Pakistan adrift without a compass: Structural reforms put on ice

The contours of the government’s economic vision paint a picture of policymaking adrift, without a compass, tooting imaginary foreign investments to create a mirage of an economic turnaround. The multiple crises that Pakistan faces today are perhaps more profound than at any time in its history. The administration’s response has been a proliferation of committees. 

There are three officially notified committees tasked with developing economic policies. Two focus on the so-called “homegrown economic development plan,” and the third is the Economic Advisory Committee (EAC), whose members represent large business groups. The “Homegrown Economic Development Plan” committee’s recommendations will be led by Professor Stefan Dercon of Oxford University. While drawing on international expertise is commendable, it is ironic that the government could not find a sufficiently competent local expert to steer the charting of supposedly homegrown policies.

From the statements by the Prime Minister and his cabinet, and the emphasis on the Special Investment Facilitation Council (SIFC), the strategy for economic revival seems to rely primarily on further borrowing from multilateral institutions and hoping for investment flows from Gulf countries and China. There is little indication that the government plans to implement fundamental reforms to dismantle the structures underpinning an economy plagued by rent-seeking, diminishing per capita GDP, and the lowest productivity growth over the last three decades among regional peers.

The proposed budget for the fiscal year 2024-25 reinforces the impression of “business as usual” with little intent to reduce the government’s footprint. Current expenditure is budgeted to increase by a massive 29 percent from the previous year to PKR17.203 trillion. Public sector pay is to increase by 25 percent for grades 1 to 16, and 20 percent for higher grades. Including a 15 percent rise in pensions and applying similar increments across the provinces is estimated to balloon the public sector pay and pensions bill by PKR1.5 trillion. Despite research showing that public investment has failed to provide the desired multiplier effect on economic growth, an all-time high PKR1.4 trillion is allocated for the Public Sector Development Programme (PSDP). The thin allocation to a large number of projects leads to time and cost overrun resulting in the development schemes becoming economically unviable.

No policy measures have been initiated to catalyze the private sector’s self-discovery process toward greater efficiency and global integration. 

Javed Hassan

Much of the burden for achieving fiscal balance has been placed on raising more revenue, but the limited reform measures are incremental rather than transformational. The budget makes token gestures at broadening the tax base, while the bulk of the direct tax burden falls on the corporate sector and the urban middle classes, comprising salaried individuals, professional partnerships, or sole proprietors. It is estimated on average the tax bill for salaried employees will increase by 20 percent. Increasing the petroleum development levy (PDL) also demonstrates continued reliance on regressive indirect taxation for additional revenue.

The sense of unfairness is exacerbated by the fact that many other affluent segments of society with vast amounts of wealth that generate considerable income, such as agriculture, property, and retail sectors, together comprising over 45 percent of the GDP will continue to remain untouchables and contribute only a nominal amount in taxes. 

No policy measures have been initiated to catalyze the private sector’s self-discovery process toward greater efficiency and global integration. The policy framework does not incentivize the exit of less productive enterprises or the reallocation of resources toward more productive and internationally competitive sectors. The Competition Commission of Pakistan’s numerous rulings remain unenforced due to legal hurdles, symptomatic of large business groups’ influence in preventing the dismantling of uncompetitive practices.

Notwithstanding PKR1.19 trillion allocated for power sector subsidies, consumers and businesses will continue to endure unaffordable electricity bills. To alleviate the households and improve industry competitiveness, the power sector needs to be placed on a sustainable and affordable trajectory by renegotiating Independent Power Producers (IPPs) capacity payments. This requires Chinese banks to agree to restructure loans for IPPs, which they are unlikely to do without Pakistan’s other external creditors also agreeing to restructure their loans. This, in turn, would necessitate domestic debt restructuring. Policymakers seem reluctant to undertake the difficult but possibly necessary step of debt restructuring.

However, failing to implement fundamental reforms addressing underlying structural deficiencies— such as chronic fiscal insolvency, an external sector liquidity crunch, and low productivity in the real sector— exposes the economy to multiple vulnerabilities. The lack of fiscal space for human capital development, essential for improving economic productivity, will hinder reversing the trend of low domestic and external investment. With the lack of investments and import compression continuing to constrain the growth necessary to provide gainful employment to the burgeoning youth population, Pakistan will continue to stumble from crisis to crisis.

- Javed Hassan has worked in both the profit and non-profit sectors in London, Hong Kong, and Karachi. He tweets as @javedhassan. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Arab News.