Pakistan’s economy has struggled under Pakistan’s current government, with the country requesting $6.6 billion in IMF aid last year. Economic forecasts for 2015 suggest the economic and fiscal issues will continue unless the government addresses several related policy areas.
Earlier in September, even as anti-government protesters continued to camp with containers and tents at Constitution Avenue in Islamabad, Pakistan’s attorney general submitted to the Supreme Court that the country had suffered a loss of more than $5 billion due to prevailing unrest. In the same week, negotiations with the IMF on policy issues over the next instalment of tranche were inconclusive as the government was scrambling to survive.
Pakistan has the right mix of demography, natural resources and enterprising class for faster economic growth. But two decades of political instability, Jihadist attacks, inadequate investment in the social sector, economic mismanagement, and poor governance with deeply wrenched vested interests have made Pakistan one of the least preferred investment destinations. In 2013, the country was forced to seek the IMF’s extended fund facility to the tune of $6.6 billion to build up exchange reserves and to enable itself to recover from growth decadence.
The government initiated reforms, partly under IMF’s pressure, to increase government revenue and cut public expenditure. After beginning to reform subsidies to make it more targeted at the poorer sections, it began the process of privatizing loss making public sector companies including Pakistan airlines, Pakistan steel mills and 34 others. Despite opposition from unions, the government is on track, albeit slow, to privatize state-owned entities through the privatization commission.
Although not entirely successful, the Nawaz Sharif government did introduce taxation reforms to increase tax-GDP ratio which was only around 10%. The reforms yield results, increasing tax collection by 16%.
In the FY 2015 budget, the government further widened the tax net by proposing to tax a range of commercial transactions. The government is yet to remove a broad band of exemptions, essentially favouring the rich, called statutory regulatory orders (SROs). But by promising to do so over the next three years, it has given itself time to overcome vested interests including in its own party.
Externally, the situation is much comfortable compared to a year before. In July, the reserves increased to $14 billion with the current account deficit at a comfortable 1% of GDP.
Despite these encouraging indicators, the Nawaz Sharif government has not resolved the energy crisis. For nearly a decade, Pakistan’s energy problems have compounded because of inter-linked factors such as reliance on imported oil and gas, under exploration of domestic coal, transmission and distribution losses, subsidies and under-recovery of dues among others.
The PML-N government’s energy policy is also inadequate for Pakistan’s current and future requirements. Business-as-usual increased the circular debt to $3 billion in June 2014. This increase occurred despite a onetime payment of nearly $5 billion dollars in 2013 to retire the debt. This has translated into long power cuts during a scorching summer.
Despite the power crisis, public opinion on the government has remained positive. 64% of respondents surveyed by Pew rated the PM favourably. Even the sombre public mood on the economy has improved moderately. The economic indicators during his time in office were satisfactory enough for the World Bank to state with confidence that a recovery was underway.
Since August, however, the protest rallies and the powerful military’s thinly veiled intervention have unsettled the government. Although a coup less likely than two weeks ago, and Prime Minister Sharif is holding onto his position, he is unlikely to take bolder measures to pave a faster and sustainable growth path for the economy.