Dr. Shamshad Akhtar
After months of hard work, we have successfully reached a staff-level agreement with the IMF on the first review of the $ 3bn SBA. This is a very positive development for the economy and will support our efforts for macroeconomic stability.
The IMF SBA and support from other development partners provide us an opportunity to get our economy back on track. In today’s session, I want to share with you the ‘The Big Picture’ on pathways for sustainable development and shared prosperity.
Pakistan has all the requisites of being a major economic player in the region and Asia. According to a World Bank report, our economy could reach $ 2 trillion by 2047, from $ 350 billion today. However, this requires the formulation and implementation of sound economic policies and difficult structural reforms to achieve this potential.
Unfortunately, looking back at the last 3 decades, the failure to initiate meaningful reforms has meant that Pakistan has fallen behind regional economies in terms of human and economic development.
Once again we stand at a crossroads. The decisions over the next decade will determine Pakistan’s future. The big question is will Pakistan rise to the challenges ahead and transform its economy?
Pakistan needs more innovation and diversity in the structure of the economy for sustainable growth. The manufacturing base, in particular exports, and the agricultural basket are focused on a very narrow range of products and have failed to penetrate new markets.
Effective implementation of ambitious reforms will depend on addressing critical underlying institutional and governance constraints. We need to build stronger institutions to deal with the momentous challenges facing Pakistan today.
First, we must completely overhaul the government’s fiscal apparatus so as to lower the revenue-expenditure gap. Tax to GDP has remained low at 10% to 11% in the last 3 decades, with the government forced to finance large fiscal deficits through borrowing from domestic and external creditors.
Towards this end, the caretaker government has initiated the process of restructuring Pakistan’s tax administration. The digital transformation of tax administration is a crucial step in meeting the objectives of enhanced tax collection and improved compliance. Innovative digital technologies need to be implemented to minimize tax gaps, increase tax collection, and reduce the share of the shadow economy.
We are working towards the separation of the tax policy and tax administration functions, so as to remove the apparent conflict of interest in tax collection. Tax policy has to be designed to be fair, equitable, and productive. The revenue and fairness objectives need to be pursued by expanding the tax base, reducing tax exemptions, and through a more efficient digital tax administration.
Simultaneously, there is a need to enhance the efficiency and effectiveness of public expenditure. There is an urgent need to improve coordination within the federal government and with provinces and reorient expenditure priorities towards social welfare.
Towards this end, the government has initiated dialogue with the provinces for sharing expenditures on BISP and PSDP projects falling under the domain of provinces. A review is being conducted to close departments at the federal level for devolved subjects.
Options are being explored to shift the large infrastructure projects under the PPP mode, providing sizeable savings on budgetary resources for both federal and provincial governments. We are looking at ways to enhance allocation to the Viability Gap Fund for undertaking Infrastructure projects in PPP mode. We are also exploring avenues to seek credit guarantees from INFRAZAMIN to enhance private-sector investment in Infrastructure.
To address structural weaknesses of SOEs, improve their efficiency and functioning, and thereby reduce the drain on the budget, the government is focused on operationalizing the Centralized Monitoring Unit (CMU). The CMU will monitor the SOEs and publish regular reports on financial performance and contingent liabilities.
We are in the process of finalizing a SOE policy under the SOE law as agreed with IMF. The focus of the policy is on improving the governance and financial efficiency of the loss-making SOEs.
The Privatization program has been fast-tracked and Financial Advisors for PIA have been appointed. We are working with the IFC team on Concession and Management Contracts (Privatization) for DISCOs.
We are also working on the operationalization of the Sovereign Wealth Fund (SWF). This holding company will help us to fast-track the privatization of SOEs through G2G arrangements. The export-import gap has to be reduced through promoting exports. For this, the competitiveness of Pakistani exports has to be improved and the impediments to exports be removed. The government believes in a market-based exchange rate regime that can avoid the persistent overvaluation of local currency.
The anti-export policies of the last 3 decades have led to the loss of competitiveness of our manufacturing base. Exports have failed to make a transition from low-technology to high-technology products as about 70 percent of the country’s exports continue to be low-technology products. In addition, the country has failed to diversify its export commodities and export markets. Textiles and clothing sector, which contributes about 5% to world trade, dominates the country’s exports, accounting for around 58% of total exports.
Similarly, more than 50% of exports rely on only four markets – USA, EU, China and Afghanistan. The country has been losing competitiveness in international markets and finds it harder to sell even within its traditional markets.
Pakistan’s loss of competitiveness is evident from the fact that exports of goods and services have declined to 10% of GDP, compared to India (19%) and Bangladesh (15%).
To facilitate exports to new markets and encourage the export of new products, we are operationalizing the EXIM bank. This will bring credit guarantees and insurance products for exporters, encouraging them to target new markets for exports.
Another factor is the tariff structure that has a significant anti-exports bias. Within the tariff policy space, a large number of SROs distort the trade regime by modifying the notified import duties selectively without any economic justification.
This has resulted in low import content which in turn restricts our manufactured products to a narrow range of low value-added exports. This is also the reason why Pakistan has one of the lowest integration in the global value chains.
Some progress has been achieved in streamlining customs rules and procedures to expedite the clearance of both exports and imports through the Single Window operations, but more work is needed to achieve international best practices.
The investment-saving gap has grown more acute in the last 3 decades, greatly limiting the growth potential of the economy. In Pakistan, any acceleration in economic growth invariably leads to a balance of payment difficulties, reversing the gains of higher GDP growth.
The SIFC has been set up to materialize new investments in critical infrastructure and neglected productive sectors of the economy including agriculture, minerals, and IT services. SIFC is also facilitating G2G arrangements and has successfully executed the first transaction between Karachi Port Trust (KPT) and AD Ports, UAE for the Container terminal at Karachi.
SIFC is also facilitating potential partnership of the Saudi Wealth Fund in the $ 7bn Reko Diq transaction. Under the SIFC a transaction pipeline to expedite investment in critical infrastructure has been developed and it includes $ 10bn Saudi Aramco Refinery project and the Agriculture Corporate farm lease of 85,000 acres of land to potential foreign investors.
The Financial Inclusion strategy focuses on using digital platforms and non-banking channels to bring financial services to the masses. To tackle this challenge, the Pakistan authorities launched an ambitious National Financial Inclusion strategy in 2018. An elaborate digital infrastructure is being developed and includes the launch of the RAAST payment gateway in 2021. This has enabled instant end-to-end digital payments between individuals, businesses, and government entities.
In conclusion, bold reforms will lead to a new era of development and prosperity in the country. We need to establish a fast-growing and efficient economy that is capable of creating more quality jobs to absorb its labor force, especially the youth of the country; an economy that is more self-reliant yet economically better integrated with economies in the region and beyond; an economy which is forward and outward-looking, willing and capable of competing for its rightful place in international trade and commerce.
The writer is the Minister for Finance, Revenue and Economic Affairs
