Leveraging recent successes to accelerate reforms and growth

It is time to build on positive developments as govt seems prepared to undertake ambitious reforms

ISLAMABAD:

The recent decline in Pakistan's inflation rate to 9.6% is a significant achievement, marking the lowest level in three years. This represents a 65% drop compared to August 2023. Hopefully, this should result in several economic benefits, such as enhanced consumer purchasing power, stabilised business costs, and improved government finances.

It is time for the State Bank to consider a substantial reduction in interest rate considering the rather wide gap of over 100% between inflation and interest rate. India's 6.5% interest rate has stayed consistent for the last several months despite inflation hovering around 5%. A significant rate cut would help reduce debt servicing costs and spur economic activity.

Adding to the positive momentum, international rating agencies like Moody's and Fitch have recently upgraded Pakistan's ratings. Furthermore, Moody's has also adjusted the outlook to positive from stable. As a result, Pakistan is now in a better position to raise new foreign debt by selling Panda/ Green/ Eurobonds and Sukuk at lower costs. The remarkable performance of the Pakistan Stock Exchange (PSX) – which became the best-performing equity market globally during FY 2023-24, delivering an impressive annual return of 89% in PKR terms and 94% in USD terms – is a strong indicator of the market's belief that economic conditions have significantly improved.

There could be no better time to build on these positive developments. Fortunately, the government seems more prepared and determined than ever to undertake ambitious reforms.

With both local and international input, a well-crafted "home-grown economic growth agenda," coordinated by renowned political economist Professor Stefan Dercon of Oxford University, is ready for immediate implementation. Domestic think tanks and academia have also developed their credible reform programmes, which can supplement some areas such as taxation and exports.

Reforms are never without challenges, but history shows that those who take bold steps often achieve lasting success. For the first time, we have developed a comprehensive package that addresses multiple facets of the economy. These reforms are interdependent, and their collective implementation can create a synergistic effect, leading to sustainable growth. One major reform being considered is the shift towards export-led growth. Historically, our policies have always favoured import substitution, and since 2008, we've doubled down on that approach and reversed all gains achieved over the previous 10 years of reforms.

Unfortunately, it was from that point onwards that we began to significantly lag behind regional neighbours in all key economic indicators, with our exports stagnating ever since. A strategic pivot from import substitution to export-led growth could enhance competitiveness, spur innovation, and boost productivity.

Additionally, this shift could position us to capitalise on industries relocating from China. By moving away from subsidising inefficient industries and broadening import sources, we can create a more dynamic economy.

To ensure a fairer market environment, no industry should be permitted to receive more than 20% tariff protection. Implementing this measure would not only create a more level playing field but also help diversify Pakistan's limited export portfolio. This shift may face opposition from some rent-seekers but more enlightened industrialists should welcome it as it will enable them to utilise more efficient capital goods and better quality inputs. It would also greatly benefit small and medium enterprises to source their raw materials and intermediate goods at competitive prices.

Concerns about potential revenue losses are likely overstated. Experience from other countries, as well as Pakistan's own brief history of reforms from 1997-2002, indicates that such changes often lead to significant revenue increases and reduction in smuggling. A recent study by the Pakistan Institute of Development Economics (PIDE) using computational models, validated by the UK Department of Trade, suggests that the removal of all regulatory/additional duties and lowering of tariffs should result in net gains of Rs17 billion in customs duty in the first year of reforms, rising sharply to Rs188 billion within three years.

There are also some concerns that liberalising imports could potentially widen the trade deficit. However, past experiences indicate that attempts to curb the trade deficit by imposing higher import taxes backfired everytime, leading to an even larger deficit. This is because import taxes indirectly function as taxes on exports, hampering trade balance improvements. Luckily, at present, we have a window of opportunity. With oil accounting for 30% of import bill, the recent steep decline in Brent crude prices, from $87 per barrel in July to $72 in September, provides considerable relief. This reduction could help mitigate any adverse impact on the trade deficit.

Being under the IMF programme will help ensure that the government does not start placating powerful sectors who may oppose reforms. The government should not hesitate in hiring talented people from the private sector to implement the reform agenda. If it is able to implement its home-grown economic growth agenda over the next three to four years, it will make significant strides towards higher growth. Indeed, this is the only way forward for reducing poverty, which has been climbing during all these years of protectionism and ill-conceived economic policies.

The writer is a member of the PM Committee on Tariff Rationalisation for

Export-led Growth. Previously, he has served as Pakistan's ambassador to WTO and FAO's representative to the United Nations