Must overcome the human capital crisis, fiscal imbalances and energy inefficiencies
Pakistan’s economy has shown some resilience in the face of the worst poly crises resulting from poor policy choices, combined with a series of recent shocks in the form of pandemic/natural disasters and adverse global conditions causing a slow-down in growth, increase in poverty and even brought the country to the brink of default. Moreover, human development outcomes (health, education) remain at a low level while per capita income growth has been declining in the face of low productivity and high fertility. These challenges call for stringent reforms across the board but for that to happen, restoring political stability is of utmost importance so that all stakeholders are on the same page. Any quick fixes and further external financing may prove to be detrimental to the economy. Pakistan is a fairly young state to have deep-rooted issues impeding its development for too long and it could only go up from this abyss if it could overcome human capital crisis, fiscal imbalances and energy inefficiencies.
Prior to attracting any foreign investment, Pakistan needs to put the house in order by investing in its manpower development, education systems and infrastructure but the lack of fiscal space creates impediments. Expenditures in the current fiscal framework account for a substantial 19.7 per cent of the GDP, while revenue generation lags at only 10.5 per cent of GDP. A mere 2.5 per cent of GDP is earmarked for developmental initiatives. The government should prioritise expanding the tax base instead of increasing tax rates. It is crucial to integrate individuals across income levels and the informal sector into the tax system. Moreover, the allocation of undue subsidies and tax incentives to cartels should be restrained.
By discontinuing these exemptions and concurrently broadening the tax base, the government may improve the tax-to-GDP ratio from its current 10.5 per cent to 13 per cent in the short term, with a potential of reaching 18 per cent in the long run. State-owned enterprises (SOEs) present a persistent fiscal challenge, with the top 14 SOEs registering losses of Rs458 billion and accumulating circular debts that strain the national economy. Leveraging a private-public partnership approach and partial privatization can enhance operational efficiency and reduce fiscal deficits. Elevated interest rates have further exacerbated operational costs, while high inflation has eroded purchasing power, contributing to a projected poverty rate of 37.2 per cent and a 38 per cent decline in purchasing power, driven by soaring food costs in 2023. Implementing the Treasury Single Account and phasing out subsidies has the potential to save over Rs850 billion in the short term and more than Rs1.4 trillion in the long term.
Additional challenges
The cost-push factors (a massive increase in gas tariff, ongoing hikes of electricity charges and collection of petroleum development levy on petroleum products), combined with growing political uncertainty are bound to hurt the entire export sector, particularly goods exporting industries. This will affect individual businessmen and all small and medium enterprises — the backbone of the domestic economy — and an essential part of the supply chain of export-oriented industries. Any gain achieved in goods and services export proceeds would be marred by an increase in the cost of doing business. Energy sector inefficiencies need to be addressed faster and more consistently, as they have long been a drain on public resources. Recent tariff increases have helped limit losses while protecting poor consumers to some extent, but large distribution and transmission losses, combined with high generation costs have to be reduced to put the sector on a sustainable footing. Pakistan has access to some of the cheapest hydropower and solar resources. Leveraging these will require investment, which will only come if long-standing issues in the distribution and transmission systems are addressed, notably through more private participation.
The agriculture sector in Pakistan has significant potential for foreign direct investment (FDI) and various factors such as food security, availability of uncultivated land spanning millions of acres, cost-effective workforce and Pakistan’s conducive agro-climatic conditions to grow a wide range of crops make a strong case for promoting FDI in the agriculture sector. Such investments in agricultural and industrial production could lead to job creation, increased exports and generation of additional tax revenues. Corporate farming is one area that could offer viable investment prospects but to be able to reap its benefits, Pakistan needs to focus on agricultural research and advanced seed production technologies. This, in turn, will result in enormous seed imports of agronomic and horticultural crops driven by farmers’ increased adoption of high-yielding/hybrid seeds. This initiative will also enhance the country’s crop productivity and farm incomes by ensuring the availability of affordable, high-yielding seeds.
A challenging business environment discourages investment. By providing a competitive level playing field, cutting bureaucratic red-tapism and increasing policy consistency through coherence across federal and provincial governments, the core issues behind low investment and declining productivity growth could be addressed. Pakistan has a lot of potential to bounce back from where it is currently. This year could prove to be a turning point for Pakistan if the concerned quarters abandon playing political musical chairs and focus on implementing tough structural reforms.