Over the last several months, global lenders, IFIs, and credit rating agencies have been forthcoming in their views on the existential threat facing Pakistan’s economy as its external and fiscal imbalances continue to constrain its ability to import essential goods and make foreign debt payments.
Their message of urgent reforms is often punctuated with their worry over the ruling and business elites’ proclivity to digress from the path and return to their profligate policies as soon as international reserves improve and the external sector stabilizes.
Although the current government has repeatedly pledged to implement reforms for a sustainable economic revival, a definitive policy direction is missing. Some progress has been made to privatise loss-making PIA, for instance, but the government is yet to spell out a holistic policy for scores of other SOEs.
Market forecasts for 2024 are not strong, averaging at estimations of two percent growth—the fourth lowest after Myanmar, Azerbaijan, and Nauru with modest economic recovery.
The specter of inflation looms large, recording 29.7 percent in December 2023 and is expected to stay above 20 percent in 2024, again the highest among 46 countries and the fifth lowest for FY 2024–25. Unemployment and poverty rates have surged, and foreign reserves are under pressure due to the increasing trade deficit.
Pakistan is in a stagflation phase for a prolonged period, and the World Bank too said last week that another 10 million more people might fall into the poverty trap because of any adverse shocks. About 98 million people are already living a poor life in Pakistan.
The United Nations Development Program Integrated SDG Insights Report of 2023 showed Pakistan on track to achieve only 35 out of 169 Sustainable Development Goals targets. If Pakistan is to reduce the number of people living in poverty from 6.1 million to 3.9 million by 2030, it will need a comprehensive ‘SDG Push’ comprising an integrated set of high-intensity economic reforms and accelerator pathways, especially in the areas of taxation and revenue, sustainable debt management, and climate finance.
Achieving a growth target higher than 2 percent will require not only maintaining current fiscal policies but also a political consensus to undertake long-overdue structural reforms. It will require a painful but necessary shift in the national economic and financial policy paradigm—from one that is overburdened by and mainly servicing the debt to a model of resilient and inclusive growth that is driven by equity-based revenue generation, innovative financing (SDG investments and climate capital), competitive productivity, and strong measures of transparency.
To survive, the government is raising taxes at the cost of savings, consumption, and citizens’ welfare. It is necessary to audit the entire economic structure, analyzing what works and what does not, and removing all inefficiencies. Without it, no policy is effective since these inefficiencies are deeply embedded in the present model.
This long, continuous process needs improvement at each stage but must be done as soon as possible. Secondly, create state institutions that ensure the rule of law and accountability. It also requires a strong political commitment, despite the high political costs, to the dominant state institutions that maintain the status quo.
They may prefer to keep their present position. But if they are concerned about the country’s development, they must not create barriers to institutional reforms. Thirdly, we require market-led reforms that facilitate the growth of the private sector in the market.
The private sector is the main driving force behind economic development, job creation, tax revenue, lower inflation, and an improved standard of living for citizens. A stronger market paves the way for a stronger economy. My fourth suggestion is about industrial policy.
It doesn’t involve creating a further government footprint in the market while eliminating some. Its economic justification is simple: internalizing externalities to capture learning and innovation, and offsetting those externalities that cause market failure.
Its objective is to promote industrial development to improve productive capacity and diversification in the economy and to facilitate some industries to gain a comparative advantage in the local and international markets. It will ultimately increase the market size and boost the export sector.
Regarding industrial policy, the most influential economist, Dani Rodrik, warns, “The kind of discipline that’s required is the discipline of monitoring, figuring out whether what you’re doing is working, and being able to move away from mistakes when things aren’t working. Successful industrial policy is not about picking winners; it’s about letting the losers go. Some of the worst cases of industrial policy are when you keep putting good money after bad.”
Therefore, before starting the industrial policy, Pakistan must ensure its policymakers and political economy are efficient enough to maintain that discipline Rodrik advises. Otherwise, a new industrial policy will create new evils.
Almost all industrialized countries, including East Asian economies, have achieved economic success due to the abovementioned factors. These are not easy to implement and require strong political commitment, which is why not all countries are successful economically. However, the evidence confirms that these policies work and have contributed to the economic success of many countries.
Copyright Business Recorder, 2024
Will policymakers heed the advice?
37
1
27.04.2024
Over the last several months, global lenders, IFIs, and credit rating agencies have been forthcoming in their views on the existential threat facing Pakistan’s economy as its external and fiscal imbalances continue to constrain its ability to import essential goods and make foreign debt payments.
Their message of urgent reforms is often punctuated with their worry over the ruling and business elites’ proclivity to digress from the path and return to their profligate policies as soon as international reserves improve and the external sector stabilizes.
Although the current government has repeatedly pledged to implement reforms for a sustainable economic revival, a definitive policy direction is missing. Some progress has been made to privatise loss-making PIA, for instance, but the government is yet to spell out a holistic policy for scores of other SOEs.
Market forecasts for 2024 are not strong, averaging at estimations of two percent growth—the fourth lowest after Myanmar, Azerbaijan, and Nauru with modest economic recovery.
The specter of inflation looms large, recording 29.7 percent in December 2023 and is expected to stay above 20 percent in 2024, again the highest among 46 countries and the fifth lowest for FY 2024–25. Unemployment and poverty rates have surged, and foreign reserves are under pressure due to the increasing trade deficit.
Pakistan is in a........
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