FeaturedNationalVOLUME 19 ISSUE # 10

Transformative reforms: Seizing the historic opportunity

In the wake of a commendable period of declining poverty rates, Pakistan’s economy currently faces one of its most challenging crises. Poor policy decisions, compounded by external shocks like COVID-19 and catastrophic floods, have slowed economic growth, increased poverty, and brought the nation to the brink of debt default. This juncture demands bold and sustained reforms.

According to the World Bank, this time, the call for transformative change is urgent, as the risks of short-term fixes loom larger than ever. After a commendable period of sustained reduction in poverty rates, Pakistan’s economy is currently grappling with one of its most severe crises. Poor policy decisions, coupled with a series of setbacks—namely, the impacts of COVID-19, the catastrophic floods of 2022, and adverse global conditions—have resulted in a slowdown in economic growth, an increase in poverty levels, and pushed the country perilously close to debt default. Furthermore, human development indicators linger at levels comparable to much poorer nations, while per capita income growth has dwindled due to low productivity and high fertility rates.

These challenges necessitate profound and sustained reforms. Although the proposed reforms are not groundbreaking, what sets this moment apart is that the alternative of managing through short-term solutions and external financing is riskier and more difficult to execute. Historically, many countries have emerged stronger from similar crises. For Pakistan, this could be an opportunity to address deeply entrenched issues that have hindered the country’s development for far too long.

Firstly, Pakistan must tackle its human capital crisis. A staggering seven percent of children in the country do not survive beyond their fifth birthday, a rate multiple times higher than in comparable nations. Additionally, 40 percent of children under the age of 5 experience stunted growth, surpassing 50 percent in impoverished districts. Reducing stunting rates by half within a decade is plausible, but it requires a shift from the conventional emphasis solely on nutrition and health to ensuring broader access to clean water and sanitation, birth spacing services, and improved living and hygiene conditions. Achieving this goal demands robust cross-sectoral and local coordination, a nationwide mobilization, a behavioral change campaign, and annual investments of nearly 1 percent of GDP.

A weakened education system compounds the effects of stunting, with 78 percent of 10-year-old children unable to read age-appropriate text, and over 20 million children out of school.

Secondly, to finance improvements in service delivery and human capital development, Pakistan must create more fiscal space. Tax collection has stagnated at a low 10 percent of GDP for decades. Swiftly abolishing costly tax exemptions and reducing compliance costs could generate approximately 3 percent of GDP in added revenues. Additional funds could be raised at provincial and local levels from undertaxed sectors like real estate, agriculture, and retail, potentially adding another 3 percent of GDP. Efficiency in managing public resources could result in expenditure savings. Privatizing most loss-making public enterprises, cutting poorly targeted subsidies in agriculture and energy while safeguarding the poorest, and reducing overlaps between federal and provincial spending could yield savings of another 3 percent of GDP annually.

Over time, bold fiscal reforms could potentially generate more than 12 percent of GDP in new fiscal space—three times the additional resources needed to address human development gaps, leaving ample resources to boost public investments in infrastructure and reduce public debt. However, putting Pakistan’s public finances on a more sustainable path will ultimately require stronger economic growth.

Thirdly, Pakistan must strive for a more dynamic and open economy. Current policies distort markets to the advantage of a few, hindering productivity growth. Frequent overvaluation of the currency and high tariffs lead firms to focus on domestic markets, discouraging exports. A challenging business environment deters investment, exacerbated by a strong state presence in contested markets. Tax distortions also discourage productive investment, favoring non-tradable sectors such as real estate. While expediting the sale of productive assets or selectively attracting foreign investment may provide short-term forex reserves, addressing the core issues behind low investment and declining productivity growth—leveling the playing field, spurring competition, reducing bureaucracy, and enhancing policy predictability—is crucial for lasting impact.

Fourthly, the agricultural sector must undergo transformation to ensure food security amid climate change and rising water scarcity. Current subsidies, government procurement, and price restrictions confine farmers to low-value, undiversified farming systems and water-intensive crops.

Redirecting subsidies toward public goods, such as research on seeds, veterinary services, irrigation, drainage services, promotion of regenerative agriculture, and the establishment of integrated agriculture value chains, could lead to increased productivity, higher on- and off-farm incomes, and enhanced resilience against climate shocks.

In the fifth aspect, inefficiencies within the energy sector must be swiftly and consistently addressed, as they have long been a drain on public resources. While recent tariff increases have helped curb losses and protect low-income consumers, substantial distribution and transmission losses, coupled with high generation costs, need to be minimized for the sector’s sustainable future.

Fortunately, Pakistan possesses access to some of the most cost-effective hydropower and solar resources. Realizing these benefits requires substantial investment, achievable only through addressing longstanding issues in distribution and transmission systems, particularly through increased private participation. Tariff adjustments essential for cost recovery must be insulated from political influence to provide credible incentives for long-term investors.

Implementing these policy shifts necessitates collaboration at all levels. Local governments must be empowered with the capacity to raise and efficiently allocate funding for essential local services, necessitating a revival of decentralization.

Moreover, while a more dynamic economy presents opportunities for most Pakistanis, ensuring that no one is left behind requires the expansion of social safety nets, along with improvements in targeting and coherence across federal and provincial instruments.

By undertaking these fundamental reforms in the coming years, Pakistan has the potential to achieve upper-middle-income status by its centennial in 2047. There is confidence in the country’s human capacities and proven implementation abilities to reach this ambitious goal. Instead of letting the economic crisis go to waste, Pakistan can turn it into a historical turning point, marking the year 2024 as ‘Pakistan’s moment.’

In conclusion, Pakistan stands at a pivotal moment in 2024, poised to turn its economic crisis into a historic opportunity. By redirecting subsidies, addressing energy sector inefficiencies, empowering local governments, and expanding social safety nets, the country can pave the way for a resilient and dynamic future. Decentralization, coupled with private sector engagement, holds the key to unlocking potential in agriculture and energy. If these fundamental reforms are implemented diligently, there is a realistic path for Pakistan to attain upper-middle-income status by its centennial in 2047. ‘Pakistan’s moment’ is not just a phrase but a tangible prospect, achievable through strategic and transformative measures.