Growth prospects

The prime minister and his economic team have expressed satisfaction on the state of the economy in recent weeks. This confidence appears to be premature and misplaced. Not for the first time has a government declared that the economy is at a 'take-off' stage when it has merely partially stabilised.

While the economic stabilisation post-2018 crisis and the recent momentum in economic activity post-Covid first wave are remarkable, both given the severity of the crises as well as the relative performance to countries around the world, it should be clear that neither are entirely policy-induced nor are sustainable.

The rebound in economic activity is a feature of recovery from sharp output contractions, and is on display around the world. For Pakistan's economy to grow sustainably in both the short as well as long run, it has to overcome some serious constraints to growth.

In the medium term, external debt repayments remain elevated and are likely to necessitate a return to the currently suspended IMF programme, as well as a successor Fund programme. With an ' uncorrected' programme design that is unsupportive of a quick transition to growth after a period of stabilisation, the IMF programmes will keep the growth trajectory depressed in the medium run.

In the longer term, some features of Pakistan's secular growth performance over the past four decades underscore the challenges. The government appears to be misreading the economic situation.

- The economy's long run growth rate (as measured by a 10year moving average) has exactly halved between 1970 and 2020, from 7.2 per cent to 3.6pc;

- Since 1980, Pakistan has recorded the lowest per capita income growth among South Asia. In nominal US dollar terms, Sri Lanka's has increased by a multiple of 14, Bangladesh's by 8.3 times and India's by 7.7 times. Pakistan's per capita income has risen 4.2 times in this period.

- Bangladesh's per capita income in nominal US dollar terms is now 144pc of Pakistan's (having overtaken India's as well this year).

While there is little doubt that Pakistan has had to face exogenous factors that have been unique - such as the large spillover effects of the ' war on terror', and internal instability promoted by hostile neighbours and 'frenemies' - many of its performance shortfalls are endogenous or self-created. These include the mishandling of the energy crisis since the 1990s, a crumbling fiscal framework, and an unchecked slide in productivity.

A common undercurrent in these failures is something that successive governments have paid little attention to since the 1990s: poor economic governance and management. Successive governments have dropped the ball on exports, energy, domestic resource mobilisation, productivity, promoting export-enhancing FDI, as well as managing myriad policy trade-offs. At the same time, regional competitors such as India and Bangladesh (and other dynamic economies such as China and Vietnam) took full advantage of the first globalisation wave.

A weak institutional framework hangs like a dead albatross around the neck of the state, imposing substantial 'deadweight' costs. It produces untenably large inside and outside lags in policy formulation and implementation, leading to a state which is unresponsive both to internal requirements as well as to a rapidly changing external environment.

Added to the structural plus institutional factors is unbridled policy uncertainty and inconsistency. Whether generated by the executive or institutions such as the Supreme Court and NAB, investors have had to face a litany of uncoordinated, ad hoc actions by state organs that have been economic value- and investor-confidence destroying. To make the situation more testing, Pakistan faces emergent and emerging new challenges - from tricky geopolitics to a changing global economic and industrial landscape. These challenges stem from shifting sands in the Gulf, the possibly diminished role of China in the world economy going forward due to reconfiguration of global supply chains, and the advent of the 'fourth industrial revolution'.

What does Pakistan need to do to meet the growth challenge? In the short to medium term, fixing the tax system such that it supports rather than penalises investment and commercial activities of the formal sector is one of the most critical imperatives. Efforts to ease the energy constraint and address affordability for industry will pay dividends. This is an area where the present government's efforts are commendable and far ahead of the unidimensional response of previous administrations which focused only on adding power generation capacity. Pakistan also needs to better leverage CPEC as a potent growth driver, especially with regard to using it as an economic diplomacy platform viz Turkey, Qatar, Iran, Russia and the Central Asian states.