Pakistan must continue to strengthen reforms despite COVID-19
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PTI came into power on the back of a transformative agenda that promised a combination of policy and administrative reforms in Pakistan with the objective of eliminating deeply embedded structural inefficiencies in both the public and private sectors.
Prime Minister Khan envisioned cutting a path towards an Islamic welfare state that would provide much needed support to society’s most vulnerable members. This was in large part to be funded by a progressive tax regime within a business friendly and competitive economy.
However, many of the ambitious goals have had to be delayed since the macroeconomic challenges inherited by his government required PM Khan’s finance team to focus exclusively towards monetary and fiscal measures to stabilize the economy in the first eighteen months. Entering into IMF’s Extended Fund Facility (EFF) program required having to correct the previous government’s misaligned combination of loose monetary policy and supporting an overvalued exchange rate.
The structural reforms under EFF have been politically difficult but have borne results. For example, adopting a flexible, market-determined exchange rate mechanism resulted in the Pakistani Rupee depreciating by 30 percent and fuelled inflationary pressures, but it also helped boost exports and bolster international reserves. In order to narrow fiscal imbalances and maximize revenues, the government has simplified tax laws and procedures, and broadened the tax base through filer registration and documentation. These measures combined with public spending austerity were successful as the federation recorded primary fiscal surplus in the first quarter of the current fiscal year after several years of deficit.
The recent collapse in global oil prices will also help Pakistan’s balance of payments by as much as $8bn, although some of this is likely to be offset by a fall in remittances from expatriate Pakistanis working in oil-exporting Gulf countries.
Javed Hassan
The IMF acknowledged the progress made in advancing reforms and pursuing sound economic policies. It noted in its latest EFF staff review that Pakistan had achieved all economic targets and met all performance criteria. However, this good work could be jeopardized by the unexpected and monstrous challenges brought about by the coronavirus pandemic. The economic outlook in the near-term has significantly deteriorated and remains highly uncertain over the next couple of years. The Pakistani Rupee has fallen from the pre-COVID level of 154 to 164 against the US dollar, and the benchmark stock market index, KSE100, declined by over 25 percent.
Pakistan’s GDP is forecast by the IMF to contract by as much as 1.5 percent in 2020, and growth is likely to remain modest in the first half of 2021. As well as reduced GDP growth expectations, the next couple of years could see reductions in estimates for tax collection, exports growth, inward remittances and investments. Therefore, EFF performance targets will need to be adjusted. The Fund has indicated its willingness to do so as long as Pakistan continues to demonstrate its commitment to the reform process.
To address the economic impact of Covid-19, the IMF approved the disbursement of US$1.386 billion under the Rapid Financing Instrument. It stated that its support will help “provide a backstop against the decline in international reserves and provide financing to the budget for targeted and temporary spending increases aimed at containing the pandemic and mitigating its economic impact.”
With its inclusion in the G20’s one-year debt standstill for developing countries and ongoing negotiations with multilateral lenders, it is expected that repayment of as much as US$12bn of Pakistan’s external debt will be postponed till June 2022. The recent collapse in global oil prices will also help Pakistan’s balance of payments by as much as $8bn, although some of this is likely to be offset by a fall in remittances from expatriate Pakistanis working in oil-exporting Gulf countries.
While the coronavirus pandemic is likely to significantly deteriorate near-term growth prospects and the government’s fiscal position, the offsetting factors of external debt repayment standstill, oil price collapse, and support from multilateral institutions provides the government an opportunity to renew its commitment to the reforms in line with its own vision of good governance and an open and business friendly economy. Moreover, since much of the donor support received in this crisis is predicated on Pakistan entrenching reforms, this should be an imperative.
Recent reports commissioned by the government on the sugar and wheat sectors and the Independent Power Producers highlight how state subsidies and sovereign guarantees to large swathes of the economy have entrenched rent seeking within the system, and depressed the overall competitive environment. In order to enhance productivity and growth, the role of the public sector has to be limited to only addressing market failures. Where targeted interventions are inevitable to support an activity, it must be ensured that these are for a limited period only.
Finally, as part of the package to address the crisis, tariffs on key medical supplies and other crucial COVID-19 products have been removed since import restrictions increase costs and potentially could cost lives. Pakistanis are also exporting protective gear; for example, masks are being produced with specialized material coming from China. Beyond liberalizing imports of COVID-19 related essentials, Pakistan must take advantage of rapid growth of digital trade that enables services and goods to be provided to consumers by distant suppliers. This will require that tariff structure be simplified by reducing if not eliminating them altogether for inputs such that Pakistani entrepreneurs and the economy generally is much more globally integrated than it presently is.
*Javed Hassan is a graduate of Imperial College London and an MBA from London Business School. He is an investment banker who has worked in London, Hong Kong, and Karachi. Twitter: @javedhassan.
