ISLAMABAD: The World Bank (WB), which has recently extended financial support to the incumbent government to fight the Covid-19 situation, has observed that risks are high in Pakistan as governance system is partially subject to influence by elites, undermining transparency and accountability.
The World Bank report 'Resilient Institutions for Sustainable Economy July 1, June 30, 2020,' asserted that political and governance risks are high and tilted to the downside on account of the Covid-19 pandemic.
It says that risks include a widespread domestic outbreak of COVID-19 requiring an extended period of movement restrictions, protracted recessions in key export markets, a significant decline in remittance inflows (particularly from the GCC region), or materialization of contingent liabilities.
According to the report, while the present government has won the national elections and holds a majority in the lower house of the parliament, political risks to the operation are significant. This is driven by three factors. Firstly, the implementation of selected policy reforms (such as the harmonization of the sales tax system, regulatory overhaul, energy policy, and coordinated fiscal management) requires political support from the provincial governments, including Sindh, which is the only province governed by another political party.
Secondly, opposition can form within the federal government against adverse short-term developments associated with the operation. For instance, the efforts to address the anti-export bias of the national tariff policy could have short-term negative fiscal and liquidity implications that could stir resistance. Governance risks are also high as Pakistan's system of governance is partially subject to influence by elites, undermining transparency and accountability.
Thirdly, social resistance to the stabilization programme. The negative impact of the ongoing economic adjustment on growth and measures taken by the authorities to restore and maintain macroeconomic stability (like electricity tariff increases) could have a negative impact on the poor and vulnerable.
A preliminary analysis suggests that, in a worst-case scenario, up to an additional four million households could fall into poverty by 2023 because of the ongoing economic adjustment. This puts reform implementation at risk when reforms adversely affect the interest of certain groups.
The Bank maintained that Covid-19 pandemic has put an additional strain on the structural reform program, with vested interests exploiting the crisis to demand more subsidies and incentives from the government and political elites. Political risks are mitigated, in part, through extensive consultations with the government counterparts at the federal and provincial levels aimed at reaching consensus and aligning priorities. The impact of the stabilization measures can be mitigated by the policy reforms to protect the poor and vulnerable supported by the SHIFT Development Policy Financing (DPF) prepared in parallel, including measures to increase the participation of women and girls in the labor market and measures to improve federal safety nets to respond to shocks in a more appropriate and timely manner.
However, despite the mitigating factors, residual risks to the operation remain high. This is because the crisis could divert the government's resources to deal with the evolving situation and this could potentially impede the successful implementation of the reforms supported by the operation.
Pakistan's macroeconomic risks are high. The low level of foreign reserves and high debt ratios limit the buffers that Pakistan could use to manage external risks. The global COVID-19 pandemic presents substantial economic risks.
The pandemic-induced global crisis can further impact Pakistan through reduced demand for exports, import shortages, rising prices, lower revenues, and higher interest rates. Volatility in international financial markets would affect Pakistan's financing costs at a time when it will need to access financial markets to meet its large external financing needs. Uncertainty of oil prices, given Pakistan 's reliance on imported fuel in its energy mix, and of remittances from the Gulf countries (an important source of remittances for Pakistan ) add to the downside risks. Greater exchange rate flexibility and structural reforms will help mitigate these risks.
The main factors that cause the crises are ;(i) weak institutions;(ii) lack of coordination mechanisms for fiscal policy making between federal government and provinces, which result in unsustainable fiscal targets;(ii) limited operational independence of the Central Bank, to implement a flexible market-determined exchange rate;(iii) frequent reversal of structural reforms, including key measures in the energy sector;(iv) complex business regulatory environment that impede the existence of a vibrant private sector and ;(v) elite capture which undermines reforms that reduce their ability to extract rents.
Over the last two decades, economic growth in Pakistan has averaged 4.4 percent a year, below the South Asian annual average of 6.3 percent. Slow progress of structural reforms, low private investment (approximately 10 percent of GDP on average in the last decade, which is less than half of the South Asian average) and slow export growth due to an overvalued currency, among others, have hindered growth prospects. With a population growth rate of 2.4 percent, the country has seen a limited per capita real growth rate.
Copyright Business Recorder, 2020