Women work in a rice field in Lahore, Pakistan. Strengthening the economy to create more jobs, particularly for women and youth remains a priority for Pakistan (photo: Arif Ali/AFP/Getty images)
Pakistan: Glass Half Full?
November 10, 2016
- Successful program completion points to moment of opportunity
- Significant challenges remain ahead
- Close partnership to continue through policy dialogue and capacity building
Pakistan’s economy has stabilized from near-crisis circumstances and economic growth has gradually increased under the recently completed three-year economic reform program supported by a $6.15 billion arrangement under the IMF’s Extended Fund Facility.
In an interview, Harald Finger, IMF mission chief for Pakistan, talks about the state of the economy, the challenges ahead, and the next steps for Pakistan.
IMF News : On her recent visit, IMF chief Christine Lagarde spoke about a moment of opportunity for Pakistan. What has Pakistan accomplished over the course of the just completed program, and in what sense is there now such a window of opportunity?
Over the past three years, Pakistan has greatly strengthened the resilience of the economy and began making inroads towards addressing long-standing structural economic challenges. Not everything worked out fully as envisaged, of course, but it is important for us to recognize the program’s achievements. For instance, foreign exchange reserves have tripled, supported by foreign exchange purchases and external borrowing.
The fiscal deficit declined by 2½ percent of GDP (not counting a large payment to clear energy sector arrears just before the program started). This was made possible by removing untargeted energy subsidies that disproportionately benefited the affluent, significantly raising tax revenue through removing exemptions and concessions, and taking a more systematic approach to bringing various economic groups into the tax net.
These measures allowed for an increase in investment spending and social protection. Enrollment in the Benazir Income Support Program has increased by 1½ million families, and stipends were raised by more than 50 percent.
In the energy sector, power outages have gradually decreased and financial performance is strengthening. As a result, accumulation of arrears in the sector has also declined significantly, thereby relieving pressures on the budget. Increased independence of the State Bank of Pakistan has improved the monetary policy framework. A new comprehensive strategy to improve the business climate has been adopted and started to be implemented.
While there have been important achievements, the outlook for economic growth has also turned broadly favorable. Exports and agricultural output have been declining amid a more challenging external environment and appreciating real exchange rate. These are important causes for concern. But private credit growth has been recovering, and strong machinery imports, cement consumption, and gradually rising core inflation also point to firm domestic demand. Moreover, large-scale investment under the China Pakistan Economic Corridor is beginning to be implemented.
With the authorities’ accomplishments in strengthening the economy’s resilience and a broadly favorable outlook for growth, the IMF's Managing Director, Christine Lagarde, spoke of a moment of opportunity for Pakistan during her recent visit to Islamabad. She emphasized that now is the time for the country to continue its transition toward becoming a full-fledged emerging market by addressing the remaining challenges and implementing policies for higher and more inclusive growth.
IMF News : Following completion of the economic reform program, what are Pakistan’s remaining economic and financial challenges?
Pakistan has done relatively well over the last three years, but of course much remains to be done. It will still take a multi-year effort across several policy areas to address the many challenges Pakistan faces. I am often reminded of the classic question of whether the glass is half empty or half full.
Let me highlight some of the main structural challenges. Exports represent a small share of GDP, and as I mentioned, have been falling. Investment (both public and private) remains much too low to support sustainable growth, and social spending on health and education is well below levels seen in comparative countries. Despite the progress made over the course of the program, tax revenue collection remains much below Pakistan’s potential; this limits the space for investment and social spending, but also points to fairness issues in light of still widespread tax evasion.
Business climate and governance indicators are still sub-par, the financial sector remains underdeveloped, and the gender gap—on human, social and economic dimensions—is among the largest in the world. Power outages, while having declined over the last three years, still persist, as do the financial losses of ailing public enterprises.
There also remains stabilization challenges. Public debt is still high, and external financing needs are projected to increase, though without large spikes in any particular year. A sustained drive at tackling these and other challenges will be needed to support high and inclusive growth that is steady.
IMF News : Will Pakistan need another IMF program?
With continuous effort in reforms, Pakistan has a good shot at reinforcing the recent stability gains and reaching a level of economic resilience which would not require renewed financial assistance for stabilization from the IMF. Everything will depend on the authorities’ policy effort, along with any unforeseen shocks, of course.
Our close partnership with Pakistan will continue through policy dialogue, including in the context of Article IV consultations and post-program monitoring, and capacity building.
IMF News : What lessons have you learned from the successful completion of the program?
While economic reform programs can be difficult to implement and take time to bear fruit, the most important lesson for us is that our shot at success is greatly improved when we can support an economic program that is homegrown, and widely debated in society. We also learned from our experience with Pakistan and many other countries that being flexible and agile is just as important.
IMF News : There have been some vocal critics in Pakistan of the government and, by extension, the IMF’s role during the program. How do you deal with this criticism?
A lively public debate about economic policy choices and priorities is welcome and constitutes a healthy part of the policy-making process. Overall, I find that we have been able to make our assessments and policy advice heard in the public debate quite well. We have been engaging through op-eds, regular press conferences and conference calls, and through our Resident Representative in Islamabad, Tokhir Mirzoev, who is in regular contact with journalists and editors. The Managing Director’s recent visit was also a welcome opportunity for outreach. Occasionally, we have had to issue ad hoc press statements when our views were grossly misrepresented.
There have been critical voices over the course of the program. They have alleged that national account data had a political bias, that there was either an excessive focus on fiscal adjustment or no real fiscal adjustment at all (sometimes both positions have even been taken in the same article), that the program was anti-poor, that too many waivers were given and so on.
Some of the arguments made were grossly misleading, for example by misstating the size of fiscal adjustment by adding stocks and flows, or by alleging that development spending was cut under the program when in fact it went up by more than 50 percent.
The critics also highlighted important points on which we agree, chiefly by pointing to the many challenges Pakistan still faces in the period ahead and the substantial reform agenda it will need to implement. But the program has helped Pakistan today being financially stronger and better positioned to tackle these challenges.