Box: Economic Revival – Key Measures

 Revenue enhancement strategies including tax revisions in

sectors like retail, agriculture, and real estate, alongside a
wealth tax on movable assets, as deemed appropriate.
 Tax exemptions to limit to essential sectors only like food and
medicine, and supply chains to digitize
 Austerity measures to rationalize government expenditures,
along with a review of subsidies and grants.
 Review of the Development Plan and emphasis toward Public
Private Partnership (PPP) projects.
 Compliance with Quarterly budget targets and IMF
agreements, including tax collection and debt liabilities
 The 5Es framework (Exports, Equity. Empowerment,
Environment, and Energy) to address socio-economic
challenges, and to encourage export expansion and business
facilitation.
 The use of Information Technology to digitize the economy
and expand the tax net.
 State-Owned Enterprises (SOEs) reforms to be enacted,
including an SOE policy, Central Monitoring Unit (CMU),
and SOE performance reports
 Focus on the implementation of a Treasury single account
(TSA), remittance Incentives, energy conservation, and price
controls.
 The Privatization Commission to privatize selected Public
Sector Enterprises using various modes. Initiatives include
assessing privatization options for DISCOS restructuring
options for PIA-CL, and unbundling studies for SNGPL and
SSGPL
  Capital market development with a focus on reducing
corporate taxes, Improving non- bank finance, and promoting
the capital market.
 For Export enhancement, implementation of Weighted
Average Cost of Gas (WACOG), operationalization of EXIM
bank, and faster clearance of sales tax refund are priority
short-term measures.
 The short-term initiatives for Business facilitation and
promoting investment, to be taken by the Board of
Investment, including the Asaan Karobar plan (establishing
central e-registry, development of Pakistan Business Portal,
National Regulatory Delivery Office).
 IT exports to be boosted through trainings, a Startup Pakistan
Program, and policy interventions. In telecommunications,
reforms aim to foster growth and introduce 5G technology.
 In Maritime affairs, initiatives include reducing freight
charges, enhancing ship recycling, developing port master
plans, and revitalizing the fisheries sector.
 Pakistan Railways to focus on governance, private sector
participation, technology and digitalization..
 The National Highways Authority (NHA) to restructure
resources, focus on maintenance and optimization, and seek
private-sector financing.
 The Petroleum Division to implement price reforms and
attract foreign investment. Along with other initiatives.
 In the Power sector, short-term actions include an anti-theft
campaign, cost reduction through solar initiatives, and
renegotiating IPP agreements
Privatising Discos
White elephant
Editorial Published October 18, 2023
PIA is running on fumes, both literally and figuratively. The debt-
ridden national carrier was forced to cancel 14 domestic flights and
delay four others for hours on Monday after Pakistan State Oil
refused to provide it with any more fuel until it settled its past dues.
PSO, itself is facing a major liquidity crisis as receivables crossed
a record Rs755bn the same day, seems to be running thin on
patience: PIA seemed to be starting to crash.
 consistently ranked among the worst airlines both
internationally and domestically. It has already burnt countless
billions in pursuit of ‘revitalisation’ plans that have turned out
to be wild goose chases. Instead of shovelling billions more
into it each month from taxpayers’ money, it is time to put it
out of its misery and privatise it. It’s employees will protest
but the govt. needs to be stuck on privatization. We cannot
continue wasting the nation’s precious resources on white
elephants while ordinary people are struggling to eat.

