KARACHI: Pakistan has been facing serious challenges, including low savings and investment levels, falling exports, poor spending on the social sector and reliance of the tax structure on stopgap measures that create distortions in the economy, according to the State of the Economy 2015-16 report released by the State Bank of Pakistan (SBP) on Thursday.

It praised the government for macro-economic achievements and expressed hope for a better future with a higher economic growth rate. However, it identified a number of challenges that the economy has been facing.

There are certain challenges that deserve the undivided attention of all stakeholders, said the report. “Pakistan needs to increase its savings and investment levels. Although public investment is increasing despite resource constraints, investment by the private sector has not increased sufficiently,” it said, adding that this has inhibited the country’s potential growth.

“Savings are not commensurate with required investible resources. The situation cannot be fully remedied unless the private sector, in particular, comes up with attractive savings schemes in the areas of pensions, provident fund, gratuity, old-age benefit schemes; targeted marketing of such schemes (including in the rural areas) is also imperative,” said the report.

Declining exports continue to pose a major challenge for a sustainable external account. Some recent policy fixes are welcome steps and will have positive impact, but structural issues in the export industry should also be resolved, it said.

These shortcomings magnify the impact of falling global commodity prices. “Therefore, a more coherent and integrated industrial and trade policy, supplemented by a regulatory regime that rewards innovation, is the need of the hour,” said the report.

“While ongoing fiscal consolidation measures are welcome and have been widely appreciated by both local and foreign stakeholders, the reliance of the tax structure on stopgap measures — like the imposition of regulatory duties in November 2015 — is creating distortions in the economy,” said the report.

As sectors like telecommunication and energy yield hefty revenues, others like agriculture are hardly contributing their worth in total taxes, it added.

The report said the country has been unable to spend nearly as much on social sector development as it needs to. Be it health or education, Pakistan spends much less as a percentage of GDP than many developing countries.

“Despite some improvements in areas like poverty alleviation, maternal and child mortality and primary school enrolment, the country was unable to meet a majority of the targets set under the Millennium Development Goals (MDG) framework,” said the SBP report, adding that with the Sustainable Development Goals (SDGs) having replaced MDGs last year, a deep rethink is required across all levels of the government.

The report said that Pakistan seems to be well-positioned to address these challenges and make progress to a higher growth trajectory and social development. Moreover, a prolonged spell of low oil prices has made it easier to expedite and deepen structural reforms, it added.

The report reiterates that without private-sector participation, it will be hard to achieve a higher and sustainable growth rate that is built on the pillars of entrepreneurship, innovation and competitiveness.

While commenting on sector performance, the SBP said the crop sector posted negative growth of 6.3 per cent in 2015-16, which led to a decline of 0.2pc in the overall agriculture sector for the first time since 2000-01.

The industrial sector posted healthy growth of 6.8pc in 2015-16, which was not only higher than 4.8pc growth realised in 2014-15, but also surpassed the annual target of 6.4pc. Construction activity grew 13.1pc in 2015-16 – more than double the level of growth seen in 2014-15.

On the back of modest growth in the commodity-producing sectors (agriculture and industry), higher trade volumes and a healthy performance by financial institutions, the services sector grew at a decade-high level of 5.7pc in 2015-16, the SBP said.

“With an improved macroeconomic environment, better energy supplies and subsiding security concerns, business sentiments are upbeat. In addition, smooth progress on China-Pakistan Economic Corridor-related projects will ease infrastructure and energy constraints, and also create demand for industrial output.”

Published in Dawn, November 18th, 2016