Need for institutional reforms

Pakistan’s economy has started showing positive signs of recovery and resilience after years of grappling with inflationary pressures, fiscal imbalances, and external debt challenges.

The Pakistan Bureau of Statistics (PBS) recently reported that the country’s headline inflation has reached its lowest level since May 2018, standing at 4.9 percent year-on-year in November 2024. This decline is significant, considering that just a year ago, the inflation rate hovered around 38 percent, marking a stark improvement in economic indicators.

On a month-to-month basis, the Consumer Price Index (CPI) increased by 0.5% in November 2024, a slower pace compared to the previous month. Moreover, CPI inflation average for the first five months of fiscal year (FY) 2024-25 was recorded at 7.88 percent, a sharp decline from 28.62 percent observed during the same period in FY 2023-24.

Analysts and economic experts have attributed this downward trend to proactive monetary policies and improved fiscal discipline. It is highlighted that November’s inflation rate was the lowest in 78 months, reflecting an increasingly stable economic environment.

This positive trend has provided room for further adjustments in monetary policy. The State Bank of Pakistan (SBP) has already enacted a significant policy rate cut of 250 basis points, bringing the key rate down to 15 percent. With inflationary pressures subsiding faster than anticipated, SBP is poised to support economic growth through more accommodative monetary policies. Urban and rural inflation rates also show improvement, with urban CPI inflation decreasing to 5.2% year-on-year in November 2024, and rural CPI inflation holding steady at 4.3%.

Pakistan’s ongoing engagement with International Monetary Fund (IMF) remains on track, with the government fully committed to meeting all conditionalities under the programme. This steadfast adherence to macroeconomic reforms has ensured the programme’s smooth progress, as confirmed by the Ministry of Finance. The successful implementation of IMF programme is seen as a cornerstone for achieving sustainable economic stability. By fulfilling its obligations transparently, Pakistan aims to foster an environment conducive to inclusive growth.

The banking sector has also demonstrated encouraging trends, with the gross Advance-to-Deposit Ratio (ADR) reaching 47 percent in November 2024.

This marks a substantial improvement from 39 percent just two months earlier. Banks have been aggressively increasing lending to meet the required ADR threshold of 50 percent to avoid incremental taxes. This shift signifies a more dynamic banking sector that aligns with national economic objectives. However, challenges persist, including a need for greater equity between conventional and Islamic banking systems in terms of regulatory reforms.

Despite these improvements, external debt remains a critical issue. Pakistan’s total external debt stocks were estimated at USD 130.847 billion by the end of 2023, up from USD 127.708 billion in 2022. Interest payments on public and publicly guaranteed debt have risen sharply, emphasising the urgency of fiscal reforms.

While remittances provide a cushion, amounting to USD 26.6 billion in 2023, they are insufficient to offset the growing burden of external obligations.

Transparency and accountability being vital for economic stability, Pakistan must prioritize improving its asset disclosure laws, especially for judiciary and military officials. Strengthening these laws would help align Pakistan with global standards and build public trust. By adopting examples from other nations, Pakistan can improve its governance framework.

For instance, Ukraine enforces mandatory annual asset declarations for public officials, with severe penalties such as fines, dismissals, or criminal charges overseen by the National Agency on Corruption Prevention. Similarly, India requires members of judiciary to disclose their assets under rule 16 of All-India Services (Conduct) Rules, 1968 and violations can lead to criminal prosecution or disciplinary actions.

Indonesia offers a robust model through its Corruption Eradication Commission, which enforces annual asset declarations for judges and high-ranking military personnel, penalizing violations with legal investigations or asset forfeitures.

Kenya’s Public Officer Ethics Act, 2003 mandates asset disclosure for all public officers, with non-compliance leading to suspension, removal, or criminal proceedings. In the Philippines, judiciary and military officials must file Statements of Assets, Liabilities, and Net Worth (SALN), with non-compliance resulting in fines or imprisonment under the Republic Act No. 3019 Anti-Graft and Corrupt Practices Act.

Similarly, developed countries also present valuable practices. The United States imposes stringent rules under the Ethics in Government Act, 1978 with oversight by the Office of Government Ethics (OGE).

The UK’s Bribery Act 2010, Canada’s Conflict of Interest Act, 2006 in force since July 9, 2007 ensure public officials’ compliance through strict penalties for breaches. By incorporating these mechanisms, Pakistan can combat corruption effectively and foster accountability across all sectors.

However, to achieve sustainable economic growth and reduce reliance on external borrowing, Pakistan must adopt a multi-pronged strategy. First, fostering a conducive environment for foreign direct investment (FDI) is essential. Several countries have successfully implemented strategies that Pakistan could mirror to attract investments and stimulate long-term growth.

For instance, Chile attracted over USD 21.7 billion in FDI during 2023 by emphasizing renewable energy, particularly in solar and wind sectors.

The government streamlined regulatory processes and offered substantial incentives for green energy projects, which made the country an attractive destination for sustainable investments.

Similarly, Egypt, which attracted USD 9 billion in FDI in 2023, focused on enhancing its energy and infrastructure sectors, particularly renewable energy and hydrogen projects, through regulatory reforms and improved business transparency.

In Indonesia, FDI reached $47 billion in 2023, largely due to government-driven initiatives in green energy, particularly electric vehicles, alongside infrastructure improvements and tax incentives. Similarly, Vietnam received $20 billion in 2023, becoming a key manufacturing hub with low labour costs, favourable trade agreements, and enhanced infrastructure.

By focusing on renewable energy, infrastructure development, and regulatory reforms, Pakistan can create an attractive investment climate, positioning itself for both economic stability and long-term growth.

We must adopt comprehensive reforms to secure long-term economic growth and stability for Pakistan. Modernizing key sectors such as agriculture and manufacturing will play a pivotal role in boosting productivity and exports. By improving farming techniques, enhancing supply chains, and investing in value-added industries, we can reduce dependency on imports and strengthen the trade balance.

For instance, South Korea has effectively modernized its agricultural practices to increase productivity, while Germany has diversified its manufacturing base, leading to more resilient export markets.

Addressing fiscal deficits requires bold public expenditure and tax policy reforms. Rationalizing subsidies, prioritizing development spending, and improving tax collection efficiency are essential. Additionally, by formalizing informal sectors and integrating undertaxed areas, we can significantly expand the tax base. India, for example, has made significant improvements by formalizing its informal economy through digitization and tax reforms, which have successfully generated additional revenue for public services.

To improve governance, an institutional framework is integral for economic stability. Adopting transparent asset disclosure mechanisms, especially for public officials and military personnel, will foster trust and accountability. Countries like Singapore and New Zealand have led the way with strict anti-corruption policies and independent oversight bodies, effectively reducing illicit financial flows and improving investor confidence. Therefore, by implementing a corporate governance model, Pakistan can better counter the informal economy and curb corruption, leading to improved accountability and economic resilience.

Copyright Business Recorder, 2024