The International Monetary Fund (IMF) Managing Director Christine Lagarde on Monday urged Pakistani authorities to focus on three priority areas for economic reforms: reinforce economic resilience, raise the growth rate and make growth more inclusive. Speaking here on Monday at an event titled, "Emerging Markets in the Global World", Lagarde advised the authorities to "find guidance from Pakistan's founder, Muhammad Ali Jinnah, who once said: 'With faith, discipline, and selfless devotion to duty, there is nothing worthwhile you cannot achieve'."
Lagarde stated a challenging global environment, with global growth too low projected lower than before, for too long, and in many countries benefiting too few people, and keeping in mind the discipline Jinnah emphasised, "I see three priority areas for economic reforms notably (i) reinforce economic resilience, (ii) raise the growth rate and (iii) make growth more inclusive."
The good news for Pakistan is that it has already begun to strengthen its drivers of growth after three years in the home-grown IMF programme which pulled it off from the brink of an economic crisis to economy on a stronger footing. Public finances have improved considerably, external reserve buffers have been rebuilt, and growth has been gradually strengthening. These are very encouraging developments. A clear example is the power sector with a reduction in power outages from nine hours to one hour per day for industries, and from eight to five hours for urban consumers as well as a cut in costly and inefficient subsidies disproportionately benefited the more affluent.
She said that accumulation of power sector arrears, also known as circular debt, has also significantly decreased. These are major achievements. There have been equally important achievements on the budget revenue side and revenue collection improved by 2 .5 percent of GDP over the past three years.
These tax reforms matter because efforts to mobilise higher revenues have freed up resources to raise public investment and to strengthen social safety nets. For instance, more than 1.5million new beneficiaries were added to the Benazir Income Support Program, and the program's cash stipends were raised by more than 50 percent. This is an important step since 30 percent of the population still lives below the poverty line.
Pakistan despite a significant fiscal consolidation achieved under the program, public debt remains high, at about 19 trillion rupees, or 65 percent of GDP. This debt needs to be serviced and, at current levels, the interest bill is larger than Pakistan's entire development budget. To place debt on a downward trajectory, action is needed on both revenue and expenditures.
On the revenue side, despite the marked improvements over the IMF-supported program, Pakistan today still only collects little more than half of what is estimated as a feasible amount. This means continued efforts are needed to bring more people into the tax net and ensure that all pay their fair share. At the same time, reducing public enterprise losses can enable a scaling up of growth-enhancing investment in physical and human capital. Currently, these losses amount to more than a two-thirds of what is spent on the Benazir Income Support Program. Imagine what you could do with that amount of extra resources!
Taken together, these reforms are important to reduce budget deficits and build sufficient buffers to protect the country against shocks that may come down the road. In parallel, there is a need to continue strengthening social safety nets to protect the most vulnerable segments of society. "These steps will pave the path to higher growth, which brings me to my second priority," she said.
The second priority area, she stated, is to raise growth and this can be done by promoting private investment, strengthening exports, and raising productivity. Private investment in Pakistan today accounts for only 10 percent of the economy. In emerging markets however, the average is about 18 percent. Pakistan's exports are about 10 percent of GDP; emerging markets' exports are nearly four times as high. So here too, Pakistan can do better. Higher public investment in infrastructure can help. For instance, continuing support for projects under the China-Pakistan Economic Corridor will not only promote growth and job creation, but will also facilitate regional integration.
She said that another way to boost growth is by improving the business climate-by strengthening governance and enabling the private sector to thrive. Pakistan ranks 117 out of 168 countries in perceived corruption. Although direct social and economic losses are difficult to measure, even a perception of corruption deters private investment and impedes efforts to promote sustainable and inclusive growth. Increasing transparency and accountability and removing red tape can help. For example, it still takes Pakistani companies much too long to figure out their tax forms. That time could be spent much more efficiently on pursuing business opportunities.
She said two million young people enter the job market in this country. This could be a tremendous opportunity for growth. But it also presents challenges. How can these can be absorbed when the global economy is growing so slowly.
She added clearly, in this environment, Pakistan needs to rely on the strength of its own policies to generate more growth and jobs, and to join the group of dynamic emerging markets. She further stated that simplifying procedures to open new businesses, enforce contracts, and pay taxes can go a long way in promoting growth. At the same time, the energy sector reform needs to be completed. "All in all, I see enormous upside potential. IMF studies show that improving Pakistan's business environment to the average of, say, the Middle East and North Africa region could increase growth by 1.5 percentage points per year," added Largarde.
Third, priority area, she stated is to make growth more inclusive and increasing access to education is crucial, especially in Pakistan where youth comprise about 60 percent of the population. IMF research suggests that improvements in education have contributed importantly to reducing income inequality within countries.
Currently, education outcomes in Pakistan remain weak. One out of every 12 children in the world that does not attend school lives in Pakistan. "I am aware that access to education is a key concern for the Pakistani citizen, a point brought across when I met with Malala Yousafzai," she said.
Bolstering public investment in education from 2.5 percent of GDP to emerging market average-around 4 percent of GDP-will be essential to prepare the workforce with the necessary skills and make Pakistan more competitive on the global market. Beyond education, there is also a need to improve women's participation in the economy. Closing gender gaps in economic participation could boost GDP by up to a third. These gains are non-trivial. Women can be a game-changer for Pakistan, added Lagarde.
This is an important time-"a moment of opportunity"-for Pakistan, a country undergoing an economic transformation that can place it well among the ranks of emerging market economies.
She said that in advanced economies, despite signs of recovery in some countries, overall growth prospects remain subdued. Many of them are still dealing with crisis legacies-high debt, low inflation, and low investment-but also higher uncertainty, added Lagarde. She said China and India are growing at about 6-7 percent, while Brazil and Russia are showing signs of improvement after a period of severe contraction. Low commodity prices, especially oil, have hit commodity exporters hard, and in the Middle East, countries continue to struggle with ongoing conflicts and terrorism.
Emerging markets are also undergoing transitions and two of them are particularly relevant for Pakistan. The first transition is in China as the world's second largest economy is rebalancing its economy from manufacturing to services, from investment to consumption, and from exports to domestic services. Pakistan, she said that China's third largest trading partner, accounting for close to 20 percent of overall trade. So clearly, a slowing Chinese economy means fewer exports from Pakistan.
Pakistan also stands to gain from the second transition-the decline in oil and other commodity prices. At the global level, the fall in oil prices created winners and losers. Income was redistributed from heavy exporters such as Saudi Arabia and Russia to net importers such Pakistan, India, and many others. In the case of Pakistan, a much lower oil import bill drove a marked improvement in your country's external balances and benefited consumers and businesses.
"Let me conclude. The Urdu poet, philosopher and politician, Sir Muhammad 'Allama Iqbal, said: 'Be aware of your own worth, use all of your power to achieve it. Create an ocean from a dewdrop. Do not beg for light from the moon, obtain it from the spark within you.'"