Former Governor State Bank of Pakistan Dr Ishrat Hussain said Thursday that with few exceptions, there has never been a broad-based ownership of reforms which is a must for sustained economic development nor the reform package is formulated by the economic managers and this lack of domestic ownership translates into highly haphazard implementation of reforms.
"Sustained economic development does not take place in the absence of political stability," said Ishrat while delivering the Quaid-e-Azam lecture "Economic Reforms in Pakistan: one step forward, two steps backward," at the concluding session of 28th Annual General Meeting and Conference of the Pakistan Society of Development Economists (PSDE), here on Thursday.
He said another factor impeding the progress of reform process has been the reversal, discontinuity, uneven and lacklustre implementation record; besides the capacity issue of implementing the reforms. The informal asymmetric power relations within the bureaucracy also create an incentive for poor governance while next factor pertains to the structure of political institutions, patterns of leadership including type of regime and the dynamics within the political parties including their support bases.
Economic reforms imply important shifts in the balance of political powers among contending interests groups while the prevalent social and cultural norms in Pakistani society also pose a powerful deterring force to reforms particularly in the area governance.
Similarly, the popular mindset in Pakistan has become highly suspicious of private enterprise and markets. Executive branch, judiciary, parliamentary committees, Accountability Bureaus and the media have all created an atmosphere in which it has become difficult to make large investments and earn decent returns. Further he said the battle lines between those who wish Pakistan to become a part of global system and those who want the country to withdraw, isolate and disengage itself from the international arena are being drawn sharply. Finally, Pakistan has not faced a major abrupt and sharp downfall in its economic fortunes. Only twice in its history it has recorded a negative growth rate.
Ishrat said that the incoming government in Pakistan and the visionary leadership if it emerges as a result of the elections have to capitalise on the honeymoon period to shift the direction of economic policies and governance and establish credibility by taking some tough but inevitable decisions during that period. Unless this directional shift takes place the prospects for inclusive rapid economic growth do not look very promising.
He further explained that the nature of reforms that Pakistan should embark upon consists of two components - stabilisation and long term structural adjustments. He examined the record of last sixty five years with respect to reforms.
The newly-elected government that came to power in March 2008 could not manage the lingering crisis in 2009 forcing Pakistan to approach the IMF in November 2009. A 'home-grown' reform package consisting mainly of mobilising additional taxes to bring fiscal deficit under control was agreed upon. Lack of political consensus on General Sales Tax (GST) and Agriculture Income Tax (AIT) among the coalition partners led to the breakdown of the agreement with the Fund but after incurring a heavy financial obligation of $8 billion to be repaid in 2012 and 2013.
Economic growth has been anemic from 2008-12, public finances have been heavily distressed, and huge borrowing from the banking system to finance widening fiscal deficit resulted in double digit inflation. Exchange rate depreciated steeply and private domestic and foreign investment dried up. Under the 18th Constitutional amendment the devolution of powers from the federal to the Provincial Governments and an enlarged share to the provinces out of Divisible Tax pool under the NFC Award took place. The devolution remains incomplete as the local government reforms have been put on hold.
The Musharraf government that assumed power in October 1999 did undertake major economic reforms in the six year period between 2000 and 2006 which slowed down in 2007 due to the impending elections and confrontation with the judiciary. Pakistan successfully met all the performance criteria under the Stand-by program and the Poverty Reduction and Growth Facility (PRGF) negotiated with the IMF. The major areas of successful reforms were Trade and Tariff, Financial Sector including the privatisation of nationalised commercial banks, breaking up the monopoly of Pakistan Telecommunication Corporation and opening up the sector to the private sector and Promotion of Higher Education.
Historical survey of the economic reforms and structural policy changes since 1960s to-date shows a highly erratic and volatile path. Meaningful actions with high potential of success were initiated and carried forward some distance. But as soon as a new government - democratic or military - came to power these policies were reversed, backtracked or not implemented fully. The expected benefits were either postponed or accrued only in dribs and drabs, he added.
Dr Nadeem-ul-Haque Deputy Chairman Planning Commission said on Thursday that decline in growth and increase in subsidies has caused problems on the expenditure side. He further said that we need to focus on the soft issues rather than working on the hard issues. It is the most important thing to look for instead of worrying about declining tax-GDP ratio.