Hosting the Shanghai Cooperation Organization (SCO) summit in Islamabad by Pakistan on October 15-16, 2024 was a good omen after a long period of diplomatic isolation. The event provided a platform for enhancing engagement with major global powers, particularly China and Russia.
Both countries are integral to Pakistan’s economic development and defense sectors—their participation in the summit symbolized strengthening these relationships. Several Memorandums of Understanding (MoUs) were signed during the summit, focusing on infrastructure, trade, and energy collaboration—areas critical for our long-term economic stability.
The timing of this summit was significant, especially in the scenario of shifting regional dynamics. Beyond enhancing ties with China and Russia, the summit offered an opportunity for Pakistan to traverse broader regional relationships.
A key development, in particular was visit of India’s Foreign Minister for the first time since 2015—a very important gesture that would certainly help in easing strained relations between the two neighbouring countries since 1947.
The SCO, with its emphasis on multilateral cooperation, offers a neutral platform. Thus, it provides both Pakistan and India to address shared challenges, such as counterterrorism, trade, and regional connectivity. Any breakthrough can pave the way for dialogue between these two nuclear rivals, leading to a peaceful and prosperous South Asia.
SCO summit, however, is just one piece of the larger puzzle in Pakistan’s quest for economic recovery and stability. While diplomacy and international cooperation are essential, the country must also address its internal economic challenges. In recent years, Pakistan’s economy has made incremental yet fragile progress towards stabilization after a period of perpetual instability.
The government’s focus must now shift to ensuring that these improvements are not only retained, but also used to create a more resilient and sustainable economic future.
A critical component of Pakistan’s economic strategy is its ongoing engagement with the International Monetary Fund (IMF). Entering the current financial year, Pakistan’s priority has been in securing a new IMF programme to support its fiscal and monetary policies. In this context, the budget for fiscal year 2024-25 budget was prepared in alignment with IMF guidelines to meet the programme’s targets.
The key measures, including electricity tariff adjustments and gas pricing reforms, were prerequisites to secure US$7 billion 37-month Extended Fund Facility (EFF) programme, approved by the Executive Board of IMF on September 27, 2024 along with disbursement of the first tranche.
The IMF’s programme leading to larger financial world support, especially from the friendly countries, is crucial for Pakistan’s continued economic reform efforts, particularly in areas such as fiscal discipline, public sector governance, and taxation.
The design of EFF programme, as outlined/elaborated in IMF Country Report No. 24/310 released on October 10, 2024, is aimed at restoring confidence in Pakistan’s economic policy framework. At its core, the programme emphasizes integration of fiscal, monetary, and exchange rate policies to create a more cohesive economic strategy. One of the programme’s primary objectives is optimizing public expenditure, ensuring that critical sectors such as health and education receive adequate funding. By allocating resources more efficiently, Pakistan can create the fiscal space necessary for long-term investments for future growth.
Tax reform is another key area under the IMF programme. Pakistan’s tax system has long been criticized for its inefficiencies and inequities, with certain sectors remaining significantly under-taxed. By broadening tax base and so that all sectors contribute fairly, the government can increase revenue generation and promote a more equitable distribution of the tax burden. This reform is essential not only for improving fiscal sustainability but also for fostering a more competitive business environment.
Additionally, the programme calls for significant improvements in public sector governance, particularly in the management of state-owned enterprises (SOEs) that have historically been a major drain on public resources, with inefficiencies and mismanagement leading to substantial financial losses. The IMF programme outlines a comprehensive strategy for SOEs’ reforms, which includes improved governance, increased transparency, and, where necessary, privatization, measures necessary to financially relieve the government.
Another means to reducing the government’s footprint in the economy is privatization, which under the IMF programme, Pakistan has agreed upon. State-owned entities, such as Pakistan International Airlines (PIA), the Roosevelt Hotel, and several electricity distribution companies are included in this list. This process can create additional fiscal space by offloading loss-making entities that have long been a drain on public resources. Moreover, privatization will introduce much-needed competition currently, monopolized or dominated by inefficient state apparatus. It will ultimately lead to improved service delivery and economic efficiency.
The ongoing EFF programme also includes measures to enhance transparency and accountability in Pakistan’s public administration. One of the most significant reforms in this area is the introduction of a digital asset declaration system for high-level public officials requiring them to disclose their assets, both domestic and foreign. It is aimed at reducing corruption and increasing public trust in its institutions. Long overdue, this move is critical in improving governance and ensuring that public resources are managed responsibly.
Pakistan’s economic recovery is also contingent upon its ability to navigate its complex federal-provincial relations. Under the current fiscal structure, the federal government is left with limited resources after sharing revenue with provinces forcing the federal government to rely heavily on borrowing to meet its financial obligations, causing the country’s debt levels to rise.
For addressing imbalances, arising out of existing Seventh National Finance Commission (NFC) Award, National Fiscal Pact (NFP) is prepared that aims at restoring federal-provincial relations and devolving certain spending responsibilities to the provincial governments, essential for reducing federal government’s fiscal deficit.
NFP’s success, however, will depend on the provincial governments’ willingness to increase their own revenue generation efforts for which they would need to enhance their revenue collection capabilities, particularly sales tax on services, property tax, and agricultural income tax. By reducing their reliance on federal transfers, provinces can create more fiscal space for the federal government and contribute their share in the country’s overall economic stability.
While the path to economic recovery is challenging, Pakistan’s participation in SCO summit has offered a unique opportunity to bolster its international partnerships and secure support necessary for its ongoing reform efforts. The agreements and partnerships forged at the summit can provide Pakistan with economic resources and strategic alliances.
Responsibility for Pakistan’s economic future rests squarely on the shoulders of its government and policymakers. The IMF programme, while essential, is not a cure-all. It provides a framework for reforms, but their successful implementation will require sustained political will and commitment.
The stakes are high, and any lapses could easily reverse progress made so far. However, with careful planning and focus on long-term stability, Pakistan has the potential to emerge stronger and more resilient than ever before.
As host of SCO summit Pakistan has successfully delivered an important message to the international community that it is prepared to welcome investors while outlining broader economic problems the country faces.
The path forward, although fraught with difficulties, but with the right policies and international partnerships, Pakistan can navigate these challenges and build a more stable, prosperous future for its citizens. The summit’s outcomes will certainly serve as a catalyst for both diplomatic success and economic reforms, providing Pakistan the tools it needs for long-term growth and stability.
Copyright Business Recorder, 2024
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS) as well as member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached at [email protected]
The writer is a US-based corporate lawyer, and specialises in white collar crimes and sanctions compliance. He has written several books on corporate and taxation laws of Pakistan. He can be reached at [email protected]
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