ISLAMABAD: In her first-ever visit to Pakistan, the IMF Managing Director Christine Lagarde on Monday said Pakistan had achieved macroeconomic stability but its public debt still remained high, making interest payment larger than the country’s entire development budget.
“Despite significant fiscal consolidation achieved under the IMF-sponsored programme, public debt remains high at about Rs19 trillion, or 65 percent of the GDP. This debt needs to be serviced and, at current levels, the interest bill is larger than Pakistan’s entire development budget. To place debt on a downward trajectory, action is needed on both revenue and expenditures sides,” Lagarde said while addressing a seminar titled “Pakistan and Emerging Markets in the World Economy”, organised by the State Bank of Pakistan (SBP) here.
Lagarde started her speech by quoting the Father of the Nation Quaid-e-Azam MohammadAli Jinnah and ended her address with the poetic translation of Allama Mohammad Iqbal in English.
Answering a query about Pakistan’s entry into the fresh loan package from the IMF after a couple of years, the IMF chief said she would be delighted to help out the country, as completion of the last programme indicated that Pakistan delivered on all reform steps in the last three years.
Asked about the possibility of granting debt concessions to Islamabad after playing a crucial part in the global war against terrorism, she replied that the IMF money did not have any provision for debt restructuring as other forums such as the Paris Club was used to undertake such restructuring of debt.
“The IMF lending could not be restructured. I wish I could do so but it is the money contributed by global partners, which cannot be restructured,” she added.On this question, Finance Minister Ishaq Dar explained in a lighter vein that he did not sponsor this question as he did not know the person who raised this important question.
Talking about corruption, she said another way to boost growth was by improving the business climate by strengthening governance and enabling the private sector to thrive as Pakistan ranked 117 out of 168 countries in perceived corruption.
Although, direct social and economic losses, she said, are difficult to measure, even a perception of corruption deters private investment and impedes efforts to promote sustainable and inclusive growth.
Increasing transparency and accountability and removing red tape can help, she said and cited an example that it still takes Pakistani companies much too long to figure out their tax forms.“That time could be spent much more efficiently on pursuing business opportunities,” she maintained.
Over the past few years, she stated that economic dynamism in the world economy had gradually been shifting from advanced economies to emerging markets. Today, these countries are home to 85 percent of the world’s population, and account for almost 60 percent of global GDP — up from just under half only a decade ago. While the global recovery has been subdued, emerging economies have contributed more than 80 percent of global growth since the crisis.
“In thinking about how to meet these challenges, we can find guidance from Pakistan’s founder Muhammad Ali Jinnah, who once said: ‘With faith, discipline, and selfless devotion to duty, there is nothing worthwhile you cannot achieve’.”
“Overall, global growth has been too low, for too long, and in many countries has benefited too few people. Our forecasts for world growth are 3.1 percent this year and 3.4 percent next year — well below the 3.7 percent average for nearly two decades before the 2008 financial crisis,” she said.
“China and India are growing at about 6-7 percent, while Brazil and Russia are showing signs of improvement after a period of severe contraction. Emerging markets are also undergoing transitions of their own — shifts that create challenges but also opportunities.
“Let me mention two that are particularly relevant for Pakistan. The first transition is in China, she said and added that the world’s second largest economy is rebalancing its economy—from manufacturing to services, from investment to consumption, and from exports to domestic services. This means a slower but more sustainable growth path.
“This transition, however, is not without ripple effects —especially through trade. Think of it. China is now among the top 10 trading partners for over 100 economies that account for about 80 percent of world GDP. It is also Pakistan’s third largest trading partner — accounting for close to 20 percent of overall trade. So clearly, a slowing Chinese economy means fewer exports from Pakistan,” she maintained.
“Yet there is also good news. As China moves up the value added chain, it will reduce its production of some labor-intensive goods. This is an opportunity for countries such as Pakistan, but Pakistan will need to retool its economy and train its people to realise this advantage.
“Pakistan also stands to gain from the second transition — the decline in oil and other commodity prices. At the global level, the fall in oil prices created winners and losers.”Just three years ago, she said, Pakistan was on the brink of an economic crisis.
“Today, and thanks to the authorities’ homegrown programme of reforms that the IMF supported, the economy is on a much stronger footing.“Pakistan has also made important strides in growth-supporting policies. A clear example is the power sector. Not everything has been resolved, but disruptive power outages have come down from about nine hours to one hour per day for industries and from eight to five hours for urban consumers.
“The tax reforms matter because efforts to mobilise higher revenues have freed up resources to raise public investment and to strengthen social safety nets.
“For instance, more than 1.5 million new beneficiaries were added to the Benazir Income Support Programme, and the programme’s cash stipends were raised by more than 50 percent. This is an important step since 30 percent of the population still lives below the poverty line.
“Now, with a more resilient economy and growth picking up, Pakistan has reached a moment of opportunity. It can now embark on the next generation of reforms to generate higher and more inclusive growth, and tap into the dynamism of emerging economies.
“Keeping in mind the discipline Mr. Jinnah emphasized, I see three priority areas for economic reforms. A challenging global environment means Pakistan’s economy needs to become even more resilient.
“On the revenue side, despite the marked improvements over the IMF-supported programme, Pakistan today still only collects little more than half of what is estimated as a feasible amount. This means continued efforts are needed to bring more people into the tax net and ensure that all pay their fair share.
“At the same time, reducing public enterprise losses can enable a scaling up of growth-enhancing investment in physical and human capital. Currently, these losses amount to more than two thirds of what is spent on the Benazir Income Support Program. Imagine what you could do with that amount of extra resources!