Playing for pennies

Khurram Husain Published October 19, 2023
IT is now next to impossible to have any forward-looking
conversation about the outlook for Pakistan’s economy without
taking into consideration the developments in the Gaza crisis.
The external sector has always been vulnerable in Pakistan (barring
a few years of reserve accumulation here and there) but rarely has
it been as vulnerable as it is now.
Consider, for example, that in July the managing director of the
IMF had to point out that the ongoing Stand-by Arrangement is one
last shot at trying to restore debt sustainability. If this programme
fails, then debt restructuring will become inevitable. The last time
Pakistan undertook debt restructuring was in 2000 and 2001, nearly
a quarter of a century ago.
The managing director’s comment alone Is enough to know that
the external sector is in a very precarious position, one the likes of
which it has not stood in for decades. And given this
precariousness, its vulnerability to developments in the world,
whether economic or geopolitical, is magnified.
Two questions are important to ask about the Gaza conflict from
this perspective. First, how far will it go? Second, how far will it
spread?
Others are better positioned to talk about the geopolitics and
drivers of conflict in that crisis. For now, it is enough to note that
this time it is different. This is not one of those flare-ups that has
marked the timeline of Gaza and Israel since 2000.
That was a strategy the Israelis referred to as ‘mowing the lawn’,
which meant going in after a gap of a few years and taking out a
large number of the fighters, bomb-makers, financiers and other
skilled individuals working with Hamas, to degrade the
organisation’s ability to wage conflict. Hamas would rebuild this
capability in a few years, and the Israelis would come in a few
years later and ‘mow the lawn’ once again.
It Is possible that ‘relevance’ in this new world could be a chalice
more poisoned than the two Afghan wars we got embroiled in.
It’s safe to say the days of ‘mowing the lawn’ are now over. The
attacks of Oct 7 were so intense — claiming more casualties in this
short timespan than the Israelis have faced in any preceding war —
that they have turned the page in this conflict forever.
What is opening up before us now is a much larger and most likely
more protracted war than anything seen in the long history between
Israel and Palestine. Unless diplomacy succeeds in talking the
Israelis out of their ambition, the attack on the hospital in Gaza on
Tuesday could be only the first of many more such atrocities to
come.
This war has already started churning the streets, both in Arab as
well as Western capitals. The important thing to note is that it has
not even begun in earnest yet. These are the days between Sept 11
and Oct 7, 2001. The real conflict is yet to begin. How far it goes,
and how much social upheaval it engenders along the way, remains
to be seen — the protagonists themselves don’t know.
But note how England, France and Germany have all passed
decrees trying to curb public expressions of support for the
Palestinians, perhaps in anticipation of what is to come, and how
their substantial Arab and Muslim populations might react.
It is a matter of time before it starts churning financial markets too,
as well as the appetite of bilateral lenders to acquire Pakistani
assets. There are some suggestions that the war could restore
Pakistan’s relevance in some form or another. But consider the
realignments underway.
This is the first time I am seeing leaders of Egypt and Jordan
refusing to meet a US president on his visit to the region. The
Saudi Arabian crown prince and Iran’s president held a direct
phone call and the next day the prince indefinitely suspended his
participation in the US-backed initiative to normalise ties with
Israel. Rarely has the United States been snubbed like this in the
Middle East.
Nobody quite knows the shape of the alliances that may be
emerging, because they are fluid at the moment. But it is possible
that ‘relevance’ in this new world could be a chalice more poisoned
than the two Afghan wars we got embroiled in.
This could put Pakistan in a position of having to choose between
its allies and benefactors. The Gulf kingdoms we owe billions to?
The United States, whose multilateral financial system keeps the
country’s economy from sinking? The Chinese, who are now the
single largest supplier of military hardware, foreign investment,
and loan-based bailouts on our balance sheet?
And will we really matter so much in the new configuration? This
isn’t exactly the Americans asking to use Pakistani airspace and
territory to wage war on Afghanistan after all. That proposition was
worth billions of dollars, enough to pump the growth rate to record
highs, even if only for a year. This is more likely a more
ceremonial presence that will be asked for — but at what cost to
our other relationships that are equally critical to our economic
survival?
Time is running out. Pakistan’s growth model no longer works.
And the world that has pulled the country through every slump is
crumbling with increasing speed each year. This doesn’t mean we
are all doomed. All it means is we have to wake up.
A country the size of Pakistan — both in terms of GDP and
population — should not be playing for pennies on the world stage.
All the resources required to pull this country out of its slump are
right here, within the country. The trick lies in being able to unlock
them. And no foreign power will come do that for us. That is
something we have to do ourselves.

