Pakistan-Economic Sustainability Part-2

Restore macroeconomic stability; despite the disruption caused by 2007 events.
Economic growth of Pakistan has benefited from macroeconomic stability. Containing macroeconomic
imbalances helped generate (i) external current account surpluses in two of the preceding five fiscal
years while (ii) fiscal deficit was below 4% in three of the five preceding fiscal years supported by
surplus or zero primary balances (reflecting an effort to balance current revenues with current
expenditures).
10. Pakistan however now faces renewed economic vulnerabilities. Among others, compulsion to
subsidize food, oil products and power & gas tariffs by preventing full pass through of international
price hikes and to raise public investment to address infrastructural and skills gaps, essential to
maintain growth path, have together disrupted progress in fiscal containment. Corrective policy
actions, taken in the last few weeks, including rise in petroleum products, electricity and gas prices
and cuts in development expenditures will at best ease marginally fiscal strains.
11. Notwithstanding, the growing aggregate demand pressures in face of rising per capita income,
six-fold increase in remittance, set to reach $6.5 billion for FY08, and exceptional rise in private credit,
high import growth of petroleum products and capital, intermediate and raw material goods have
compounded these vulnerabilities. Underlying demand pressure and threefold increase in import oil bill
coupled with slow down in export growth has also widened external current account deficit.
12. Keeping strong vigilance on the economy, the central bank took a lead in containing the
aggregate demand pressures. Incrementally, monetary policy was tightened through three rounds of
raising the SBP policy rate (by 300bp) since April 2005 to 10.5%, raising the reserve ratio, and
improving liquidity management through open market operations. Monetary policy in Pakistan has
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benefited from the independence and strong accountability of the central bank as well as from the
central bank’s conscious efforts to ensure transparency in public communications of monetary policy
stance and perspective on the economy. Monetary policy has managed to keep inflationary pressures
in check by managing to lower core inflation; slippages in inflation target were inevitable given the
uptrend in the global commodity prices as well as structural complexities and inefficiencies of
wholesale and retail markets.
13. Global and domestic cyclical events will undoubtedly pose frequent challenges for small and
open economies, like Pakistan. Recognizing this, the new Government will need to strengthen the
Medium-Term Macroeconomic Stabilization Program and front load it, while accelerating the
implementation of structural reforms to realign deficits to sustainable levels. Keeping this in
perspective, the Government’s broader economy strategy for the next few years will need to include:
i. Increasing domestic resource mobilization to raise revenue/GDP ratio by at least 5 percentage
points of GDP. This is possible given the scope for enlargement of tax base: the existing tax
regime collects almost 68% of taxes from manufacturing and corporate sector, while agriculture
and services sectors (aside from banks) are exempt and segments of economy are outside tax
net;
ii. Nation-wide campaign to raise saving levels through continued efforts to raising awareness and
deepening financial markets;
iii. Restricting large proportion of new resource mobilization for public investment, while prioritizing
the recurrent expenditures through a major overhauling of the Government machinery;
iv. Restoring the momentum of privatization of state-owned enterprises, which has been one of the
most successful in Asia. The Government has sold off cumulatively almost $7 billion of assets
over FY00-FY08 and there are around 61 state entities in the pipeline;
v. Providing more autonomy to public sector organizations, with effective leadership and
management, to improve their operational and financial efficiencies accompanied by a program
to strengthen their balance sheets which should allow them to graduate from budgetary
allocations to seeking funding from the market; and
vi. Raising private investment/GDP from 23% to at least 28% which involves significant tapping
additional resources both from domestic and international financial markets.
12. Although this is an ambitious macroeconomic framework, but launching and adhering to it is
attainable and critical. To position itself, Pakistan plans to further enhance its policy framework and
tap its economic potential by mobilizing additional foreign capital that is likely to be attracted as the
country offers lucrative investment opportunities across all sectors.
13. Deepening of liberal incentive and investment regime will help economic sustainability.
Broad based deregulation and liberalization of investment and pricing regime, Pakistan attracted
cumulatively $13.5 billion investment across all strategic sectors. This has been facilitated by easing
entry of domestic private sector and foreign equity with flexibility to fully own businesses. Long
standing liberal and partial capital account convertibility allows individuals, firms or companies to freely
undertake all international transactions through the interbank market. Aside from allowing 100%
foreign equity, there are no bars on repatriation of capital, profits, royalty etc. Exchange rate stability
has been supported by prudent exchange rate management.