“Taken together, these reforms are important to reduce budget deficits and build sufficient buffers to protect the country against shocks that may come down the road. In parallel, there is a need to continue strengthening social safety nets to protect the most vulnerable segments of society. These steps will pave the path to higher growth, which brings me to my second priority. Second, raise growth.”
She said that this can be done by promoting private investment, strengthening exports, and raising productivity. Private investment in Pakistan today accounts for only 10 percent of the economy. In emerging markets however, the average is about 18 percent. Pakistan’s exports are about 10 percent of GDP; emerging markets’ exports are nearly four times as high.
So here too, Pakistan can do better. Higher public investment in infrastructure can help. For instance, continuing support for projects under the China-Pakistan Economic Corridor will not only promote growth and job creation, but will also facilitate regional integration.
Another way to boost growth is by improving the business climate by strengthening governance and enabling the private sector to thrive. Pakistan ranks 117 out of 168 countries in perceived corruption.
Although direct social and economic losses are difficult to measure, even a perception of corruption deters private investment and impedes efforts to promote sustainable and inclusive growth. Increasing transparency and accountability and removing red tape can help. For example, it still takes Pakistani companies much too long to figure out their tax forms. That time could be spent much more efficiently on pursuing business opportunities.
Simplifying procedures to open new businesses, enforce contracts, and pay taxes can go a long way in promoting growth. At the same time, the energy sector reform needs to be completed.
All in all, she sees enormous upside potential. IMF studies show that improving Pakistan’s business environment to the average of, say, the Middle East and North Africa region could increase growth by 1½ percentage points per year.
Third, make growth more inclusive. As Mr. Jinnah would say, “devotion to one another”. Increasing access to education is crucial, especially in Pakistan where youth comprise about 60 percent of the population. IMF research suggests that improvements in education have contributed importantly to reducing income inequality within countries.
Currently, education outcomes in Pakistan remain weak. One out of every 12 children in the world that does not attend school lives in Pakistan. I am aware that access to education is a key concern for the Pakistani citizen, a point brought across when I met with Malala Yousafzai.
Bolstering public investment in education from 2.5 percent of GDP to emerging market average — around 4 percent of GDP —will be essential to prepare the workforce with the necessary skills and make Pakistan more competitive on the global market.
Beyond education, there is also a need to improve women’s participation in the economy. Closing gender gaps in economic participation could boost GDP by up to a third. These gains are non-trivial. Women can be a game-changer for Pakistan!
Let me conclude. The Urdu poet, philosopher and politician, Sir Muhammad ‘Allama’ Iqbal, said: “Be aware of your own worth, use all of your power to achieve it. Create an ocean from a dewdrop. Do not beg for light from the moon; obtain it from the spark within you.”
Ishaq Dar said Pakistan had to obtain the IMF package after winning 2013 elections because the government was obligated to pay back $4.5 billion of the loan which was obtained by the previous PPP-led regime.
The foreign currency reserves held by the SBP were below $3 billion and the payment due to the IMF loan was $4.5 billion instantly, so the government opted the path of getting IMF loan on basis of homegrown agenda.
He said that the foreign currency reserves now touched $24.5 billion out of which $19.5 billion were held by the SBP.
The minister highlighted the achievements made by the government in the last three years and said that the macroeconomic stability was restored and now the country was heading towards growth trajectory of five percent.
The country had achieved the GDP growth of 4.7 percent and multilateral institutions had revised their projection of growth upward up to 5 percent for the current fiscal year against official projection of 5.5 percent.
He said Pakistan completed 12 steps of reform path for completion of first-ever IMF’s sponsored program in its history.
Governor SBP Ashraf Mehmood Wathra said the country’s central bank achieved autonomy and many other reforms were implemented under the IMF program, which was accomplished in last September 2016.
“Timing and sequencing of reforms are important and adhering together with both is better,” he concluded.
Earlier, in a separate meeting with Christine Lagarde, Nawaz Sharif appreciated the Fund’s assistance for Pakistan’s economic recovery and macroeconomic stability.
He said the present government had achieved economic stability by pursuing a comprehensive reforms agenda.
The IMF chief called on the prime minister at the Prime Minister House. Nawaz said the tireless efforts of the government’s economic team had turned the economy around in a short span of three years. “We are successfully delivering on the major challenges of terrorism, economy and power shortages that we inherited from the previous governments,” added the prime minister.
Nawaz said his government was focused on increasing the economic growth and then take it to the next level by ensuring the trickledown effect of the economic gains achieved by our government.
“We want to further reduce our expenditures, increase our exports and lower down the cost of production for our industrial and agriculture sectors,” he stressed.
The prime minister said his government was setting up power projects in hydel, coal and LNG and would be able to eliminate power shortages from the country by the year 2018.
He further said there was no loadshedding for the industrial sector and the focus was on producing cheaper and affordable electricity.
“We are also committed to providing social protection to the poor and vulnerable people of our society for which our government has increased the budgetary allocation to BISP from Rs40 to Rs120 billion in the last three years.
“The poor families covered under this programme have been increased from 3 million to 5.6 million families,” he said.
Lagarde said completion of the IMF programme reflected very positively on the country, as it was viewed as a symbol of credibility and stability the world over.
She said Pakistan was now in a better fiscal position and certainly out of economic crisis and congratulated the prime minister on successfully completing the IMF programme, which has helped Pakistan restore its macroeconomic stability, reduce vulnerabilities and make progress in tackling key structural challenges.
“It is a fantastic step in your journey that you have achieved a better and solid economic position in a brief period of two years,” said the IMF MD.