Identifying a host of risks, the Asian Development Bank (ADB) expects Pakistan to work on a series of areas for reform and institutional strengthening for sustainable economic growth, poverty reduction and job creation and to end its repeated boom and bust cycles.
In its latest synopsis as part of its 5-year Country Partnership Strategy, the Manila-based lending agency has concluded that Pakistan’s weak institutions and governance continue to constrain investment, limit the structural transformation of the economy, and restrict access to quality public services. “This is evident in Pakistan’s poor performance on the Worldwide Governance Indicators, where the country’s score is lower than the South Asian average. Pakistan is ranked low on political stability, control of corruption, the rule of law, voice and accountability, and government effectiveness,” it said.
Pakistan’s weak institutions and governance continue to constrain investment, limit the structural transformation of the economy and restrict access to quality public services
At the same time, the ADB noted that a slower-than-expected recovery from the Covid-19 pandemic and accompanying social pressures might delay the economic and structural reforms needed to strengthen macroeconomic stability even though the government has committed to accelerating the momentum of structural reforms as the pandemic impact is mitigated. Economic uncertainty poses risks to both sovereign and non-sovereign operations. Private sector operations, in particular, are subject to country, market, and obligor risks.
On the public financial management side, major risks include poor budget planning practices, inefficient budget execution practices and weak systems for the preparation, appraisal and monitoring of public investment projects. On top of these, risks also include weak treasury management, poor accounting and reporting standards and inadequate corporate governance of Public Sector Entities (PSEs).
There are a lot of risks in public procurements. These include the inability to make use of advance contracting because of complex government approval procedures, lack of awareness of the use of local procurement frameworks for foreign projects, ineffective complaint mechanism and fear of inspections by the National Accountability Bureau and audit objections by auditors.
Moreover, Pakistan is also prone to natural disasters triggered by natural hazards, such as floods, earthquakes and pandemics. The country is highly vulnerable to epidemics and pandemics, such as Covid-19 and could delay the government’s reforms and divert scarce fiscal resources from planned projects.
Talking about the development challenges, the ADB noted that Pakistan economy exhibited an episodic pattern of growth characterised by boom-and-bust periods. A narrow production and export base makes the economy less resilient to adverse economic shocks, which results in a binding balance-of-payment constraint to growth. “A large fiscal deficit, a weak external position, and eroded macroeconomic buffers reflect structural weaknesses in economic management.”
The pandemic, which led to a sharp contraction in growth, has heightened the vulnerability and compounded the economic difficulties. Pakistan’s limited fiscal space holds it back from tackling its infrastructure and social sector deficits, critical to building the resilience of the population. The high cost of doing business for the private sector restricts its international competitiveness. Governance bottlenecks and institutional capacity challenges persist.
Low levels of human capital development result in stagnating labour productivity. Social protection systems are evolving but still do not provide adequate cover for all vulnerable population segments. A combination of strained growth, inadequate human capital and social protection and the underexploited potential of women exacerbates poverty pressures and intensifies income inequality.
The Covid-19 pandemic is likely to force more people into poverty. Women and girls are likely to be affected disproportionately. Leaving the pandemic aside, Pakistan’s growth has in any case been highly cyclical because of unresolved structural challenges, including insufficient export capacity, weak domestic revenue mobilisation, failing public sector enterprises (PSEs), and an under-reformed energy sector that requires massive public subsidies to stay afloat.
The ADB said that Pakistan’s external account had improved, partly because of the introduction of a market-driven exchange rate policy in 2019. Import contraction amid the Covid-19 impact also helped, with the result that the current account deficit was trimmed from 4.8 per cent of GDP in 2018-19 to 1.1pc of GDP in 2019-20. International reserves reached $12.1 billion at the end of 2019-20, and import coverage increased to 2.9 months. “However, Pakistan’s exports reversed the rising trend seen at the beginning of 2019-20 to decline by 7.2pc in the fiscal year.”
The bank has called for robust reform needed on the fiscal front to reduce the fiscal deficit and to generate fiscal space for productivity-enhancing capital spending. Some significant steps are being taken already under an ongoing International Monetary Fund programme, such as eliminating new exemptions and preferential tax treatment, bringing large retailers into the tax net, and establishing a tax policy unit in the Ministry of Finance. Pakistan still needs to improve its tax policy and administration, ensure broader tax compliance, and rationalise fiscal transfers to loss-making PSEs.
Likewise, Pakistan’s public debt, including guarantees, is high, estimated at 87.2pc of GDP in 2019-20. However, the large part (55.8pc of GDP) of public debt is domestic debt. “A careful prioritisation of government expenditures and the curtailment of losses by PSEs, together with efforts to raise higher revenues, are needed for a sustainable improvement in the country’s debt profile”.
A quarter of Pakistan’s population still lives below the poverty line. While the poverty headcount had declined from 64.3pc in 2000-01 to 24.3pc in 2014-15, progress across different regions of Pakistan remains uneven. Additionally, about 20 million people are near-poor and highly vulnerable to shocks that can pull them below the poverty line. The Covid-19 crisis may have pushed more people into poverty, vulnerability and unemployment.
The energy sector’s high-cost structure, accentuated by supply chain inefficiencies, inflicts substantial costs on the economy. The sector continues to suffer from incomplete reforms and lack of integrated planning, insufficient tariffs, inefficient subsidies, unsustainable losses, and critical infrastructure bottlenecks that put the circular debt at a massive 4pc of GDP in June 2020.
More significantly, despite being an agrarian economy, Pakistan faces food security constraints as it has one of the lowest crop yields in the region, its agricultural marketing system is underdeveloped, and the sector remains vulnerable to climate risk and pest attacks. Demand and supply disruptions from Covid-19 have caused significant food price volatility. Enhancing food security requires adopting modern agriculture technology, modernising the delivery of irrigation water services, improving agricultural productivity and increasing access to affordable credit and marketing services.
Published in Dawn, The Business and Finance Weekly, February 1st, 2021