On the right track?

On the right track?

By Jeffrey Franks

When a runner in a marathon has completed only the first five kilometres of the race, it is easy to say he has accomplished little. Onthe other hand the only way to finish the race is to run the first five kilometres, then the next five, and so on.

And when a runner who usually quits after 5km is still going strong, wise observers cheer rather than finding fault.

In the case of the latest Pakistan programme with the IMF, we have commended Pakistan for its progress in addressing its economic problems, while recognising that much more still needs to be done. In contrast, some commentators argue that things are bad and getting worse. Why such a mismatch in views?

The end of last month marked the halfway point in Pakistan’s latest economic programme with the IMF, and my departure as IMF mission chief for Pakistan after three years. So perhaps it is a good time for some reflection on Pakistan’s economy.

Pakistan’s shortcomings should not obscure the fact that progress has been achieved.

No one would argue that Pakistan’s economic problems have been solved. However, we in the IMF see significant progress being made, as follows:

An economic crisis has been avoided. It is easy to forget that two years ago Pakistan was close to a balance of payments crisis.

The State Bank of Pakistan was losing over $350 million per month and would soon run out of reserves.

A crisis would have brought a collapse of the rupee, an economic recession, and made it difficult for the government to pay its bills.

More importantly, economic crises have an inordinate impact on the poor and less well-off segments of society. Instead, GDP growth will be around 4pc this year and next, much better than expected of countries undergoing significant economic adjustments.

Monetary and foreign exchange performance improved. Foreign exchange reserves have recovered from only $3 billion in November 2013 to over $11bn, and are on track to exceed $15bn in the next few months. Headline inflation has declined sharply and should remain low due to a prudent monetary stance.

Fiscal imbalance has been sharply reduced. Electricity subsidies have been reduced from nearly 2pc of GDP to 0.7pc of GDP, while tax revenues have increased by 0.5pc of GDP last fiscal year and are on track to rise by more than 0.5pc of GDP this year. Tax exemptions and concessions through SROs were cut by 0.3pc of GDP and should fall by a similar amount next year.

Important structural reforms are under way in the energy sector, tax policy, central bank operations, the trade regime, and public enterprises. Structural reforms are tough in all countries. They are complicated. They take time to be implemented and to show results. But this programme has made a good start in key areas. Energy reforms are reducing losses, improving efficiency, reforming governance, and beginning to tackle the supply problems. The privatisation programme has been reactivated, albeit slowly. Trade reforms will make Pakistan a better place to do business.

The poor have been given unprecedented protection from the cost of economic adjustment. The direct aid to the poor under the Benazir Income Support Programme has increased sharply. Monthly benefits have risen by over 25pc and a million new families are being brought into the system. In addition, consumers under 50 kWhs/month have been spared any electricity tariff increase.

The critics are right about one thing — much remains to be done to achieve a sustainable economic transformation. Economic growth is still below the 5-7pc per year rate needed to generate significant imp­rove­­ments in living standards. The fiscal deficit is still too high and the tax-to-GDP ratio remains among the lowest in the world. While much progress has been made in reducing budgeted energy subsidies, off-budget ‘circular debt’ still generates some 1pc of GDP in losses per year and periodically threatens the functioning of the energy system.

The country has barely begun the reforms needed to enhance the economy’s productivity and competitiveness. Export growth is stalled, due in part to an overvalued rupee. But these shortcomings should not obscure the fact that real progress has been achieved.

This is an impressive start for a runner who used to drop off consistently by this point in the race. Pakistan has passed the 5km mark, is coming on 10km, and is still going strong. Will he be derailed by political expediency or by the jeers coming from the critics in the stands? Or will he continue on, adjusting his pace and stride and correcting course as needed to reach the finish line — a country with higher sustainable growth, falling poverty, and a growing presence in world markets? I sincerely hope so.

(The writer is the director of the IMF offices in Europe and served as mission chief for Pakistan from 2012 to March 2015.)

Published in Dawn, April 15th, 2015

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