How Can Pakistan Fix It's Economy? | Haroon Sharif | | Dawn News English

Summary

The World Bank and IMF have conducted reviews on Pakistan's economy, projecting a growth rate below potential at around 2% for the World Bank and 2.7% for the IMF. Key challenges highlighted include a narrow tax base, high inflation, and a significant fiscal deficit. Recommendations focus on expanding the tax net, managing debt, and addressing structural issues to boost investment and export competitiveness. The report emphasizes the need for fiscal discipline, policy consistency, and private sector involvement for sustainable economic growth.

Takeaways

• 🌐 International institutions like the World Bank and IMF conduct periodic reviews of Pakistan's economy.
• 📉 Pakistan's economic growth is projected to remain below potential, with estimates slightly below 2% to 2.7%.
• 🏦 The banking sector's profits and a better cotton crop are expected to drive economic growth.
• 💹 Macroeconomic stability is a concern due to a narrow tax base, with tax to GDP ratio around 10%.
• 📈 Inflationary pressures are high, with IMF suggesting a slight decrease to mid-20% in the next financial year.
• 💸 A large fiscal deficit is a key risk, with the budget deficit at 7.8%, exceeding IMF's recommended limit.
• 💵 Pakistan's debt profile is stressed, with almost 100% of budgetary resources spent on debt servicing.
• 👥 The young population requires investment in sectors like health, education, and skills development for sustainable growth.
• 🚧 Structural reforms are critical for Pakistan's economy, including fiscal policy, expenditure management, and power sector efficiency.
• 🌱 The need for a shift towards a competitive export base and value-added sectors for long-term economic growth.

Q & A

What is the frequency of the World Bank's economic review for Pakistan?

The World Bank conducts a six-monthly review called the Pakistan Economic Development update.

What is the projected economic growth rate for Pakistan according to the World Bank and IMF?

The World Bank projects Pakistan's growth to be slightly below 2%, while the IMF suggests it might touch 2.7% in the year 2023-24.

What factors are expected to drive Pakistan's economic growth as per the reports?

The banking sector's profits and a better cotton crop are expected to drive Pakistan's economic growth.

What is the main challenge to macroeconomic stability in Pakistan as highlighted by the reports?

The main challenge is a narrow tax base, with sectors like retail, property, and agriculture not being effectively taxed, resulting in a tax-to-GDP ratio of around 10%.

What does the IMF suggest regarding Pakistan's inflationary pressures?

The IMF suggests that inflationary pressures might slightly decrease to the mid-20% range in the next financial year.

What is the current budget deficit percentage of Pakistan, and how does it compare to the IMF's recommendation?

Pakistan's current budget deficit is around 7.8%, which is 4% higher than the IMF's recommended range of 4-5%.

How does the high fiscal deficit impact Pakistan's ability to finance its debt?

The high fiscal deficit means there is a significant financing requirement to cover it, which can lead to increased borrowing and debt servicing costs, crowding out private sector credit and potentially leading to inflation.

What percentage of Pakistan's budgetary resources is spent on debt servicing, and what does this indicate?

Pakistan is spending almost 100% of its budgetary resources on debt servicing, indicating a debt-stressed country status.

What are the key structural reforms suggested by the IMF and World Bank for Pakistan's economy?

The key structural reforms suggested include expanding the tax net, reducing the size of government and saving expenditures, and moving towards a competitive export base.

How does the current economic situation affect Pakistan's ability to invest in sectors like health, education, and skills development?

The current economic situation, with high fiscal deficits and debt servicing costs, leaves little room for investment in crucial sectors like health, education, and skills development.

What are the mega constraints that Pakistan needs to address to improve its economic situation?

The mega constraints include political instability, lack of capability in bureaucracy for policy formulation, deteriorating law and order, and the need for structural policy shifts towards deregulation and private sector-led growth.

