Economic turn-around?

The first 1,000 days of Prime Minister Imran Khan’s government have been eventful. The economy went into a recession last year with the outbreak of the pandemic and continues to suffer from high food prices and a rising cost of living. The new finance minister has been a vocal critic of the government’s handling of the economy and wants to renegotiate the $6 billion Extended Fund Facility (EFF) of the International Monetary Fund (IMF).

Even before the Covid-19 pandemic hit the world economy, Pakistan had already started a painful adjustment programme to avoid bankruptcy. The reforms focused on reducing the unsustainable trade and fiscal deficits. As a consequence growth plummeted and inflation skyrocketed.

To evaluate the economic performance of the PTI government’s first 1,000 days, it is important to understand the baseline. Under the PML-N government, the economy had grown at an average of 4.7 percent. However, the high growth came at great cost. The consumption-led growth was fuelled by keeping imports cheap and incurring record external loans to finance the spiralling deficits. Eventually, this had to stop.

When the PML-N left in 2018, power sector losses were piling up at a record pace and there was talk of sanctions to be imposed by the Financial Action Task Force. In 2019, the government needed $25 billion just to keep the economy moving and pay back loans owed to international creditors. It had only $2.5 billion in hand (SBP reserves net of forwards and swaps).

Today the economy is accelerating. Key sectors, including exports, construction and manufacturing are doing well. Foreign exchange reserves have reached over $16 billion and the current account has a surplus. The IMF has forecast that with the current trajectory the GDP growth will accelerate to 4.5 percent by 2023 and inflation decline down to 6.5 percent. More importantly, the quality of growth is significantly better, with lower reliance on imports and more job creation. During 2008-2013, the economy grew at 2.8 percent and created 7 million jobs. During 2013-2018 the economy grew at 4.7 percent and created 5.7 million jobs (Labour Force Survey, PBS).

The second metric to evaluate the performance of PTI governments during its first 1,000 days is how the economy has fared compared to the rest of the world during the Covid-19 pandemic. The world economy contracted by 3.5 percent in 2020, with India (8 percent), Iran (5 percent), UAE (6 percent) and KSA (4 percent) all posting sharp decline. Pakistan’s economy contracted by 0.4 percent.

The pandemic was thus managed more effectively in Pakistan than in most countries. The government provided record stimulus measures. More than Rs 1,240 billion fiscal stimulus and over Rs 1,000 billion monetary stimulus were injected into the economy. The government debt stood around 84 percent of the GDP. 15 million households (around 45 percent of Pakistanis) received some emergency cash assistance from the government. Nearly 1.6 million jobs were protected through the Rozgar scheme. More than 1,000 new large construction projects have been registered (worth over Rs 350 billion). These are expected to generate new jobs and provide affordable housing to a million households.

The national economy is turning around; the data suggest that GDP growth will reach 3 percent in 2021. However, big challenges lie ahead. The privatisation programme has remained stalled, and the pandemic has resulted in more complications for reform of the state enterprises. The tax machinery has resisted moves for meaningful change. The focus has been on marginal gains rather than overhaul of policy and compliance. Capacity payments on power projects will rise to Rs 1,455 billion by 2023, from Rs 468 billion in 2018 – the main reason power tariffs will have to be raised by Rs 3.34 per unit to achieve cost recovery.

Prime Minister Imran Khan has tasked Mr Tarin to target 6 percent growth by 2023. The foundations have been laid for accelerated growth but to achieve this target the government will have to ramp up spending and provide further monetary and fiscal incentives to the private sector.

It is important that the government anchors this growth on sustainable policies. The tax reforms targetted for 2021, including harmonisation of the GST under a unified tax rate, must be accompanied by a plan to reduce the tax rate to 12 percent (from 17 percent). The FBR will oppose this tooth and nail. However, the gains to the economy will be significant as this will drive inflation down and drive growth.

The government also needs to reduce its cost of borrowing. Banks have a monopoly over government debt. More competition, especially from retail consumers, will force banks to lend at lower rates. The National Savings programme needs to be expanded with a focus on leveraging technology and bringing new products, especially long term Islamic saving products. The government can raise Rs 500 billion over the next two years by expanding the scope of NSS instruments.

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