Pakistan Plan to boost Economy
Pakistan’s new finance minister, who has already moved to pull the economy from the brink and garnered vital support from the International Monetary Fund, said in an interview that the country now will launch a wide-scale privatization program as it seeks to meet ambitious growth targets.
Finance Minister Ishaq Dar aims to double the economy’s growth rate.
Under the previous administration of the Pakistan Peoples Party, investment had collapsed, the budget deficit had jumped to well over 8%, public debt had ballooned, and depleted foreign-exchange reserves meant Pakistan was in danger of defaulting on $3 billion of international loan repayments due this financial year.
“We inherited an economy that was in a serious state of imbalance,” said Finance Minister Ishaq Dar, a confidant of Prime Minister Nawaz Sharif, who trounced PPP in May’s elections and took office the following month. “Pakistan was at a critical stage.”
Since then, the government managed surprisingly quickly to remove the $5 billion chain of “circular” debt that was choking the crucial electricity sector, by paying off and restructuring the liabilities. A roughly 60% increase in electricity tariffs to consumers—an unpopular step—will be implemented fully by October, in an attempt to stop the debt from accumulating again.
To protect its foreign reserves, the government also secured this month a $6.6 billion loan from the IMF, winning guarded praise from the fund for its agenda. For the past three years, multilateral lenders had shunned Pakistan. The loan, which is designed only to allow the country to make the repayments on the previous, lapsed IMF program, should instill more confidence in the country, analysts said.
Mr. Dar said that, as a result of the planned overhauls, he seeks to double the economy’s growth rate, currently barely keeping up with the population increase, to 6% in three years.
Ishrat Hussain, a former governor of Pakistan’s central bank, cautioned that the IMF conditionalities, based on stabilization and fiscal discipline, would make meeting such high growth targets a challenge. “The government is moving in the right direction,” said Mr. Hussain. “After five years of stagnation, people are expecting a revival of growth, but the IMF program takes away some freedoms. This will be a major balancing act for them.”
Analysts warn that the new economic strategy can’t be realized unless Islamabad also tackles the country’s other major crisis: security. A raging Islamist insurgency in the northwest that also menaces the rest of the country, coupled with endemic organized-crime violence in Pakistan’s commercial heart, Karachi, has spooked investors.
Mr. Dar says he is aware of the challenge. “We have three E’s as our priority: Economy, Energy and Extremism. The leadership is fully committed to deal with all three E’s. They are interrelated,” he said.
Publicly owned enterprises have become a major burden on the economy, losing between $4 billion and $5 billion a year, said Mr. Dar, adding: “Surely we can’t keeping bleeding like that.”
The government’s plan is to privatize around 35 public corporations in the next three years, he said. This month, the government announced the first on offer: a minority stake in Pakistan International Airways, the troubled national carrier.
Increasing tax revenue is another priority. Only about one million people pay income taxes in Pakistan, a country of 180 million. Diplomats say the international community, tired of lavishing aid on a country whose own elite refuse to pay their taxes, is eager to bring more Pakistanis into the tax net.
Mr. Dar said he aims to add 500,000 taxpayers over the government’s five-year term, raising tax revenue as a proportion of gross domestic product to 15% from the current 8.5%.
Having been elected partly on a promise to end electricity shortages, Mr. Sharif’s government now says it will take at least five years to achieve it, which could test voters’ patience.
The electricity-price increase was accompanied by an increase in sales tax, a jump in gasoline prices, a slide in the rupee, and a spike in food prices because of flooding and Ramadan. That all meant a 2.6-percentage-point leap in inflation from June to August, prompting grumbling among the business community—traditionally the backbone of Mr. Sharif’s party.
“Stabilization measures and structural reforms are always painful,” Mr. Dar acknowledged. “We have taken some very difficult decisions.”