Unaffordable prices of crop inputs, electricity bills and

exceeding risks of climate change are the serious threats to the
farmers.
 To promote balance use of fertilizers, Govt may immediately
ensure availability of all Phosphatic and Potassic fertilizers on
subsidized rates and Urea on single price for farmers across
Pakistan.
 Provision of Pesticides and hybrid Seeds of crops on
subsidized rates to farmers are critical to produce bumper crop
of cotton and reduce food inflation respectively.
 Tube well electricity tariff needs immediate revision,
Government may revise this tariff from Rs 40- 45/unit to
Rs10/unit at flat rates.
 Government may allocate 2% of Agri GDP in budget 2023-24
for research to develop climate compatible seeds of cotton and
Agro related technologies.
 Government may allocate fallow lands to corporate sector of
Pakistan to ensure national food security and creating new
jobs for rural youth, especially female farmers.
 Government may also allow export of 2 million tons surplus
maize gains to stabilize its price and save farmers.
 To reduce cost of farm operations, Govt may abolish 17%
GST on locally manufactured farm implements. Secondly,
17% GST on Banola (seed cotton used for edible oil
extraction) may also be abolished.
THE caretaker government’s decision to ‘hand over’ the loss-
making power distribution companies, or Discos, to the private
sector through long-term concessions comes across as vague. News
reports suggest that the proposal to transfer the Discos to the
private sector through concessions was one of three options put
forward by the energy ministry at a recent meeting of the Special
Investment Facilitation Council. The other two solutions put on the
table were older: provincialisation and privatisation of the Discos.
The reasoning behind the SIFC’s decision to pick this option is
unclear as the mechanism under which these companies are to be
transferred to the private sector and the details of the concessions
are shrouded in secrecy. The power minister did not utter a single
word at his recent news conference that might have cleared the
confusion.

The power distribution companies have been a constant source of

deep worry for successive governments. The large distribution
losses, revenue leakages, low bill recovery, huge electricity theft
and supply constraints plaguing these companies have put them at
the centre of Pakistan’s power sector woes. In the past, various
options, including privatisation and provincialisation of Discos,
have been debated to fix the staff-heavy, inefficient, and
mismanaged companies. Not one could be implemented for several
reasons. The option of provincialisation means that their losses
would be transferred by the centre to the provinces. Their
privatisation seems impossible because these are monopolies and
typically very large companies — both financially and
geographically. Resistance from their staff is also a major
impediment to privatisation. No effort to sell any Disco barring K-
Electric has succeeded in the last 20 years because of these
reasons. It is difficult to say how the new plan — which doesn’t
seem to go beyond rhetoric — will counter these obstacles. The
practical and quicker way to the problem lies in breaking the
monopoly of these companies by exposing them to private
competition. Private investors must be encouraged to set up new,
smaller power distribution companies by allocating them specific
areas and allowing them to use the existing distribution network of
the Discos for a reasonable fee. This will be in line with the
government’s plan to create a competitive electricity trading
market in the country and provide consumers a choice, besides
exposing the Discos to competition and forcing them to improve
their services and cut losses.

