## Pakistan: The Realities of Economic Reform

_IMF Blog, December 19, 2013_

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## Bibliographic details
- Authors: Jeffrey Franks
- Published: December 19, 2013

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### 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*

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## References

- [program](http://www.imf.org/external/np/sec/pr/2013/pr13532.htm)

_Source: https://www.imf.org/en/blogs/articles/2013/12/19/pakistan-the-realities-of-economic-reform_