the types of reforms that are, in many cases, included in this growth agenda. For this agenda to succeed, a strong drive towards systematic implementation is as important as the actions announced," states the draft report.

It adds, "The failure of structural reforms for growth in Pakistan is not due to a lack of ideas, but a lack of political will to implement these reforms."

The report acknowledges the work done by the Pakistan Institute of Development Economics.

"The reforms described will offer opportunities for all stakeholders—across firms, households, and beyond—but will require policy continuity and strong political consensus," the report says, warning that Pakistan's economy and its people may not get many more chances. This opportunity must not be wasted.

From macroeconomic to industrial planning, almost everything is currently outsourced to foreign consultants, despite acknowledgment at the highest levels that Pakistan's problem lies not in planning but in implementation, said a senior government official involved in these meetings.

The report highlights that Pakistan's economy is burdened by high government debt and deficits. It stressed that the government is committed to fulfilling all its obligations under the IMF programme.

Reform agenda

The Dercon Plan stresses that Pakistan needs more private investment, export orientation, and a shift away from import substitution, along with sufficient tax revenue and control over public finances.

The report states that stimulating private investment is crucial because, without it, labour productivity growth, job creation, and catching up with comparable countries will remain impossible. Similarly, export-led growth is essential, as no growth in Pakistan will be sustainable without it, nor will productivity growth be incentivised.

Lastly, optimising public finance by expanding the tax base more fairly across firms and households, balancing the budget, and directing spending towards economic growth with stability and equity are vital.

Investment action plan

The plan recommends implementing the Asaan Korobar Act 2024 and the Regulatory Guillotine in the federal government to reduce the cost of doing business by up to 3% of GDP. It also proposes sector-specific investor-friendly policies to simplify procedures, enhance investor confidence, and reduce investor complaints by 25% within the next year.

The report advises simplifying inspection regimes to reduce their cost and time, regardless of sector and business size, and establishing walk-in and digital Business Facilitation Centres to halve the time needed to process No Objection Certificates, aiming to serve 5,000 businesses within the next nine months.

The report also suggests setting up an investment ombudsman to address grievances related to fair business practices and bureaucratic hurdles, with 50 disputes settled in the next year.

"Pakistan will need to reverse the high cost of energy faced by firms and households alike," the report states.

To the extent economically feasible, the plan proposes converting fuel supply towards domestic sources, along with actively restructuring and settling circular debt. It also recommends creating competitive electricity markets where multiple suppliers can sell power directly to users.

Crucially, the Dercon Plan emphasises the need to relocate industries from China to Pakistan, including through joint ventures within one year, to boost exports. It also recommends developing a project pipeline of up to 50 investable projects within the next three months.

Exports plan

The Dercon Plan stresses the need to expand activities related to trade promotion and market access negotiations and to extensively reduce tariffs on imports of intermediate inputs used in exports.

Optimising public finance

The report recommends establishing a new policy unit under the finance minister, separate from the Federal Board of Revenue (FBR) but working closely with the prime minister's office. This unit will assess all tax, energy tariffs, custom tariffs, and subsidies based on economic principles.

The report also suggests increasing the tax-to-GDP ratio to 13.5% annually within three years, while spreading taxes and their collection more broadly and equitably across all businesses and households to reduce the tax burden per taxpayer.

A comprehensive reform of the FBR is recommended to improve tax collection, including through intensified digitalisation efforts.

To reduce expenses, the plan recommends an ambitious programme to privatise state-owned entities. The Dercon Plan also calls for right-sizing the government at both federal and provincial levels to reduce costs and improve efficiency. It said there is a need to rationalise public development expenditures, including rapidly reducing throw-forward spending in the Public Sector Development Program (PSDP) and optimising the use of public-private partnerships for development expenditures.

What will Pakistan get?

The report projects that if all these actions are implemented, Pakistan's economy can create one million new jobs per year by fiscal year 2028, with these jobs offering higher productivity through increased private sector investment.

By 2028, the economy could sustain 6% annual growth, and these reforms would not only boost the economy but also allow it to grow by 6% or more without triggering a balance of payments crisis after the IMF programme ends.

Pakistan could attract an additional $10 billion in private investment per year by fiscal year 2028, and its exports could grow by an additional $20 billion per year by 2028. This would result in $60 billion more in exports by fiscal year 2028, increasing the export share of GDP to about 15%.