Could 2024 mark Pakistan’s economic turnaround moment?

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A worker at the cloth section of a cosmetics shop and general store
A worker at the cloth section of Rifat Bibi's cosmetics shop and general store in Gujar Khan Town of Pakistan's Punjab province. Photo: Visual News Associates / World Bank

After a commendable period of uninterrupted decline in poverty rates, Pakistan’s economy is now facing one of its worst crises . Poor policy choices combined with a series of shocks—COVID-19, the 2022 catastrophic floods, and adverse global conditions—have caused growth to slow, poverty to increase, and brought the country to the brink of debt default. Moreover, human development outcomes remain at levels we see in much poorer countries, while per capita income growth has been declining in the face of low productivity and high fertility. 

These challenges call for deep, sustained reforms. We recently launched Policy Notes, which lay out our views on what these reforms should entail. What we propose is not new. What is different this time though is that the alternative of muddling through with short-term fixes and external financing is riskier and much harder to pull off. 

Many countries’ turnarounds have emerged out of similar crises. For Pakistan, this could also be an opportunity to address deep rooted issues that have plagued the country’s development for too long.  

First, Pakistan must address its human capital crisis. Seven percent of children in the country die before their 5th birthday, multiple times higher than in comparable countries. Forty percent of children under 5 suffer from stunted growth—and it’s more than 50 percent in poorer districts. 

Halving stunting rates in a decade is feasible, but it will require a shift from the traditional focus only on nutrition and health to providing wider access to clean water and sanitation, birth spacing services, and improved living and hygiene environments. 

It will take strong cross-sectoral and local coordination, a national mobilization and behavioral change campaign, and investments of close to 1 percent of GDP every year. 

A weak education system is compounding the effects of stunting: 78 percent of 10-year-old children are unable to read age-appropriate text, while over 20 million children are out of school. 

Second, to finance improvements in service delivery and human capital development, Pakistan must generate more fiscal space. Tax collection has remained at a low 10 percent of GDP for decades. Abolishing expensive tax exemptions and reducing compliance costs could quickly generate about 3 percent of GDP in added revenues.  

More funds could also be raised at the provincial and local levels from undertaxed sectors, like real estate, agriculture, and retail—potentially adding another 3 percent of GDP. Expenditure savings could be achieved by more efficient management of public resources. Most loss-making public enterprises should be privatized. Poorly targeted subsidies in agriculture and energy should be cut, while protecting the poorest. Overlaps between federal and provincial spending should also be decreased. These measures could provide savings of another 3 percent of GDP per year. 

Over time, bold fiscal reforms could potentially generate more than 12 percent of GDP in new fiscal space.  This is three times the additional resources needed to address human development gaps, leaving enough resources to raise public investments in infrastructure and reduce public debt. But to put Pakistan’s public finances on a more sustainable footing will ultimately not be possible without stronger economic growth. 

Third, therefore, Pakistan must strive for a more dynamic and open economy. Current policies distort markets for the benefit of a few, while preventing productivity growth. Frequent overvaluation of the currency coupled with high tariffs lead firms to focus on domestic markets, disincentivizing exports. 

A challenging business environment deters investment, as does strong state presence in contested markets. Tax distortions also discourage productive investment and support non-tradable sectors such as real estate. Accelerating the sale of productive assets or selectively attracting foreign investment deals may bring in much-needed forex reserves in the short term, but a lasting impact will require urgently addressing the core issues behind low investment and declining productivity growth—leveling the playing field, spurring competition, cutting red tape, and increasing policy predictability. 

Fourth, the agriculture sector must be transformed to safeguard food security in the face of climate change and rising water scarcity. Current subsidies, government procurement, and price restrictions lock farmers into low-value, undiversified farming systems and water-intensive crops. 

These subsidies should be reallocated into public goods such as research on seeds, veterinary services, irrigation, drainage services, promoting regenerative agriculture, and building integrated agriculture value chains . Such measures could generate productivity gains, boost on- and off-farm incomes, and make Pakistan more resilient against climate shocks. 

Fifth, energy sector inefficiencies need to be addressed faster and more consistently as they have long been a drain on public resources. Recent tariff increases have helped limit losses while protecting poor consumers, but large distribution and transmission losses, combined with high generation costs, must be reduced to put the sector on a sustainable footing. 

Fortunately, Pakistan has access to some of the cheapest hydropower and solar resources. Leveraging these will require investment , which will only come if long-standing issues in the distribution and transmission systems are addressed, notably through more private participation. 

Also, tariffs adjustments needed to recover costs have to be shielded from politics in order to provide credible incentives for investors over the long term. 

All these policy shifts cannot be achieved at the federal level alone. Local governments will have to be empowered with capacity to raise and efficiently allocate funding to invest in much-needed local services. Decentralization needs to be revived.  

Moreover, while a more dynamic economy will provide opportunities for most Pakistanis, to leave no one behind social safety nets will need to expand while improving targeting and coherence across federal and provincial instruments. 

By putting such fundamental reforms into place in the coming years, Pakistan can achieve upper-middle income status by its centennial in 2047. We have no doubt it has the human capacities and a proven implementation ability to reach this goal. 

The country has ample potential to not let this economic crisis go to waste, and instead, make it a historical turning point. The year 2024 could mark ‘Pakistan’s moment’.

 

This blog is a repost from Dawn, first published on January 3, 2024.

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Najy Benhassine

Country Director for Pakistan, South Asia Region

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