The economy has entered 2020 with fragile stability, subdued growth and a “decisive policy implementation phase” to address “deep-seated problems and its large imbalances” while preserving financial stability.

Virtually riveted to monetary and fiscal policies in the 15th month of its term, the PTI government is expected to expedite planned structural reforms “particularly in the public sector” that it sees as the “key to reviving economic activity and growth”. Certain eminent economists say that government expenditure “is a bigger contributor to our financial ills,” going beyond losses of bleeding state enterprises and the unrecovered cost of energy provision.

Structural reforms are more difficult and, as empirical evidence shows, often take decades to complete. They lie at the heart of Pakistan’s frequent recurring balance-of-payments crises. The year will see renewed efforts, encountering tougher challenges, to build upon the initial success in achieving macroeconomic stability so far.

The long-awaited restructuring of loss-making state-owned enterprises and the privatisation of non-strategic units need to be expedited

Despite significant improvements in the external sector, no substantial change has occurred in the current account deficit when seen as a percentage of GDP, which is negative 4.6pc against the average 2.4pc for India and Bangladesh. Dollar reserves have increased primarily on the back of surging debts. In the past, structural imbalances, not prudently managed, arrested organic, synchronised growth of the domestic economy.

In the first International Monetary Fund (IMF) review, economic growth estimated for 2019-20 is 2.4pc, unchanged from its forecast in May. Gross savings are now projected to be negative 4.2pc — as opposed to earlier 3.3pc — with the savings-investment imbalance at 1.8pc of GDP. IMF officials expect the debt profile to become sustainable in three years. In a joint review of the performance of the economy, Dr Hafiz Pasha and Shahid Kardar estimate GDP growth at a lower rate of 2pc for 2019-20.

With a low level of foreign direct investment and workers’ remittances and exports not growing as fast as expected, the twin fiscal and current account crises are being currently managed with not-so-certain inflows of foreign debt. Facing difficulties in securing the annual borrowing target, dollar investment has been allowed in government securities with unprecedented high returns, which are unmatched worldwide. The government has not released three biannual Debt Management Risks Indicator reports over the past one and a half years.

The need for foreign investment in government securities makes it more difficult to foresee when the policy rate will be cut. Some currency analysts are of the view that the possibility of the rupee coming under pressure by the end of June cannot be ruled out.

A heavy agenda for removing structural imbalances, as agreed with the IMF, awaits much-needed reforms. For example, electricity tariffs are being raised to recover costs while IMF data shows that around one-third of the circular debt in 2018-19 was due to distribution companies’ inefficiencies. National Electric and Power Regulatory Authority and Oil and Gas Regulatory Authority are to be empowered through amendments to existing regulations to avoid delays in the issuance of tariff notifications. The decades-long-awaited restructuring of loss-making state-owned enterprises and the privatisation of non-strategic units need to be expedited.

Tax administration is to be revamped with the creation of semi-autonomous Pakistan Revenue Authority to boost revenues whose current actual potential seems unlikely to reduce the fiscal deficit to a sustainable level without significantly trimming the size of the government.

As stipulated in the IMF agreement, the federation is required to “deepen cooperation and coordination” with the provinces to expand the tax base. The National Finance Commission’s recommendations on the harmonisation of sales tax are to be placed before parliament by the end of February. The new budget strategy will be finalised in time to be presented to parliament by March 15. However, legislative matters carry a high political risk without taking the opposition on board.

Published in Dawn, The Business and Finance Weekly, January 6th, 2020