Published in Dawn, October 8th, 2023

Tax collection and GDP
The economy and discourage tax compliance, perpetuating the
risks to the long-term sustainability of the country’s economic
structure. With one of the world’s lowest tax-to-GDP ratio of 8.6pc,
Pakistan has been running a fiscal deficit of more than 7pc for the
last several years because of the rulers ‘unwillingness to expand
the tax base. Little wonder that the country now finds itself in a
debt trap, and is always looking for ever-shrinking handouts from
global lenders to pay its bills and a little money to help its
inflation-stricken poor. It is time that Pakistan’s policymakers paid
heed to what Ms. Georgieva has been asking them to do for the
country to be able to become a functioning entity by directly taxing
all incomes, irrespective of their source, and reducing indirect
taxation.
Our big opportunity
By Dr Sharmila FaruqiSeptember 29, 2023
Pakistan currently finds itself at a critical juncture, grappling with a
severe economic crisis However, amidst the economic turmoil,
there is another noteworthy development stirring within the nation
– general elections.
Data from the Election Commission of Pakistan (ECP):106 million
in 2018 to about 127 million as of July 25 2023
The latest census, which revealed that 44 per cent of voters belong
to the 18-35 age group, highlights the demographic reality that
suggests the youth will have significant influence on shaping
Pakistan’s political landscape. With a median age of approximately
22 years, Pakistan ranks as one of the world’s youngest nations,
coming in as the 36th youngest out of 227 countries globally and
the sixth youngest in the Asian region.
Among South Asian countries, Pakistan is the second youngest,
with Afghanistan being the only one having a higher proportion of
young people.
The PPP, recognizing this demographic advantage, has strategically
positioned itself to harness the power of the youth vote (63 per cent
of the country’s population is aged between 15 and 30).
PPP Chairperson Bilawal Bhutto-Zardari, in a recent statement, has
emphasized the importance of Pakistan’s youth, declaring them the
country’s greatest asset. This acknowledgment is not merely
rhetorical; it is reflected in the party’s policies and initiatives
designed to empower and engage the youth.
The PPP’s dedication to the Sindh Flood Emergency Housing
Reconstruction Project, with its goal of constructing or renovating
2.1 million sustainable housing units, reflects a sincere
commitment to the welfare of those impacted by natural disasters.
Notably, 70 per cent of the beneficiaries of this housing scheme are
women. By addressing the housing requirements of the most
vulnerable, the PPP aims to earn the trust and support of both
women and the youth.
The Benazir Income Support Programme (BISP) has also been
instrumental in providing financial assistance to those in need,
particularly during the challenging tenure of the PTI government.
The reactivation of accounts for 192,000 beneficiaries, who were
previously removed by the PTI government, exemplifies the PPP’s
dedication to social welfare and economic relief, which resonates
with the youth.
However, it is not only the youth that hold the key to the upcoming
elections. Women, constituting 50 per cent of the voters, play an
equally pivotal role in shaping Pakistan’s democratic future.
Ensuring their active participation in the electoral process is not
just a matter of equity but a democratic imperative. Women’s
voices, choices, and concerns must be heard and represented in the
political arena.
We must engage in efforts to encourage and facilitate women’s
participation in voting. This engagement goes beyond mere
tokenism; it must actively involve women in political discourse
and decision-making. When women are empowered and engaged,
the democratic process becomes more inclusive and reflective of
the diverse voices and perspectives within the nation.
The PPP’s Lady Health Worker (LHW) programme, initiated by
Shaheed Mohtarma Benazir Bhutto, has a primary goal of
delivering essential primary health services to both rural and urban
areas. It stands as a testament to the PPP’s dedication to
mainstreaming women in the workforce and promoting their social
and economic empowerment.
This programme, which commenced in 1994 with a workforce of
approximately 30,000 women, has since expanded significantly,
with over 125,000 employees now deployed across all districts of
the country. In today’s challenging economic climate, Pakistan
needs more initiatives like this to address the growing economic
hardships.
As the country stands on the cusp of these crucial elections, it is
evident that the youth and women can be the driving force behind a
democratic transformation in Pakistan. The stakes are high, and the
outcome of these elections will significantly impact the trajectory
of the nation’s political and economic future. Therefore, it is
Imperative that efforts be made to ensure a massive turnout of both
young people and women at the polls.
Increasing youth participation in elections requires more than just
appealing rhetoric; it demands concrete actions. Political parties
should prioritize issues that resonate with the youth, such as job
creation, education reform, and social justice. By addressing these
concerns and crafting policies that directly impact the lives of
young Pakistanis, parties can earn their trust and commitment to
the democratic process.
The situation regarding young voter turnout seems to be evolving,
as evidenced by the rise in young voter participation from 26 per
cent in 2013 to 37 per cent in 2018. This change has led to a
decrease in the difference between overall voter turnout and youth
voter turnout, reducing it from 28 percentage points in 2013 to 15
percentage points in 2018.
The youth should not only be encouraged but actively given a
platform within our political systems, as they can play a pivotal
role in driving progressive change. In a ground-breaking move,
Dubai ruler and UAE PM Sheikh Mohammed bin Rashid Al
Maktoum directly invited applications from the nation’s youth to
join his cabinet and represent their demographic on social media.
Pakistan should take inspiration from such initiatives and similarly
integrate young voices into the political arena to ensure their
representation and influence in decision-making.
The government of Bangladesh, under its Economic Acceleration
and Resilience for NEET (EARN) Project, aims to equip about
900,000 economically disengaged youth with skills and alternative
education needed for employment and entrepreneurship. What’s
more progressive about this project is that 60 per cent of the
targeted population consist of women. Projects like these are the
need of the hour in Pakistan to empower the vibrant youth of our
nation.
The demographic dividend of a youthful population and the
democratic imperative of gender equality make the involvement of
these two segments of society crucial. It is through their active
participation, informed choices, and commitment to democratic
values that Pakistan can overcome its challenges and build a more
inclusive and prosperous future.
The upcoming elections provide an opportunity for the nation to
reaffirm its commitment to democracy and ensure that the voices
of its youth and women are not just heard but celebrated.
Outlining a charter of the economy
Zafar U. Ahmed Published April 15, 2023 0
PAKISTAN’S economy has been in crisis for a large part of its
existence. However, a stage has now been reached where personal,
party and institutional interests and differences ought to be
restrained and all stakeholders need to agree to some basic
principles and policies.

