Importance of reforms in economy

According to a World Bank report on “Global Economic Prospects” published on 7th June, 2016, reform delays in Pakistan such as entrenched political obstacles to privatisation, would compromise future productivity and dampen growth prospects.

Such delays would also increase fiscal pressures because budget projections also take into account proceeds from strategic disinvestments. Chronic energy deficiencies in the country have weakened foreign direct investment but a pick-up is expected with the start of China-Pakistan Economic Corridor (CPEC).

Nonetheless, domestic investment in the country remains weak. On the positive side, the country is likely to benefit from expected improvement in power supply and security situation. Pakistan had an annual energy deficit of about 5,000 megawatts which may have shaved about four percentage points of GDP growth per year.

Ongoing monetary accommodation would support credit expansion in the private sector. Fiscal consolidation is likely to be maintained. GDP growth rate picked up to 4.2 percent in 2015-16 – its highest pace in seven years. This was supported by several positive factors including an improvement in security situation, lower oil prices, higher workers’ remittances, acceleration in credit growth and rising public investment.

Pakistan’s EFF arrangement with the IMF remains on track. Fiscal deficit fell from 8.4 percent of GDP in 2013 to 5.3 percent in 2015 on account of improved revenues and reduced expenditures.

Although the report of the World Bank does not contain the latest data on growth rate of the economy and fiscal outcome, the overall thrust of the report is well balanced and quite appropriate to the prevailing conditions. The statement that domestic risks to growth include setbacks in reform implementation, particularly in the areas of privatisation and fiscal policy, reflects an accurate assessment of the situation.

Obviously, a delay in privatisation would continue to put increasing pressure on the budget due to the existence of loss-making public sector enterprises and a lack of reforms on the fiscal front would force the country to resort to all kinds of borrowings from various sources, adding to the internal and external stock of debt and debt servicing liability of the country.

Unfortunate is the fact that almost all the governments were aware of the dire need to make headway in these areas but backed out from the necessary reform measures due to stiff resistance from trade unions and opposition parties. The present PML (N) government also seems to have followed the same course.

The government has produced mixed results through its attempt to privatise PIA. There is no work in the PSM due to its closure but its labour force gets the wages from the national budget. So far as fiscal efforts are concerned, there are no measures in the FY17 budget broaden the tax base and ensure equity in taxation.

Different approaches to filers and non-filers seem to be a recognition of the fact that FBR finds itself unable to unearth the potential tax payers and bring them into the tax net with the force of law.

Also, while the reform efforts are floundering, some other areas of the economy like merchandise account, saving and investment rates and sharply rising debt level are also a cause of concern. Significantly lower oil prices may also fade over the medium term, putting more pressure on the external sector and domestic price level.

Besides, it looks some what weird that the country has now put all of its eggs in the basket of the CPEC. Somebody in the government needs to analyse the consequences if this basket is retracted by China for one reason or the other. After all, decisions of all the governments are always based on self-interest.

Lastly, it has always been the contention of the government that all the IFIs have showered their praise on the performance of the economy during the tenure of the PML (N) government. The present report of the World Bank shows that the country has still to confront certain challenges and overcome them to claim such a distinction. –Business Recorder