The International Monetary Fund (IMF) said Pakistan has “moved further and further behind” its regional peers in terms of living standards, “underscoring the need for urgent policy correction”.
The remarks from the Washington-based lender were mentioned in its staff report released on Thursday night.
“Pakistan has been falling behind its peers in recent decades in terms of income per capita, competitiveness, and export performance. From 2000 to 2022, Pakistan’s GDP per capita grew at average annual rate of only 1.9%.
“By contrast, Pakistan’s peers achieved more than twice this rate: Bangladesh averaged growth of 4.5%, India reached 4.9%, Vietnam 5%, and China a growth of about 7.5%.”
Compared to regional peers, Pakistan’s export growth has been weak, while its competitiveness has declined given an appreciated real exchange rate relative to productivity growth.
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The IMF noted that the “recent restoration of stability is an opportunity to implement reforms placing Pakistan on a path of sustained, inclusive, per capita economic growth with stronger export capacity”.
Pakistan’s growth underperformance reflects weak contributions from human and physical capital and shrinking productivity, the lender said.
“Economic growth during 2000–20 was mostly driven by physical capital accumulation and an increase in labor hours, with these factors contributing about 1.9 and 1.15% points per year, respectively.
The IMF said that Pakistan’s declining export performance and limited openness to trade challenge the country’s development and external viability.
“Beyond weak exports, Pakistan has struggled to innovate and develop production of more sophisticated export goods, as indicated by its low and declining share of knowledge-intensive exports,” the IMF noted.
Apart from economic indicators, Pakistan’s health and education indicators have significantly lagged behind those of its regional peers, which has also undermined growth, investment, and productivity, said the IMF.
Citing World Bank data, the IMF said that Pakistan’s expenditure on education as a percentage of total expenditure is lower than that of India, Bangladesh, and Nepal.
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Moreover, Pakistan’s health expenditure is a significantly lower share of GDP than that of Nepal and Sri Lanka. “Pakistan has the highest infant mortality rate and one of the highest rates of stunting among children under five years of age in the region,” it said.
The IMF said that in order to place Pakistan on a new economic trajectory, the country requires addressing many distortions as well as improving the quality and level of public investment including in human capital.
“Key reforms centers on removing the remnants of the old growth strategy based around protection, preferences, and concessions. This has limited competition and the incentive for innovation and investment, locking resources into low-productivity activities (including through Special Economic Zones), which only survive because the state supports their profitability.
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“Removing these detrimental protections will spur competition and innovation as new players enter (including from outside Pakistan) and lead to a productivity-enhancing reallocation of resources, including labor.”
Moreover, to create space for higher investment in physical and human capital, there is a need to reduce the government’s crowding out of private investment and raise additional revenue from undertaxed sectors by removing exemptions and other tax concessions, said IMF.