The recognition has been there and there has been much talk of a
charter of the economy in political circles. Yet, there has been little
discussion on what the salient features of such an agreement would
be. Here is an attempt to outline the broad contours of a possible
charter:
Pakistan is a democracy and the well-being of all citizens is
paramount; the rights and interests of all segments of the
population is to be ensured, including the majority segment — ie,
the lower and middle-income citizens.
The elected representatives will collectively galvanise public
support for the steps to be taken under this charter so that the
citizenry stands by the government when self-serving special
interest groups resist necessary corrective actions.
Cronyism is a grave injustice and fosters an uncompetitive
economy. Uncompetitive ‘cronyism’ (through subsidies, tax breaks,
special access, protection from competition, etc) will be replaced
with a fair and competitive market economy, but with the state
taking responsibility for nurturing citizens to reach their full
potential and providing social protection for the deserving needy.
There’s been little debate on the main features of such an
agreement.
Discriminatory regulations and subsidies — which are estimated to
cost more than debt servicing or defence expenditures — will be
ended. If/where concessions or subsidies are deemed justified and
necessary for some component/sector, then the state must receive a
fair share (as proportionate shareholders) of the enterprise
subsidised with the citizen’s hard-earned incomes.
Technocrats and regulatory bodies will be selected on merit and no
conflict of interest will be countenanced. They will work within
policy parameters formulated by elected representatives and be
held accountable for results.
Selection, advancements, postings and job tenure of government
officials will be strictly on defined criteria, without reference to the
wishes of influentials.
An effective mechanism will be established for the coordination of
the various components of the justice system, which currently
come under different administrative units (parliament, judiciary,
ministries, police, prosecution, etc). Criteria will be agreed upon
for the selection of judges. The judicial administrative authority of
judges (formation of benches, cause list) will be shared by senior
judges.
Only the highest-priority development projects will be funded for
the immediate future. Scarce international currency reserves will
not be spent on the import of non-essential goods. Severe penalties
will be applied for defrauding the country, such as through under-
and over-invoicing.
Every effort will be made to import in the national currency under
quid pro quo arrangements, or by trading/bartering against national
production.
Unaffordable losses by SOEs will be controlled by professional
reorganisation or by transparent privatisation.
Utility pricing will be rationalised so as not to unfairly burden the
poor. Distribution losses will be controlled, for instance by
investing in upgrading and reducing inefficiencies, instead of
passing the burden onto consumers.
The current method of ‘incremental’ budgeting generally practised
by the government will be modified and, instead, plans will drive
budgeting, not the other way around.
The taxation system will be fair and non-discriminatory, and what
is due will be collected regardless of pushback by vested interests.
The tax base will be broadened to include all who ought to be
eligible, including the agriculture sector. Indirect taxes will only be
charged where fully explained and justified.
The highest priority will be to bring agriculture and livestock
productivity and quality at par with international standards and by
improving water utilisation efficiency. The land revenue
department will be streamlined to remove any hindrance to
economic activity.
Exports will be raised by producing more internationally
competitive products and services. Reliance on state concessions
and grants of ‘favoured’ status by importer countries will be
weaned off. There should be equal opportunity for all enterprises to
develop a highly competitive economy through simplified
procedures, no discriminatory policies and regulations, quality
skills training and science education, quick dispute resolution and
so forth. Overseas workers will be professionally supported as a
vital part of the national economy.
The state will facilitate and regulate a fair market economy. The
industry will step up from assembly to manufacturing. Exporters
will diversify their export goods as well as destinations.
The services sector will be encouraged to give due importance to
exports. Regulatory bodies will be accountable for performing their
assigned role effectively. Insider trading, cartel behaviour and other
illegal practices will not be allowed.
Opportunities presented by CPEC will be fully availed. Besides
infrastructure, Pakistan will work with foreign firms to
manufacture and export products via CPEC and train workers by
association with foreign experts and technology and skills
transfers.
National and provincial development strategies and plans will be
made domestically. Foreign supporters may offer to fund a part of
these. In the future, this ought to be the model for foreign
assistance, if needed.
Balochistan and former Fata will receive special considerations and
investment for their development needs to give them equitable
opportunities as citizens of this country.
At present, highly educated workers have a much higher
unemployment rate than the national average. When properly
informed about work opportunities, after completing basic
education, most students are expected to opt for high-quality,
market-driven vocational skills training. Higher education
institutions will cater to a more competitive student body and focus
on producing the country’s requirements in science/engineering,
agriculture, industry, IT and other fields.
A productive and efficient economy requires a healthy workforce.
The state will, therefore, make every effort to organise quality
healthcare for all.
Economic Crisis in Pakistan
Our exports in FY22 were $32.5 billion compared to India’s
$680bn. For a fair comparison, our per capita exports were $140,
compared to India’s $483. Pakistan’s level of per capita exports in
FY22 was achieved by India in 2006. This means that we are 17
years behind India in terms of export performance.
Most of our exports such as textiles, leather goods and rice are
dependent on agriculture and can be affected by crop and livestock
output. The lack of technology-based products in our exports
results in low product diversification and constrains growth.