Outlines

00:00

🌐 Economic Reviews and Growth Projections for Pakistan

The paragraph discusses the periodic reviews conducted by international institutions like the World Bank and IMF on Pakistan's economy. The World Bank's six-monthly review, the Pakistan Economic Development Update, and the IMF's review under the standby arrangement both suggest that Pakistan's economic growth is below potential, with projections around 2% by the World Bank and possibly 2.7% by the IMF for the fiscal year 2023-24. Growth is expected to be driven by the banking sector's profits and a better cotton crop. However, both institutions highlight significant challenges and risks to macroeconomic stability, particularly a narrow tax base, with the tax-to-GDP ratio at about 10%. The IMF suggests expanding the tax base, and both institutions note the high inflation rate, with the IMF predicting a slight decrease to mid-20% in the next financial year. Key risks include a large fiscal deficit, with expenditure control and debt management being critical issues. The last government's heavy borrowing from domestic banks led to increased debt servicing and a squeeze on private sector credit, contributing to inflation. The paragraph emphasizes the need for structural changes to improve economic stability and growth.

05:01

📉 Fiscal Deficit, Taxation, and Economic Challenges in Pakistan

This paragraph delves into Pakistan's fiscal deficit and the urgent need to broaden the tax base. The IMF and World Bank recommend bringing more sectors and individuals into the tax net, ending exemptions, subsidies, and zero ratings to increase tax collection. The paragraph also addresses the need for structural changes to boost tax collection and the importance of managing the fiscal deficit to ensure funds are available for development in areas like health, education, and infrastructure. The challenges of a large young population, the low investment to GDP ratio, and the necessity of attracting foreign investment are highlighted. The paragraph also discusses the risks of prolonged recession due to structural economic issues, political instability, and the need for consistent economic policymaking. It emphasizes the importance of improving law and order and addressing terrorism risks to create a stable environment for growth. The paragraph concludes by urging a focus on fiscal policy, expenditure management, and structural reforms to move towards a competitive export base and reduce the government's size to save costs.

10:02

🔄 Structural Shifts and Prioritization for Pakistan's Economic Growth

The final paragraph focuses on the need for structural shifts in Pakistan's economy to achieve sustainable growth. It discusses the importance of reducing the government's size, reviewing federal and provincial finances, and addressing inefficiencies in the power sector. The paragraph underscores the necessity of moving towards a competitive export base and stopping subsidies for unproductive sectors. It also emphasizes the need for the government to take a backseat and allow the private sector to lead, suggesting deregulation as a means to stimulate growth. The paragraph concludes by recommending that the incoming government prioritize power sector reforms, export competitiveness, and fiscal reforms to signal stability and attract investment. It also warns of future challenges like climate change and the importance of self-reliance and deregulation to overcome economic constraints and achieve growth.

Keywords

💡International Institutions

International institutions such as the World Bank Group and the International Monetary Fund (IMF) play a crucial role in the global economy by providing financial assistance and policy advice to countries. In the context of the video, these institutions conduct periodic reviews of their client countries, including Pakistan, to assess economic performance and stability. The video discusses the reviews conducted by these institutions, highlighting Pakistan's economic growth, challenges, and risks.

💡Economic Growth

Economic growth refers to the increase in a country's output of goods and services over time, typically measured by the Gross Domestic Product (GDP). The video mentions that Pakistan's growth is projected to remain below its potential, with the World Bank forecasting slightly below 2% and the IMF predicting it might touch 2.7%. This slow growth is a concern as it indicates that the country's economy is not performing at its full capacity.

💡Macroeconomic Stability

Macroeconomic stability refers to the overall health and predictability of a country's economy, including factors like inflation, fiscal balance, and exchange rates. The video discusses the challenges and risks to Pakistan's macroeconomic stability, particularly the risk of a narrow tax base and the inability to tax sectors like retail, property, and agriculture effectively.

💡Tax to GDP Ratio

The tax to GDP ratio is a measure of the proportion of a country's tax revenue relative to its GDP. A higher ratio indicates a more effective tax collection system. The video highlights that Pakistan's tax to GDP ratio remains around 10%, which is low and suggests a need for tax reforms to broaden the tax base and increase revenue.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video notes that the IMF predicts inflationary pressures in Pakistan might slightly decrease to the mid-20% range in the next financial year, which is still high compared to other South Asian countries and poses a significant risk to the economy.

