Pakistan required to improve revenue Mobilization

Weaker growth in Pakistan is pulling down the regional aggregate growth rate this year, with large macroeconomic imbalances and ongoing policy adjustment challenges expected to slow the country's growth from 5.2 percent in 2018 to 2.9 percent in 2019. This was stated in the latest report of the International Monetary Fund (IMF) titled "Economic Outlook Update, Middle East, North Africa, Afghanistan, and Pakistan (MENAP)."
The report projected regional inflation to pick up slightly to 11.3 percent in 2019, primarily due to higher inflation in Egypt (fuel subsidy reform) and Pakistan (weaker exchange rate).
Slowing global growth and elevated trade and geopolitical tensions are posing economic challenges for countries of the MENAP region. In addition, low and volatile oil prices are negatively affecting some countries, while others grapple with rising public debt. Elevated public debt in oil importers limits capacity to address critical infrastructure and social needs, restrains growth, and leaves economies vulnerable to external shocks, the report maintains.
In countries where the level of tax collection is low (Afghanistan, Pakistan, Sudan), there is considerable room to improve revenue mobilization, including by eliminating distortionary exemptions; taxing the richer segments of the population, such as by introducing property and wealth taxes; broadening the tax base; and reducing informality.
In several countries in the MENAP region, social tensions are rising in the context of lower growth and reform fatigue, threatening macroeconomic stability. Such tensions may also derail much-needed reforms, potentially spilling over into conflict and further regional uncertainty.
The report further states that the impact and timing of major geopolitical developments-including tensions between India and Pakistan, large demonstrations and political uncertainty in Algeria, possible peace in Afghanistan, and sanctions on Iran-are not yet clear. Such uncertainty may increase investors' perception of risk for the whole region, leading to capital outflows and exchange rate pressure. And in turn, this may feed back into further oil price volatility and regional uncertainty.
Growth in oil importers of the MENAP region is projected to remain relatively modest, constrained by persistent structural rigidities. Elevated public debt in many countries limits the fiscal space needed for critical social and infrastructure spending and leaves economies vulnerable to less favorable financial conditions. The outlook remains clouded by mounting global trade tensions and financial market uncertainty.
Social tensions are rising in many countries as unemployment remains high and socioeconomic conditions worsen. Continued growth friendly fiscal consolidation is needed to rebuild buffers and enhance resilience, along with intensified structural and governance reforms to improve competitiveness, boost private investment, and generate jobs.
Increased regional integration will also help support medium-term growth. Risks also remain to the downside, with global trade tensions casting a cloud over the growth outlook in key trading partners and raising the prospect of investors' increased risk aversion toward emerging markets.
Regional uncertainty (Afghanistan, Jordan, Lebanon, Somalia, Syria), security concerns, weaker-than-anticipated public investment, and large external imbalances (Lebanon, Pakistan, Sudan) are expected to weigh on the medium-term growth outlook.
While remittances help to provide a buffer for current account deficits in many countries (Morocco, Pakistan, Somalia), there is a downside risk of a slowdown in remittance-originating countries, most of which are in Europe or the Gulf Cooperation Council.
Targeted social transfers should replace subsidies, which benefit some segments of the population disproportionately (for example, fuel subsidies in Sudan and Tunisia and cross electricity subsidies in Jordan), while restructuring state-owned enterprises (Egypt, Pakistan) would also make for more efficient spending.
While monetary authorities in the region have largely maintained a broadly neutral policy stance (except for tighter stances in Egypt, Pakistan, and Tunisia), scope for more supportive monetary policy varies.
A more competitive business environment in which the state plays a less prominent role will improve total factor productivity and direct capital toward more productive sectors. Administered prices, electricity and fuel subsidies (Jordan, Lebanon, Sudan, Tunisia), and inefficient state-owned enterprises (Pakistan, Tunisia) suppress competition and divert resources to less productive areas.
Policymakers will face the challenging task of resuming fiscal consolidation while sustaining growth in a more uncertain external environment, including bouts of oil price volatility that are likely to persist in the near term.
Anchoring fiscal policy in a medium-term framework would help insulate economies from oil price volatility and gradually rebuild fiscal space; addressing structural weaknesses and tackling corruption, including better access to finance for small and medium enterprises (SMEs), will help diversify economies, create jobs, and promote higher and more inclusive growth.