FeaturedNationalVOLUME 18 ISSUE # 13

In search of structural reforms

The people of Pakistan have never experienced the kind of inflation they are facing today. During the last 10 months, the official consumer price index has recorded a cumulative increase of 33 per cent. This means that if a Pakistani was earning Rs100,000 a year ago, his purchasing power has gone down to less than Rs70,000.

From this we can imagine the plight of the common wage earner in the income bracket of Rs20,000 to 40,000 per month. This has never happened in Pakistan’s history before. On top of all this, unemployment has increased and businesses are closing down. According to a report, the official unemployment rate has risen to 9.1pc from 6.3pc previously.

Due to dollar shortages, the rupee is losing its value on a daily basis. The country’s inability to finance its imports has resulted in a scarcity of industrial raw materials and production losses. The latest reports show that the economy has almost collapsed as the State Bank of Pakistan (SBP) now estimates that GDP growth will slow down to just 2pc in the current year, compared to 6pc under the PTI government. Due to the harsh tax measures and the restrictions on imports, the manufacturing sector output in the first five months posted a -3.6pc contraction, while experts have forecast negative -1pc GDP growth in FY23.

What is the way out of the present crisis? In its latest report, the World Bank has pointed out that Pakistan’s economy can grow sustainably only if the country introduces productivity enhancing reforms to ensure a better allocation of resources into more dynamic activities, and of talent to more productive uses. Without doubt, there are serious distortions in the economy which stand in the way of productivity growth. The reforms needed to correct the situation include rationalizing taxes so that more resources flow into manufacturing and trade instead of real estate. To this end, there is a need to lower import duties and offer export incentives so that we export more and earn badly needed foreign exchange.

According to experts, Pakistan’s economy suffers from critical structural imbalances that have prevented sustainable growth. In this context, the World Bank has come out with a comprehensive set of policy recommendations to put Pakistan’s economy on an even keel. To quote the WB, “First, reduce distortions that misallocate resources and talent. Second, support growth of firms through smart interventions, rather than through blanket subsidies. Third, create a positive, dynamic loop between evidence and policymaking, strengthening feasibility analysis of publicly funded projects or programmes.”

In its latest report, the World Bank has asked Pakistan to maximise the positive impact on businesses and productivity across the board by reducing regulatory complexity; harmonizing the general sales tax (GST) in the whole country; reforming investment laws to attract more foreign direct investment; and upgrading insolvency laws to reduce the costs of liquidating non-viable firms.

The report has put special focus on women’s participation in economic activities to spur the pace of progress. No doubt, women in Pakistan have made progress in education and other fields, but this accumulated human capital is underused because of constraints to their participation in the labour force. According to the World Bank, Pakistan has far lower female labour force participation rates than expected for a country at its level of development. As per some recent surveys, Pakistan can accrue GDP gains ranging between 5pc and 23pc by closing the female employment gap relative to its peers, depending on the extent of implementation of complementary labor market policies. About 7.3m new jobs would be created if Pakistan were to close its female employment gap with Bangladesh, for instance.

There is a consensus of opinion among economists that aggregate productivity in Pakistan has been stagnant or declining over the past many decades because both commercial firms and agricultural farms have become less productive over time. In the agriculture sector, for example, while yields have grown over the past decades, this has been due to a more intensive use of inputs, but total factor productivity has been falling for most crops. Crop productivity in Pakistan is highly susceptible to elevated temperatures and rainfall variations, putting the crop segment at severe risk due to climate change.

In Pakistan there are a large number of enterprises both in the private and public sectors which make losses. They are a burden on the economy. The prime example of this are state enterprises and family-owned firms which do not work on the concept of efficiency and merit. The World Bank report suggests that to increase investment rates and bring in large firms that could add dynamism to markets, the country should take necessary steps to utilize the untapped FDI potential estimated at $2.8 billion annually.