The theme of this summit is finding the
Bright Spots. This is a brave undertaking when talking about
a country that has gone to the IMF on an average of once
every four years during the last three decades; where one
political party is threatening to shut down the capital for
the second time in three years; and where surgical strikes
may be occurring but not necessarily in the medical sector.
But is this time different? Are there really some bright
spots out there that will continue to shine? Perhaps even
grow in brightness rather than dim over time?
I am trained as an economist. So I am trained to be
skeptical and to find progress only when looking backwards,
in retrospect.
But I will restrain my cautionary instinct and go along with
the spirit of this summit to find some bright spots for
Pakistan.
I can see bright spots in three main areas: in the
stabilization of our economy; in the prospect of substantial
energy and transport investment from China under CPEC; and
in some aspects of our education and research environment.
Let me elaborate.
Stabilization of the economy
First, the economy. The bright spot here is that we have
achieved macroeconomic stability after a period, barely
three to five years ago, when our macroeconomic balances
were seriously out of kilter. By this I mean that our fiscal
position, our international reserve position and our
inflation picture all look good. All my macro data come from
the latest IMF review conducted in August 2016. These data
show that our budget balance has improved from a deficit of
8.4% in FY13 to a deficit of only 4.3% in FY16. The tax to
GDP ratio rose from 10% to 12.4% of GDP though most of this
increase has occurred in the last fiscal year. Our
international reserves have risen from around $6 billion in
FY13 to around $18 billion at end June 2016 or from 1.5
months of import cover to 4.2 months. Inflation was running
at 7.4% in FY13 and averaged only 2.9% in FY16.
And, in keeping with all of this, growth has moved up from
3.7% three years ago to 4.7% in FY16. Energy subsidies have
been cut from 2% of GDP to 0.6% while the Benazir Income
Support Program which helps very poor families has expanded
its coverage from 3.78 million to 5.36 million beneficiaries
while raising stipends from Rs. 3000 to Rs. 4700 per
beneficiary per quarter.
And even the trade balance is slightly better at -0.9% in
FY16 than the -1.1% in FY13. And this despite declining
exports. Exports declined by 8.5% in FY16.
FY16 performance would have been even better had it not been
for the setback in the agricultural sector, particularly in
cotton. The agricultural sector declined by 0.2% last year
and cotton output fell from 14 million bales to 10 million
bales, more or less.
So the economy looks to be a bright spot from the point of
view of macroeconomic balance. This is not to say all
sectors are doing well or that long term growth prospects
are necessarily great. But the macro picture does look
healthy. In part this is due to the fact that oil prices
have been low since the middle of 2014. This has helped a
lot with respect to inflation as well as the fiscal and
external position.
There is another aspect to the macroeconomic stabilization
that is reassuring. This is the fact that the process was
closely monitored by the IMF who backstopped our economy
with a loan of $4.4 billion dollars that was disbursed in
twelve tranches, one every three months for the last 36
months, after a review of the previous quarter's
performance. This is the first time in a long while that
Pakistan's economic managers have been able to maintain
policy discipline for 3 years and to complete an IMF
program. So both policy discipline and favorable external
circumstances have been at play.
Around every bright spot there is usually an area of partial
darkness. So it is with our case. While macroeconomic
stabilization has been achieved, several structural problems
remain unresolved. Let me touch upon these briefly.
Tax ratio: This has risen bust mostly because of the
elimination of some tax concessions and exemptions,
additional indirect taxes and some improvements in tax
administration. While there has been some increase as well
in the number of filers, the tax base continues to remain
narrow as many types of income remain outside the tax net.
Many services also remain exempt from the GST. And the IMF
has all but given up on trying to introduce a VAT in
Pakistan, a tax that has proved both productive and
efficient in most other countries.
Public sector enterprises: Not many successes can be claimed
on this front. Many public sector enterprises continue to
remain a drain on fiscal resources while providing poor or
indifferent services to the public. The PIA privatization
effort came to an inglorious end and has been replaced by a
corporatization plan. Attempts to sell the defunct Pakistan
Steel Mills have gone nowhere yet.