Pakistan emerges as top International Development

Association borrower in 2023
Amin Ahmed Published October 2, 2023
ISLAMABAD: Pakistan was the top borrower of the International
Development Association (IDA) in fiscal year 2023, securing $2.3
billion in funding, the World Bank said in its annual report.
The bank helped Pakistan respond to devastating floods with
nearly $1.7bn for five projects in the worst-affected Sindh province
to build resilient housing, restore crop production, provide health
services for mothers and children, and strengthen social protection
and the local government’s disaster response capacity.
The document, titled “World Bank Annual Report 2023 — A New
Era in Development”, states that the international institution
approved $10.1bn in lending for 37 operations in the South Asian
region during the fiscal year 2023 — $4.3bn in International Bank
for Reconstruction and Development (IBRD) commitments and
$5.8bn in IDA commitments.
IDA is the world’s largest multilateral source of concessional
financing, offering development loans, grants, and guarantees to
the poorest countries. It aims to facilitate economic growth, reduce
poverty, and enhance the living conditions of impoverished
populations.
WB says Islamabad secured $2.3bn in funding; okays $10bn for 37
operations in South Asia
According to the report, the World Bank also supported 61
advisory services and analytical products for eight countries. These
provided technical advice on issues such as debt management,
governance, job creation, social protection, air pollution and
climate resilience.
Across the region, the bank focused on enhancing human capital
resilience to minimise the effects of crises. This included building
resilience against the impacts of a changing climate and natural
disasters and promoting resilience in economy, markets, and
society to ensure inclusive and sustainable development.
The report forecast that South Asia’s GDP is expected to grow 5.6
per cent in 2023 and to remain moderate at 5.9pc in 2024,
following an initial post-pandemic recovery of 8.2pc in 2021. The
region’s growth prospects have weakened due to tightening
financial conditions, limited fiscal space and depleting reserves,
contributing to large downside risks in most countries.
Poverty in region
The decline in poverty is expected to recover in line with economic
growth, with the number of people living on less than $3.20 a day
across the region forecast to be 754 million in 2023, lower than the
estimates in 2019. South Asia is highly vulnerable to the impacts of
climate change and natural disasters.
Over the past two decades, climate-related disasters have affected
750m people, more than half of people in the region. High
inequality magnifies these impacts, as the poor, vulnerable, and
marginalised bear the greatest burden of these disasters and have
limited means to help them recover.
Across South Asia, the Covid-19 pandemic led to a collapse in
human capital for millions of children and young people. Today’s
students could lose more than 14pc of their future earnings, while
today’s toddlers could see a 25pc decline in earnings when they
reach adulthood. South Asia is confronting intensifying heatwaves,
cyclones, droughts and floods. The changing climate could sharply
diminish living conditions for up to 800m people.
In Punjab, which accounts for 73pc of Pakistan’s total food
production, a $200m project is promoting climate-smart
technologies and practices to improve water-use efficiency, build
resilience to extreme weather, and increase small-scale farmers’
incomes.
Between April 2022 and June 2023, the World Bank approved 529
standalone and regional operations covering more than 110
countries across the four pillars of the framework, totaling
$104.9bn, including $53.1bn under IBRD and $51.8bn under IDA.
Of the total amount, $23.7bn was committed for countries affected
by fragility, conflict and violence, and $2bn for small states.
The World Bank works closely with countries, the private sector,
civil society and other multilateral institutions to confront these
challenges and find lasting development solutions. Through the
Global Crisis Response Framework, the World Bank has been
responding at unprecedented levels to the converging crises,
approving 322 operations in more than 90 countries for a total of
$72.8bn in fiscal 2023. This includes $38.6bn from IBRD.
Under the first year of IDA20, the organisation committed $34.2bn
for the poorest countries. To help these countries address the
ongoing impacts of the Covid-19 crisis, the bank front-loaded
financial resources in 2023, building on the momentum from 2022.
The total climate finance amounted to a record high of $29.4bn,
accounting for 40pc of total IBRD and IDA finance in fiscal 2023.
Published in Dawn, October 2nd, 2023

