Economic growth has to be backed by structural reforms: Shamshad

ISLAMABAD: Caretaker Federal Minister for Finance Dr Shamshad Akhtar has said political and economic instability over the period of time has greatly disrupted Pakistan’s economic growth.

While addressing the 26 Sustainable Development Conference (SDC) organised by the Sustainable Development Policy Institute (SDPI), here on Thursday, the minister said economic growth has to be backed by structural reforms.

She added that macroeconomic stability has become more difficult in the last decade, the reason being delays in structural reforms, protracted actions, and exogenous shocks. She said that Pakistan was exploring avenues for debt for nature climate swaps with different partners.

Shamshad says another gas price hike to take place in Jan

The minister said that Pakistan’s fiscal policy is unsustainable due to the scale of climate funding gap. She said that Pakistan was hopeful of having a positive discussion at COP28 on the topic of climate funding issues, adding that by 2030, it has to scale up investments by 800 percent to mitigate climate vulnerability.

In her detailed address to the conference, the minister said that after months of hard work, Pakistan has successfully reached a staff-level agreement with the IMF on the first review of the $3bn SBA.

This is a very positive development for the economy and will support the country’s efforts for macroeconomic stability.

The successful implementation of comprehensive stabilisation measures helped to revitalise the Pakistani economy, placing it back on a positive growth trajectory.

The government’s efforts include lifting restrictions on the trade and investment flows by removing bans on imports, allowing banks to settle L/Cs, and profit repatriation of dividends by multinational companies (MNCs).

The minister said that Pakistan has addressed the volatility in the foreign exchange markets through reforms to the exchange companies and through enhancing competition by allowing banks to cater to the needs of citizens. Clampdowns on illegal transactions and anti-smuggling measures have also helped to stabilise the exchange markets.

Keeping a watch on our spending and revenues, we have implemented a new State-owned Enterprises (SOE) policy and fast-tracked the privatisation of the loss-making SOEs.

Pakistan has actively started to re-profile the domestic debt, with investors moving to longer tenor instruments, substantially reducing the cost of borrowing for the government, she said. These measures have helped to stabilise the economy and bring confidence back in the markets.

She said that signs of incipient economic recovery are evident and our GDP growth is projected in the range of two percent to three percent in FY24, up from 0.3 percent in FY23. Higher agriculture output and pick-up in manufacturing are positive for the growth outlook.

She said that business and investor confidence is improving as Pakistan Stock Exchange (PSX) has rallied 24 percent in the last three months and has crossed the psychological barrier of 58,000 points for the first time, adding that Pakistan’s international and domestic bond markets have rallied around 16 percent in the last three months.

She said that Pakistan has all the requisites of being a major economic player in the region and Asia as according to a World Bank report, Pakistan’s economy could reach $2 trillion by 2047, from $350 billion in FY23.

However, this requires macroeconomic stability backed by structural reforms critical to the deep-rooted challenges shackling the productive sectors of the economy.

Macroeconomic stability has become more difficult in the last decade due to both endogenous and exogenous shocks. The frequency of these shocks has intensified and so has the damage caused to the economy.

The minister said that the vulnerability of the economy has increased to global economic shocks such as the increase in international commodity prices and tighter liquidity conditions, with Pakistan effectively priced out of the international credit markets.

Vulnerability has increased due to the unsustainable debt position, with Pakistan in breach of the FRDL Act since 2013. Large fiscal and trade deficits over two decades have weakened the debt position, with the cost of servicing debt rising to 74 percent of the FBR revenue in FY23.

She added that vulnerability has also increased to climate shocks. The global warming model predicts that Pakistan’s weather patterns will become even more volatile and extreme in the decades ahead, with an average increase in temperatures by 1.3 percent to 4.9 percent by 2090.

Consequently, climate disasters, in particular, floods and droughts, are set to become even more frequent and severe. To address these vulnerabilities, Pakistan needs to address deep-rooted structural problems by striving for innovation and diversity in the structure of the economy for sustainable growth.

The manufacturing base, the export base, and the agricultural basket are focused on a very narrow range of products and have failed to penetrate new markets. Tackling the unsustainable public debt has to be the top priority of the reform agenda.

Our fiscal policy is unsustainable not only due to the revenue gaps and unproductive expenditures but it is also unsustainable due to the scale of the climate funding gap.