Business climate: Pakistan's business climate ranking has
slipped from 136 in 2015 to 138 in 2016 (out of 189
economies). While this is not a big change, the fact that
Pakistan was doing much better many years ago and that its
current ranking is in the bottom quintile is alarming. This
may be contributing to the continued lack of dynamism in the
private investment rate which continues to languish around
10% of GDP, far too low to support the growth trajectory of
6% and more that the country needs to manage its employment
challenge.
Public debt: The public debt stood at 65% of GDP at
end-FY16. This is uncomfortably high for a developing
country. Fortunately, the prospects of interest rate and oil
price shocks appear low but sustainability could be
threatened by shocks from other sources as well. For
example, if policy discipline breaks down in the run-up to
the general elections in 2018, sustainability questions
could arise because of the large public debt. In this
regard, recent amendments to the Fiscal Restraint and Debt
Limitation law provide some comfort that checks have been
put in place to maintain fiscal discipline via caps of 4% on
the budget deficit ratio for the next two years and a 50%
target set for the public debt to be achieved over the next
fifteen years.
Exports. Exports are a weak point of the economy. Export
performance cannot have been helped by the 18% or so
appreciation in the real effective exchange rate of the
rupee (as reported by the IMF). Export prospects are not
bright either because global demand is weak, as seen in
anemic growth forecasts for the major industrialized
economies. The IMF thinks risks to the external balance are
tilted to the downside.
China Pakistan Economic Corridor
The second bright spot I see is CPEC. As you know, this
involves a package of projects mostly in the energy and
transportation sectors of around $28 billion in the early
years to 2020 or so and another $16-22 billion dollars in
the next decade. Of the $28 billion in the next few years,
about $19 billion is expected to be in the form of FDI by
Chinese IPPs, mostly in energy projects, and about $6.7
billion in the form of concessional loans mostly for
transportation sector projects.
The injection of this much investment in the economy in the
next few years is bound to boost the economy, and generate
employment. This is the bright spot part of the deal.
However, there are concerns that the power purchase
agreements being negotiated with the Chinese IPPs will be
very expensive in the long run, for both Pakistani consumers
and taxpayers. One deal has already encountered problems
with NEPRA whose solution I understand is being negotiated
in non-regulatory settings. Let's wait and see.
However, it is worth noting that CPEC represents a major
commitment from a neighboring Great Power to entwine a part
of its western regional economy with ours through transport
connections and long term economic investments. At a time
when our principal aid donor is showing signs of breaking
off with us it is helpful to have an alternative. I see CPEC
as a good foreign policy option. CPEC will give us strategic
depth within our own country. As a major transport corridor
is built down the middle of the country over the next ten
years or so, China will acquire a big stake in keeping this
corridor safe and secure. In China's stake will lie our own
security as well. From a foreign policy perspective, this
seems like a very bright spot.
Research success
A third bright spot lies in the area of higher education and
research. Not many people follow this carefully but I do
since this is my domain. Recently, the Thomson-Reuters group
which tracks academic research citation volumes and impact
reported that Pakistan had performed better in this area
over the last 10 years than all four BRICs combined.
Specifically, Pakistan had a higher rate of Highly Cited
Papers than the BRIC countries, especially in the
Engineering and Natural Science areas.
What do we make of this? Citations are broadly accepted as a
measure of academic and scientific quality. If we take the
Thomson-Reuters results at face value, it means that the
investments Pakistan has been making in higher education and
research in the last twenty years or so have begun to pay
off and the country is acquiring a domestic base of
scientific research personnel that is generating papers that
other academics around the world are finding useful and
interesting and worthy of citation. If so, this is a bright
spot and could serve as a leading indicator of
science-related commercial activities to come.
This finding has been roundly attacked by some who think
that the numbers are bogus and misleading and that research
activity in Pakistan continues to be of very low quality.
Arguments have been made that Pakistani academics have found
ways to generate high citations through support networks and
that these have no solid claim to quality or impact.
I do not know where the truth lies. But only 98 HCP papers
are involved so I am sure somebody will find a way to assess
their quality in a different way, not involving citations,
and we will get another read on whether we have found a
bright spot or not.
Let me stop here and summarize on a positive note. On the
economic front, there are several bright spots. On balance,
the economic outlook for Pakistan is much better now than it
was a few years ago. Politics, on the other hand, is another
story.