💡Fiscal Deficit

A fiscal deficit occurs when a government's expenditures exceed its revenues. The video discusses Pakistan's fiscal deficit, which is around 7.8%, significantly higher than the IMF's recommended range of 4 to 5%. This high deficit indicates that the government is spending beyond its means, which can lead to economic instability.

💡Debt to GDP Ratio

The debt to GDP ratio is a measure of a country's debt in relation to its economic output. A high ratio can indicate that a country is at risk of not being able to repay its debt. The video mentions that Pakistan's debt to GDP ratio is nearing the red line of 82%, suggesting that the country is under significant debt stress.

💡Domestic Banks

Domestic banks are financial institutions that operate within a country's borders. The video explains that the previous government in Pakistan borrowed heavily from domestic banks to finance its deficit, leading to increased debt servicing costs and a squeeze on private sector credit, which in turn slowed down business activities and contributed to inflation.

💡Structural Reforms

Structural reforms refer to changes in the fundamental structures of an economy, such as tax policies, labor markets, and regulations, to improve economic performance and stability. The video emphasizes the need for Pakistan to undertake structural reforms, particularly in expanding the tax net, reducing the size of government, and deregulating sectors to promote private sector growth.

💡Investment to GDP Ratio

The investment to GDP ratio measures the percentage of a country's GDP that is invested in physical and intangible capital assets. The video points out that Pakistan's investment to GDP ratio is low at around 14%, which is a concern because it limits the country's ability to grow and develop its economy.

💡Export Competitiveness

Export competitiveness refers to a country's ability to produce goods and services that can be sold on the international market at competitive prices. The video discusses the importance of improving Pakistan's export competitiveness as a means to boost economic growth, suggesting that the country needs to focus on value-added agriculture, information technology, and textiles.

Highlights

International institutions like the World Bank and IMF conduct periodic reviews of client countries.

World Bank's six-monthly review is called Pakistan Economic Development update.

IMF's review is conducted under the program and article signed with Pakistan.

Pakistan is currently under a standby arrangement with the IMF.

Both institutions predict Pakistan's growth to remain below potential.

World Bank forecasts a growth slightly below 2%, while IMF predicts 2.7%.

Growth drivers include banking sector profits and a better cotton crop.

Reports highlight challenges and risks to Pakistan's macroeconomic stability.

Pakistan has a narrow tax base, with a tax to GDP ratio around 10%.

IMF suggests expanding the tax base, echoed by the World Bank.

Inflationary pressures might slightly decrease to mid-20% in the next financial year.

Key risks include a large fiscal deficit, with expenditure remaining high.

Pakistan's budget deficit is around 7.8%, exceeding IMF's recommended 4-5%.

Debt to GDP ratio is nearing the red line of 82%.

Previous government's domestic borrowing led to high interest rates and debt servicing.

Government borrowing crowded out private sector credit, slowing business activities.

Inflation is a result of continuous borrowing without sufficient tax collection.

Pakistan is a debt-stressed country, spending almost 100% of budgetary resources on debt servicing.

Structural changes and broadening the tax net are suggested to increase tax collection.

Pakistan has a large young population, requiring investment in health, education, and skills development.

Investment to GDP ratio is low at 14%, and needs to be increased for economic growth.

Pakistan should take advantage of regional growth, particularly from China and India.

Political instability and inconsistent economic policies are fundamental flaws.

Capability of bureaucracy to formulate competitive policies is lacking.

Law and order deterioration and terrorism risks can destabilize the country.

Pakistan needs to address fiscal site, expenditure management, and fiscal policy.

Power sector inefficiencies and circular debt need to be fixed.

Structural shift towards a competitive export base is necessary.

Government role should be reduced, and private sector involvement increased.

Prioritize power sector, export competitiveness, and fiscal reforms.

Pakistan needs to stand up on its own feet, open up investment, and deregulate.

