Pakistan: The Realities of Economic Reform
IMF Blog, December 19, 2013
Source details
- Canonical URL
- Pakistan: The Realities of Economic Reform
Other formats
Bibliographic details
- Authors: Jeffrey Franks
- Published: December 19, 2013
Program origin and ownership
- The government mostly produced the policies supported in this program.
- The economic section of the PML-N party manifesto shows that most of the policies agreed with the IMF were actually those proposed by Prime Minister Sharif and his team before the elections, such as: fiscal consolidation, tax reform, measures to tackle the energy crisis, restructuring and privatizations of public sector enterprises, trade policy reforms, and steps to boost the investment climate.
Scope and priorities of the program
- The program focuses on three agreed most important issues:
- The very large fiscal deficit, which could no longer be financed.
- The critically low level of international reserves.
- The need for structural reforms—particularly in the energy sector—to get the economy out of the low-growth trap.
- The program’s targets and near-term outcomes:
- The deficit will come down from 8 percent of GDP to around 3½ percent of GDP over 3 years.
- International reserves will be rebuilt to sustainable levels.
- Structural bottlenecks will be significantly eased.
- The program cannot address every problem immediately (examples noted: improving tax collections, cutting corruption, reforming the civil service, boosting provincial tax revenues) because of time and capacity constraints.
Sequencing and timing of reforms
- Rationale for prioritizing stabilization before broader growth measures:
- Pakistan did not have the luxury of postponing key stabilization measures; financing large deficits was not feasible.
- Temporary stimulus without addressing underlying imbalances would likely be ineffective.
- On timelines for structural reforms:
- Tax administration reforms will take 2-3 years to generate significant improvements in revenues.
- Energy supply enhancements can take even longer.
- Policy design included "quick wins" early to address vulnerabilities while longer-gestation reforms are ramping up.
Distributional impacts and social protection
- The program’s approach to distributional fairness:
- Deficit reduction will come mostly from raising revenues rather than cutting education and health programs.
- The program aims to broaden the tax base and cut subsidies for the rich, while maintaining low energy prices for the lowest consumers and increasing public spending on the poorest.
- Facts and measures cited:
- Pakistan is described as "a country of 180 million people".
- Only 1.2 million individuals and firms file income tax returns, of which about half are corporate filers.
- Energy subsidies mostly benefit a small proportion of the population; the wealthiest consume the most energy.
- Many people endure 8-10 hours a day of load shedding during the summer months.
- Social spending and targeted transfers:
- The 2013/14 budget includes a significant rise in education spending.
- Expansion of the Benazir Income Support Program (BISP):
- Currently reaches 4.9 million households.
- Will be expanded to reach 6.6 million families.
- The stipend has increased by about 20 percent, and it will be adjusted for inflation in the future.
Growth prospects and short-term costs
- Short-run effects:
- Fiscal adjustment will reduce growth initially.
- Medium- and long-term outlook:
- Continued instability would hurt growth much more by pushing the economy into crisis.
- Structural reforms aim to enhance growth by easing energy bottlenecks, promoting trade, improving the business climate, and increasing competitiveness of Pakistani industry.
- Expected results include more efficiency, more competition, more investment, and millions of new domestic jobs.
Program viability and adaptability
- While success is not guaranteed, the program is presented as an historic chance to fix long-standing problems and put the country on a higher growth path.
- Design features and supporting factors:
- The program aims to overhaul structural deficiencies while pursuing sound macroeconomic policies and protecting the most vulnerable through expanded social safety nets.
- Program design has been adjusted to take into consideration the lessons of past failures.
- The IMF is willing to be flexible to adapt to unexpected developments.
- Support from other institutions is being mobilized to help.
- Prospects for success are enhanced by a democratically elected government committed to fixing long-standing problems and achieving its objective of making life better for 180 million Pakistanis.
Jeffrey Franks — December 19, 2013
Content in this bundle
- ø½E5g"û~çEg«38e:Iz; ø½E5g"û~çEg«38e:Iz; Y2013cš19