Pakistan’s pursuit of economic reforms

The recently published book “Pakistan’s Agenda for Economic Reforms” highlights four major linkages between governance and economy. First, weak rule of law hampers economic growth. Second, delays in legal and judicial reforms accentuate governance challenges, in turn worsening poverty and inequality. Third, lack of public administration reforms decrease efficiency and effectiveness of public expenditure. Fourth, corruption in institutions of economic governance, particularly tax administration, hurts businesses and ultimately government revenues.
These linkages are important if Pakistan is to sustain the current wave of growth in its national income. Several experts have said the dividends from improved infrastructure provided by the China-Pakistan Economic Corridor (CPEC) will remain unrealized if Pakistan does not move fast toward expediting macro-level reforms that help the competitiveness of private enterprise. Some pending structural reforms in economic governance are the key to the growth and sustainability of micro, small and medium enterprises (SMEs).
At the outset, it is important to understand how government policy can influence determinants of the competitiveness of Pakistani enterprises. These determinants include, but are not limited to, the availability and cost of capital; the availability and cost of quality labor; the private sector’s ability to innovate and manage change; and infrastructure (including energy) that reduces business costs and helps economies of scale. All these determinants of competitiveness can be influenced by good or bad legislation, policy and regulations.
A key concern of the business community is the disconnect between fiscal and trade policies. When Pakistan was trying to liberalize its trade regime and pursue free-trade agreements, there remained an anti-export bias in fiscal policy, in turn neutralizing any gains that a liberal trade regime could have rendered. The tax regime at the federal and provincial levels became more complex, with almost 13 tax authorities across the country, and all of these bodies having different compliance requirements.
The public expenditure announced for enhancing the competitiveness of SMEs, including the export development fund, is rarely disbursed in a timely and certain manner. The current government has made efforts to plug the genuine infrastructure gaps affecting the business climate, but the costs of energy and transport faced by commercial consumers are still higher than peer economies. A key outcome is that Pakistani SMEs are not graduating to become large enterprises. Furthermore, it is hard to find new names in the list of existing exporters in the country.

It is heartening to note that a structured series of public-private dialogues has recently taken place on the aforementioned issues. But to create an urgency for reform in Pakistan, think tanks, business and consumer associations, an independent media will need to work as a coalition to engage Parliament, the judiciary and the civil service for the removal of constraints to inclusive growth.

Dr. Vaqar Ahmed

All provinces should urgently conduct a regulatory impact assessment so provincial governments can have a clear idea of the cost of the regulatory burden faced by businesses. Based on this assessment, the provinces need to streamline what to regulate and how so businesses are not overly burdened with municipal, labor, trade and environmental permits.
Second, the public sector needs to help SMEs financially and technically to achieve necessary product compliance and standards certification. Pakistani enterprises are not optimally benefiting from an advantageous entry of goods in the European Union region as products by small manufacturers do not comply with the bloc’s minimum quality standards.
Third, tariff rates on imported industrial inputs, and the cost of electricity and gas faced by SMEs, should be locked for the next five years. This will bring certainty in industrial and trade policies, and give the Commerce Ministry some independence to manage export promotion initiatives.
Finally, while CPEC provides a new narrative for Pakistan’s economy, there are certain pre-requisites before it can become a game-changer. The special economic zones (SEZs) will need to be integrated with value chains in China and other neighboring countries. Furthermore, for Pakistan’s exports to increase, trade-facilitation measures (including improvements in export and import processes, particularly customs) are required. As a footnote, Pakistani SMEs can only benefit from free-trade agreements if the credit regime for SME exporters is simplified, and a culture of startups and innovation is nurtured via public policy.
It is heartening to note that a structured series of public-private dialogues has recently taken place on the aforementioned issues. But to create an urgency for reform in Pakistan, think tanks, business and consumer associations, an independent media will need to work as a coalition to engage Parliament, the judiciary and the civil service for the removal of constraints to inclusive growth.
• Dr. Vaqar Ahmed is associated with the Sustainable Development Policy Institute (SDPI). Twitter: @vaqarahmed