Transcripts

[Music]

first of all explain that the

international institutions like the

World Bank group and international

monetary fund they do periodic regular

reviews of their client countries so

World Bank does a six-monthly review

called Pakistan Economic Development

update and the IMF does a you know a

review under the program and article for

you know which we have signed with them

we are currently under a standby

arrangement

so I will very quickly see what they are

saying although what they are saying is

mostly a repeat of many of us which we

have been saying but they are they are

doing it you know in one report form so

if I just summarize so you know the both

institutions think that Pakistan's

growth will remain way below our

potential uh basically World Bank says

that it will be slightly below 2%

whereas IMF think that Pakistan's you

know economic growth in the year 23 24

might touch

2.7% and what will drive this growth is

basically you know that banking sector

has good profits and there is a cotton

crop which looks better and that can you

know yield some of the returns similarly

when I look at you know this analysis uh

this report both reports highlight the

challenges and risks to Pakistan

particularly on macro economic stability

what we mean by macroeconomic stability

is that there is a huge risk of a very

narrow tax base and Pakistan has not

been able to tax the sectors like retail

and property and agriculture so

Pakistan's tax to GDP ratio remains

around 10% so IMF also suggest that to

expand it and World Bank also suggests

that to expand it whereas you know both

institutions particularly IMF thinks

that the inflationary pressures might

slightly go down to Mid 20% in the next

financial year that is relatively good

news but still having 26% inflation is a

very high number for Pakistan as

compared to other South Asian countries

so what are the key risks for Pakistan

what we need to understand from these

reports the risk is you know a very

large fiscal dep Def and we need to

understand that the budget deficit means

what what happens is that if Pakistan

does not control it expenditure

expenditure remains very high and the

budget deficit goes around

7.8% that is about 4% more than the

prescribed recipe of IMF which says keep

it between 4 to 5% now this additional

deficit how it will be financed there

will be a huge financing requirement to

pay for it by

7.8% it actually means something like 8

trillion rupees whereas our total you

know tax collection Target is around 9

trillion rupees so if Pakistan spends

you know our tax collection and other uh

uh inflows into paying our debt

servicing uh we are are not left with

much we cannot borrow much because IMF

says that the uh debt to GDP ratio is

almost touching very high at the red

line of

82% what the last government did was

that since they could not borrow

externally because the IMF program was

not agreed they started borrowing

heavily from domestic Banks it had two

repercussions because of high interest

rate Pakistan's debt servicing went up

exponentially second is that you know

private sector credit squeezed because

government borrowed everything

everything so the the business

activities basically slowed down and

this is the root cause of our inflation

because when government continues to

borrow and they don't have enough tax

collection and economic activity that is

that results into you know things

getting expensive for people because

government tries and extract money from

people from indirect taxes and also the

interest rates go up and the prices of

Commodities you know do not get stable

now with these finding the second big

risk you know which IMF has indicated uh

is Pakistan's you know debt profile and

debt management because Pakistan is one

of the debt stressed countries debt

stressed country means that a country

you know which spends more than 50% of

its budgetary resources in servicing the

debt now Pakistan is spending almost

100% now the question is can we cut down

expenditure meaningfully and you know

basically bring the deficit down at the

same time can we expand the tax net to

these sectors which have been indicated

Time and Again by many of us and now IMF

is saying World Bank is saying that you

know bring taxation to everybody who is

earning you cannot give exemptions you

cannot give subsidies you cannot do zero

ratings you know Pakistan basically has

been

the time to bring them in the tax net

and basically they think that 80% of tax

collection can go up if we do a

structural change and bring these new

sectors you know in the tax net third

thing which is very critical for

Pakistan is that we have a very large

young population now what happens is

that if fiscal deficit remains out of

control where would the money come to

develop This Nation health education

skills development M you know export

competitiveness we need to invest in two

three sectors like you know productivity

needs to go up in the agriculture sector

we need to have value addition in the it

sector now research and you know the

infrastructure money where would this

come from our investment to GDP ratio is

very low which is around 14% And it is

highly recommended that we basically you

know take Mayers and open up Pakistan

for investors to you know have some

inflows preferably in dollar terms to

take this so investment is critical

export competitiveness is critical now I

will go to actually we can go on in

these numbers what are the you know key

structural risks to Pakistan's economy

because of that Pakistan remains in a

prolonged recession but what we need as

Pakistan is to look at it is that what

is stock in us what is The Binding