To meet the targets set under the NDC 2021 of reducing emissions by 50 percent by 2030, Pakistan will have to scale up investments by 800 per cent on a conservative basis to close the climate financing gap. Growth has to be driven by higher exports and higher investment flows. The sustainability of our trade and investment policy is critical to reducing the vulnerability of our economy to global shocks.

She said that first, Pakistan must completely overhaul the government’s fiscal apparatus so as to lower the revenue-expenditure gap, saying that revenue to GDP has remained low at 10 percent to 11 percent in the last three decades, with the government forced to finance large fiscal deficits through borrowing from domestic and external creditors.

She said that the caretaker government has initiated the process of restructuring Pakistan’s tax administration and the digital transformation of tax administration is a crucial step in meeting the objectives of enhanced tax collection and improved compliance.

Moreover, innovative digital technologies need to be implemented to minimise tax gaps, increase tax collection, and reduce the share of the shadow economy, the minister maintained.

She said that the FBR restructuring plan to enhance revenue mobilisation from 9.5 per cent of GDP to a minimum 15 per cent in the first phase and rationalising the tax regime to be pro-growth. The government was working towards separation of tax policy and tax administration functions, so as to remove the apparent conflict of interest in tax collection.

Similarly, Customs is being reformed to separate tariff policy from the collection functions. Tax policy has to be designed to be fair, equitable, and productive. The revenue and fairness objectives need to be pursued by expanding the tax base, reducing tax exemptions, and through a more efficient digital tax administration.

While talking about public expenditures, the minister said that Pakistan has to enhance the efficiency and effectiveness on this account as there is an urgent need to improve coordination within the federal government and with provinces and reorient expenditure priorities towards social welfare.

Akhtar said that the government has initiated dialogue with the provinces for sharing expenditures on the BISP and the PSDP projects falling under the domain of provinces. A review is being conducted to close departments at the federal level for devolved subjects.

Options are being explored to shift the large infrastructure projects under the Public Private Partnership (PPP) mode, providing sizeable savings on budgetary resources for both federal and provincial governments. The government was looking at ways to enhance allocation to the viability gap fund for undertaking infrastructure projects in PPP mode. We are also exploring avenues to seek credit guarantees from InfraZamin to enhance private-sector investment in Infrastructure.

To address the structural weaknesses of SOEs, improve their efficiency and functioning, and thereby reduce the drain on the budget, the government is focused on operationalising the Centralized Monitoring Unit (CMU). The CMU will monitor the SOEs and publish regular reports on financial performance and contingent liabilities.

The government was in the process of finalising a SOE policy under the SOE law as agreed with the IMF. The focus of the policy is on improving the governance and financial efficiency of the loss-making SOEs.

The privatisation programme has been fast-tracked and financial advisors for PIA have been appointed. We are working with the IFC team on concession and management contracts (privatization) for DISCOs.

The government was also working on the operationalisation of the Sovereign Wealth Fund (SWF). This holding company will help us to fast-track the privatisation of SOEs through G2G arrangements.

The minister said that Pakistan’s debt has become unsustainable and we have been in breach of our Fiscal Responsibility and Debt Limitation (FRDL) since 2013. The cost of servicing the existing debt has skyrocketed to 74 per cent of FBR tax collection in FY2023.

Managing the public debt will require a significant focus on reforms to enhance resource mobilisation and contain unproductive expenditures including the SOE losses, with particular focus on the energy sector.

The debt structure presents numerous complexities to be worked out between Pakistan and its creditors. With limited buffers, moderate shocks could make debt unsustainable.

Any communication around debt issues needs to be extremely careful as premature public discussion will create many problems and given Pakistan’s debt composition would complicate matters and engagement with multiple creditors, the minister said. In this regard, the government was working on different strategies to improve the maturity profile of existing debt, reducing short-term repayments, while on the other hand, the government was trying to reduce the cost of government debt. In this regard, the recent bond auctions show that investors have started to invest in longer tenor (3Y to 10Y) PIBs, compared to earlier when investment was only flowing to short-term (less than 12m) T-bills. This has also helped to reduce the cost of borrowing for the government to around 17 per cent, from 25 per cent earlier.

On the external side, the options are very limited. The bulk of our external debt 44 per cent is to multilateral agencies (IMF, WB, ADB, IsDB) and cannot be re-profiled as a result of their preferred creditor status. Commercial debt is 14 per cent of our external debt and re-profiling this portion of debt is difficult because it involves a large number of stakeholders and involves a cumbersome process.

Copyright Business Recorder, 2023