FeaturedNationalVOLUME 19 ISSUE # 8

In search of deep, sustained reforms

After analyzing the various economic challenges facing Pakistan, the World Bank has presented a set of recommendations to correct the situation. According to the WB, following a long period of uninterrupted decline in poverty rates, Pakistan’s economy is now facing one of its worst crises in its history.

This crisis is a result of wrong policies pursued by successive governments combined with a series of shocks, including the devastating 2022 floods and difficult global conditions. These factors caused growth to slow down, poverty to increase, and brought the country to the brink of default. Over the years, per capita income growth has declined driven by low productivity and rapid population growth, pushing Pakistan to the level of poor African countries.

To get out of this morass, the World Bank has called for “deep, sustained reforms”, a course away from short-term fixes and dependence on external financing as is the case now. Instead, the country needs to address the root causes to find a durable solution to its economic woes. To this end, Pakistan should act quickly to address its human capital crisis as exemplified by deplorable conditions in the health and education sectors. Available data shows that in Pakistan seven per cent of children die before their fifth birthday — that is multiple times higher than in neighbouring countries. Similarly, forty per cent of children under five suffer from stunted growth, and more than 50pc in poorer districts.

To bring down the stunting rates, a new policy package is needed making a shift from the traditional focus on nutrition and health only to providing wider access to clean water and sanitation, family planning services, and improved living and hygiene environments. The requisite measures should comprise a national mobilisation and behavioural change campaign and investments of close to 1pc of GDP every year.

Education is another area which calls for radical reform. As a result of a weak education system, 78pc of 10-year-old children are unable to read an age-appropriate text, while over 20 million children are out of school. More budgetary allocation is needed to strengthen the education infrastructure, plan better teacher training and finance research and development.

Agriculture is the bedrock of Pakistan’s economy but it has suffered gross neglect by successive governments. In the prevailing circumstances agricultural improvement has become all the more imperative to safeguard food security in the face of climate change and rising water scarcity. Skewed subsidy policies and government procurement and price restrictions have forced farmers to continue with low-value, undiversified farming systems and water-intensive crops.

According to the World Bank, subsidies should be directed towards research on seeds, veterinary services, irrigation, and drainage services, promoting regenerative agriculture and building integrated agriculture value chains. Such measures will result in productivity gains, boost farm incomes, and make Pakistan more resilient against climate shocks.

The energy sector is the sickest arm of the national economy. Corruption and incompetence are the hallmarks of the sector which has drained public resources. Colossal distribution and transmission losses, combined with high generation costs, have to be reduced to put the sector on a strong footing. Unfortunately, Pakistan has not yet leveraged the available hydropower and solar resources and wrongly depended on costly fossil fuel sources.

Needless to say, to finance human capital development, Pakistan needs more fiscal resources but tax collection has not exceeded 10pc of GDP for more than a decade. The World Bank has recommended that to raise more revenue all tax exemptions should be abolished and brought into the tax net undertaxed sectors like real estate, agriculture, and retail business. At the same time, to save taxpayers’ money, most loss-making public enterprises should be privatised. Poorly targeted subsidies in agriculture and energy should be cut. Overlaps between federal and provincial spending should also be avoided. It is estimated that all these measures combined could provide savings of 3pc of GDP per year.

The World Bank is of the opinion that to get over its present economic crisis, Pakistan must strive for a more dynamic and open economy. Current policies distort markets for the benefit of a few, while preventing productivity growth. Frequent overvaluation of the currency coupled with high tariffs lead firms to focus on domestic markets rather than exports. A more dynamic economy will provide better and more equal opportunities for most Pakistanis, ensuring progress and prosperity for a broader section of the population.

According to the World Bank, attractive foreign investment deals may bring in much-needed forex reserves in the short term, but a lasting solution lies in addressing the core issues behind low investment and declining productivity such as providing a level playing field for all, spurring competition, cutting red tape and ensuring policy continuity.