In a low-growth trap


Dr Qaisar Rashid

On November 28, in Islamabad, Martin Raiser, World Bank’s Regional Vice-President for South Asia, addressed a gathering assembled to listen to and mull over “Reforms for a better future: Time to decide” for Pakistan.
Raiser said that Pakistan’s economy had been stuck in a “low-growth trap” (equating the poverty trap) eliciting poor human development outcomes and prompting increasing poverty. Further, poor economic conditions had rendered Pakistan highly vulnerable to climate shocks with insufficient public resources to cope with and do financial development and climate adaptation. Raiser also said that it was high time Pakistan decided whether to persist with the patterns of the sloppy past or to take difficult but crucial steps towards a bright future. Using soft possible words, Raiser condemned Pakistan’s laid back approach and customary perennial dependence on foreign financial help. Countries do plunge into a low economic growth but they tend to recuperate, contrary to the case of Pakistan, which has recently begged for loans and aid to avoid default. There is available no low-economic growth model to bank on. Slackness in economic growth begets problems and not solutions.
On the occasion, Raiser unveiled policy notes, which were a product of his nationwide consultations done over the past six months with various stakeholders. The policy notes identified four key problem areas to reform, if Pakistan wanted to come out of the low-growth (poverty) trap.
First, the major cause of concern is mounting acute human capital crisis – the silent crisis. Low investment in human capital in areas of education and health is bound to produce a compromised – mentally and physically – work force which would be unable to spur economic activities sufficient enough to break the shackle of low economic growth staggering the country. An associated concern is an existing imbalance in society to have access to education and health. Notwithstanding the islands of prosperity, not to say affluence, more people are underprivileged. Their access to education and health is both incomplete and inadequate, not making them qualify for becoming economically productive members of society in the future. The policy notes suggest that the solution lies in doubling public spending on education and health to bring it to five percent of GDP to bridge the existing gaps.
Second, another cause of concern is dwindling fiscal sustainability. Fiscally, Pakistan is getting unsustainable. Pakistan is spending more than it is earning, causing the country fall into the abyss of debt. To meet high expenditures, Pakistan is inured to seeking loans. In the next fiscal year (2023-24), “more than seventy percent of revenues will be used simply to service Pakistan’s existing debt,” as cautioned by Raiser. It means that Pakistan will be left with just thirty percent of its accrued revenue to run the country. The situation will compel Pakistan to seek loans quintessentially to meet expenditures. This is how the cycle of securing loans to pay loans will continue unabated. The policy notes suggest that the cycle be wrecked and the solution lies in improving public spending – to gain fiscal space for more public investment – by privatizing the loss incurring public enterprises, by cutting subsidies to agriculture, energy and export sectors, and by reducing the current duplication of expenditures between the federal and provincial governments. The policy notes also suggest that the counterpart of the solution lies in taking serious measures to expand the revenue base: broaden the tax base in both income tax and sales tax areas by inclusion (for instance, the under-taxed retail sector) rather than by further raising tax rates on existing tax payers. Reduce tax expenditures by digitizing the tax department. Moreover, implement the Treasury Single Account to consolidate and utilize cash resources of the government.
Third, the next cause of concern is the semi-closed state of economy. Whereas the world has moved to reducing the presence of the government’s influence on the economy, Pakistan still tends to have a sway on the economy. The policy notes suggest that the solution lies in privatization which will be a step towards opening up the economy. By dispiriting investing and parking money in land and property, money would be made available for productive investments such as in the trade-oriented and export-oriented manufacturing sector. For that matter, the government has to provide a conductive working environment to the private sector to do manufacturing and engage in trade and export activities. Nevertheless, the private sector must operate in a competitive environment to exploit local potential to proliferate, undeterred by the government.
Fourth, another cause of concern is a flurry of subsidies to the agriculture sector and exclusions offered to the energy (oil and gas) sector. These distortions (subsidies and exclusions) not only discourage the general public from paying taxes but these biases also undermine the performance of both sectors by making them less productive. The policy notes also suggest that the solution lies in the removing distortions by introducing subsidy reforms in the agriculture sector and by privatizing electricity distribution companies in the energy sector.
Interestingly, what the International Monetary Fund is coercing Pakistan to do, the World Bank is suggesting the same in soft palatable words. Certainly, the world is closing in on Pakistan.