constraint that we have not been able to

basically take that path with lots of

other Asian countries have taken and

basically are growing you know at above

7% for the past 10 years or so we should

also be cognizant that the future Global

growth is likely to come from Asia and

particularly driven by two countries

which is China and India and thirdly

East Asia now Pakistan should take

advantage of this you know growth around

us but where are we stuck now that's a

fundamental question that Pakistan has

failed to you know change the structure

of economy which is not good enough to

actually grow at a level that 2 140

million you know population can have

decent job and economic opportunities in

this country so what we are struggling

at the moment is obviously everybody

would say one is our political

instability

continued political instability that

leads to a big gap in economic

policymaking and that Gap also leads to

inconsistencies in policy so to me it's

the fundamental flaw that an

inconsistent policy is not acceptable to

investors second part basically if you

look at it is the capability capability

of our bureaucracy to actually formulate

cutting Edge policies we have not

invested in bureaucracy to make policies

which are in you know can compete with

Cambodia and Bangladesh and Vietnam and

other Progressive you know Asian Nations

that is where we are lacking because we

keep on doing projects we keep on doing

administrative Mayers but we fail to

bring you know a structural policy shift

here uh third thing obviously is that

what investors are looking at uh is the

deterior duration in Law and Order and

you know some of the risks of terrorism

coming in the Border regions because

that can destabilize a country in a big

way now these are some of the mega

constraints which Pakistan can only

address if we have a stable government

we have a legitimate government and we

have a team which is qualified which has

exposure which has seen the other

countries and that will give confidence

to the market you have seen because of

administrative Mayers rupee dollar

parity is you know changing uh towards

our favor because lots of people were

taking advantage of we capacity of

regulatory institutions what Pakistan

needs is that we need to look at our

fault lines very clearly in light of

these reports our fault line basically

is our fiscal site which is expenditure

management and our fiscal policy where

we fail to bring you know number of

people people and sectors in the tax Deb

we need to very clearly have a policy to

cut down the size of the government and

save expenditure because the current

size is not at all feasible uh World

Bank report has also indicated to review

basically look at the Federation and

provincial uh finances under the

National Finance commission what happens

is that provinces get most of the funds

but they don't have the capability

so Pakistan needs to look at you know

what to pass on to provinces and

Federation should take a smaller role or

balance out these things because this is

not sustainable uh third thing is our

power sector which everybody you know

speaks about that the circular debt both

in electricity and gas uh continues to

increase because of inefficiencies

because of theft because of expensive

prod production so we need to fix that

thing as AP third key challenge for

Pakistan's structural shift is to move

towards competitive export base that

will take 5 to 10 years but we need to

stop subsidizing sectors which are un

unproductive which cannot compete in the

global economy and we need to shift

resources to Winners we need to pick

winners like value added agriculture

like information technology uh you know

like value added textiles rather than

keep on doing very basic products which

are going now these things are known but

Pakistan in my opinion cannot very

clearly thinks that the underlying risk

remains even if we manage to do

structural adjustment in the next

program which we take we will need to do

the you know inbuilt these weaknesses of

changing the structure of economy when

we say structural reforms that is

changing the structure of economy and

that is where I think one needs to take

government's role needs to be reduced we

need to give more role to private sector

and all by deregulating we have seen

Telecom sector we have seen banking

sector and you know some of the highways

which were you know taken out of the

traditional government control and that

basically give a decent results to

Pakistan so we need to you know take a

step back and let private sector take

the lead and finally I would say that of

priorities you cannot do everything at

least take power sector and Export

competitiveness and your fiscal reforms

as a top priority and show the world

that you can do it nobody from outside

will come and help us do it because we

have much larger future challenges like

the risk of climate change which is a

huge challenge to our agriculture or

Water Resources you know livelihoods of

the poor so Pakistan needs to stand up

on its own feet open up investment

climate so that investors feel

comfortable and also you know deregulate

from a very centralized controll State

there's far too much state in Pakistan

which actually because of lack of its

capability is a binding constraint to

our growth I would recommend these

things don't do many things do few

things uh interm government should you

know basically plan and Design coming

government should implementing under the

special investment you know uh

facilitation Council or some other

Arrangement so that a signal can go that

Pakistan is on the path of stability and

future economic growth which will be

sustainable