ISLAMABAD: A slower-than-expected recovery from the Covid-19 pandemic and accompanying social pressures might delay the economic and structural reforms needed to strengthen macroeconomic stability in Pakistan, says the Asian Development Bank (ADB).
The ADB in its “Country Partnership Strategy (CPS 2021-25)” stated that the indicative resources available for commitment during the first three years of the CPS period (2021–2023) total $5.4 billion, comprising $3.6 billion for regular OCR lending and $1.8 billion for concessional OCR lending.
Additional grant resources have been allocated for a project in 2021 from the ADF-13 thematic pool worth $5 million, to increase gender equity.
The final allocation for the complete 5-year CPS period will depend on available resources, project readiness, and the outcome of the country performance assessments, it added.
Sovereign operations will be supplemented with the ADB’s non-sovereign operations, subject to headroom constraints, as well as official and commercial co-financing.
The existing cost-sharing and financing parameters will continue to be applied during 2021-2025, with the ADB financing up to 85 percent of the loan project costs and 90 percent for the Technical Assistance costs, on an overall portfolio-wide basis.
Actual shares for specific ADB projects will be determined by project-specific considerations and available co-financing.
The ADB further stated that Pakistan’s economy exhibited an episodic pattern of growth characterised by boom-and-bust periods.
A narrow production and export base makes the economy less resilient to adverse economic shocks, which results in a binding balance-of-payment constraint to growth.
A large fiscal deficit, a weak external position, and eroded macroeconomic buffers reflect structural weaknesses in economic management.
Pakistan’s weak institutions and governance continue to constrain investment, limit the structural transformation of the economy, and restrict access to quality public services.
This is evident in Pakistan’s poor performance on the Worldwide Governance Indicators, where the country’s score is lower than the South Asian average.
Pakistan is ranked low on political stability, control of corruption, the rule of law, voice and accountability, and government effectiveness.
The energy sector’s high-cost structure, accentuated by supply chain inefficiencies, inflicts substantial costs on the economy.
The sector continues to suffer from incomplete reforms and lack of integrated planning, insufficient tariffs, inefficient subsidies, unsustainable losses, and critical infrastructure bottlenecks.
These inefficiencies are manifest in the so-called circular debt problem—total cash shortfall and arrears standing at a massive Rs2, 210 billion (or about four percent of the GDP) in June 2020.
The IMF supported stabilization and structural reform program is expected to occupy center stage from fiscal year 2021 onward.
In partnership with the IMF and the World Bank, the ADB will frontload policy-based assistance to support macroeconomic stabilization and domestic resource mobilization, as well as aid critical structural reforms in energy, trade, and capital markets.
Economic uncertainty poses risks to both sovereign and non-sovereign operations. Private sector operations, in particular, are subject to country, market, and obligor risks. All private sector operations in Pakistan will require in-depth risk analysis and effective mitigation.
Structural reforms to stabilise the macroeconomy should gain momentum after the Covid-19 pandemic is mitigated, it added.
The Covid-19 pandemic, which led to a sharp contraction in growth, has heightened the vulnerability and compounded the economic difficulties.
Social protection systems are evolving but still do not provide adequate cover for all vulnerable population segments.
A combination of strained growth, inadequate human capital and social protection, and the under-exploited potential of women exacerbate poverty pressures and intensify income inequality, it added.
Largely because of the Covid-19 pandemic, the GDP contracted by 0.38 percent in fiscal year 2020.
The pandemic is likely to force more people into poverty.
Women and girls are likely to be affected disproportionately.
Leaving the pandemic aside, Pakistan’s growth has in any case been highly cyclical because of unresolved structural challenges, including insufficient export capacity, weak domestic revenue mobilisation, failing public sector enterprises (PSEs), and an under-reformed energy sector that requires massive public subsidies to stay afloat.
Pakistan’s public debt, including guarantees, is high, estimated at 87.2 percent of GDP in fiscal year 2020.
However, the large part (i.e. 55.8 percent of GDP) of public debt is domestic debt.
Efforts are being made to improve debt sustainability, including possible refinancing of external loans from major bilateral creditors.
A careful prioritization of government expenditures and the curtailment of losses by PSEs, together with efforts to raise higher revenues, are needed for a sustainable improvement in the country’s debt profile.
The Bank stated that a quarter of Pakistan’s population still lives below the poverty line. While the poverty headcount had declined from 64.3 percent in fiscal year 2001 to 24.3 percent in fiscal year 2015, progress across different regions of Pakistan remained uneven.
In particular, the rural poverty headcount ratio of 30.7 percent is more than twice the urban at 12.5 percent, with rural areas still accounting for four out of five poor individuals.
Additionally, about 20 million people are near-poor and highly vulnerable to shocks that can pull them below the poverty line.
The Covid-19 crisis may have pushed more people into poverty, vulnerability, and unemployment.
The Covid-19 has triggered a sharp drop in household incomes.
The ADB estimated that Pakistan’s headcount poverty ratio in 2020 was 1.6 percent without Covid-19; however, this ratio would rise by 5.5 percent under the worst-case scenario of a 20 percent reduction in aggregate demand.
The report stated that public financial management risks include, (i) poor budget planning practices; (ii) inefficient budget execution practices and weak systems for the preparation, appraisal, and monitoring of public investment projects; (iii) weak treasury management; (iv) poor accounting and reporting standards; and (v) inadequate corporate governance of PSEs.
These risks will be mitigated by the ADB's (i) proposed TA support to the implementation of the Public Finance Management Act and the PSE Law, (ii) policy-based assistance for financial management reforms and sector-specific institution-building, and (iii) capacity building programs to professionalize project auditing and accounting in project management offices and executing and implementing agencies.
It further stated that key procurement risks include, (i) the inability to make use of advance contracting because of complex government approval procedures; (ii) lack of awareness of the use of local procurement frameworks for ADB-funded projects; (iii) ineffective complaint mechanism; and (iv) fear of inspections by the National Accountability Bureau and audit objections by auditors.
Since the establishment of federal and provincial public procurement regulators in Pakistan, efforts are being made to improve efficiency and transparency and reduce corrupt practices in public procurement.
However, potential fiduciary risks remain.
To mitigate these risks, the ADB will (i) keep coordinating with the Pakistan Engineering Council and public procurement regulators on a system for regular updates of cost estimates, (ii) provide TA for capacity building, (iii) support the government’s initiative for the establishment of a construction and infrastructure board to ensure an enabling environment for the construction industry.
Pakistan estimated its climate adaptation investment needs at $7 billion–$14 billion per year, but its ability to adapt and to manage disaster and climate risks remains insufficient, it added.
Copyright Business Recorder, 2021
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