Structural reform
It seems Pakistan economy has at last begun to look up. According to various domestic and international estimates, Pakistan will achieve 6% plus growth rate in 2018, breaking the vicious cycle of low growth in which it was trapped for the last few years. This growth has been largely based on infrastructure spending, the China-Pakistan Economic Corridor (CPEC) and Public Sector Development Programme (PSDP). CPEC-related flows alone account for around $22 billion, which is currently in the pipeline in the form of various power and infrastructure projects. Then there is ever-growing PSDP, which is Rs2,113 billion for 201718, including both federal and provincial governments.
Pakistan's economic slowdown in previous years has been attributed to energy availability and cost of electricity. But Pakistan now has surplus electricity, enabling the government to change its policies to effectively curb the supply side. As recently announced by Nepra, the cost has also begun to go down. If this trend continues, then the industrial sector will finally get what it always demanded. New companies have lined up to enter Pakistan's auto market very soon. There are three new airlines slated to be launched in 2018. Pakistan's industrial growth rate, as indicated by large-scale manufacturing, is around 9%, the highest in decades. The corporate circles in the country's business hub Karachi seem to be generally satisfied with the current economic policies.
But some challenges still remain. Pakistan recently devalued its currency by 5% to correct its 'over-valued currency'. That will give a boost to the nominal value of our exports, but is likely to enlarge the trade deficit even faster. The trade deficit has ballooned and crossed $40 billion. Pakistan has relied heavily on remittance receipts to offset Balance of Payment deficits. A sudden surge in the repatriation of labour working in the Middle East has cast doubt on this strategy. Both the number of new labour going abroad and remittance receipts is falling.
The balance of payment crisis in Pakistan has led to IMF bailouts and it is likely to be forced into that direction again. The resource gap is huge, especially because of the inadequate domestic resource mobilisation. Tax base continues to be narrow despite a steady growth in tax collections. A recently released scorecard, which measures economic performance after every six months, has given 58% marks to efforts for economic revival. According to the scorecard, out of 54 electoral promises made by the PML-N to revive the economy, there has been some progress in 40 promises. On 14 promises, the scorecard has assigned a zero score.
Amongst the achievements, the scorecard counts doubling of GDP growth rate, increase in investment, elimination of energy shortage, control over budget deficit, curtailment of inflation, low interest rates, financial and capital market reforms, increase in the commercial credit, and an improvement in the tax-GDP ratio. The scorecard counts deterioration of regulatory environment, no privatisation, absence of tax reforms, presence of anti-export bias and narrow tax base as major shortcomings. It is evident that for economic revival, the PML-N government relied on a strategy of fresh investment, supported by lower commodity prices, and balance of payment support, rather than confronting any major structural challenges, such as tax rationalisation and regulatory reforms.
However, without wide-ranging reforms, we cannot utilise the potential that Pakistan's economy holds. Pakistan is poised to a takeoff, but it has reached this stage many a times before, and only long term political stability and serious reforms can ensure that the effort is not aborted again.