Vexing taxes
A RECENT World Bank report update on Pakistan’s development
challenges has sparked considerable consternation after it emerged
that the financial institution wants Pakistan to consider, among
other things, increasing the tax burden on more income categories,
including those previously exempted from paying taxes. To wit, the
lender has said that income taxes should also be imposed on people
earning less than Rs50,000 a month (the current exemption limit)
and that people making less than Rs500,000 should be taxed at
higher rates. In a more equitably taxed economy, the suggestion
would perhaps not have triggered the kind of outrage it has; after
all, everyone has to chip in if the economy is to be rescued from
the dire straits it is in. However, keeping in mind Pakistani
authorities’ historic unwillingness to broaden the tax net, it is
understandable why inflation-weary taxpayers are angry at the
prospect of being squeezed further during a time when balancing
their own household budgets has become a highly stressful task.
The general expectation is — and not unrealistically so — that the
axe will fall on the salaried classes again because the state will not
go after tax cheats.
Due to the Federal Board of Revenue’s overreliance on indirect and
withholding taxes to meet the government’s revenue targets, poor
and middle-income Pakistanis end up paying a significantly larger
proportion of their earnings in taxes than wealthier citizens do.
Meanwhile, runaway inflation — which taxes incomes by reducing
purchasing power — has also disproportionately impacted these
income categories. With such a regressive taxation system in
vogue, the first priority for tax authorities should be to take away
the massive incentives, concessions and exemptions granted to
various sectors of the economy and ensure that undertaxed
segments are fairly taxed first. Agriculture, retail, real estate, sole
proprietorship and non-salaried individuals’ earnings cannot
remain untaxed or undertaxed while those employed in the formal
sector are being squeezed harder and harder. Limiting government
expenditures is the other side of this coin, and a list of related
measures has been outlined in the World Bank report. Till
Pakistan’s taxation system is fixed, the government should leave
honest taxpayers alone. They have suffered enough.

Low growth
Javid Husain Published July 4, 2023 0
THE most important task facing Pakistan’s economic policymakers
is to realise the goal of a high rate of economic growth on a
sustainable basis. Unfortunately, it is a task in which successive
governments have failed in the relatively recent past. For instance,
in 2007-08, which was the last year of Pervez Musharraf’s military
rule, even a low GDP growth rate of 4.4 per cent resulted in an
unsustainably high level of current account deficit of $14bn or 6.9
pc of GDP. The difficult economic situation forced the succeeding
PPP government to apply brakes on the GDP growth rate to lower
the current account deficit and balance Pakistan’s external account.
By 2010-11, the current account deficit turned into a marginal
surplus of 0.1pc of GDP but the GDP growth rate had to be slashed
to 3.2pc which was barely sufficient to take care of the growth in
population. The PPP government in the last year of its rule (2012-
13) kept the current account deficit at the manageable level of 1pc
of GDP but by keeping the GDP growth rate at the low level of
3.9pc. The goal of a high GDP growth rate (7pc or above)
combined with the current account surplus or at least a manageable
level of current account deficit remained elusive.
During its tenure from 2013 to 2018, the performance of the PML-
N government from this point of view was only marginally better
than its predecessor. It was finally able to raise the GDP growth
rate to 6.1pc by 2017-18 but by paying a heavy price in the form of
an unsustainably high level of current account deficit amounting to
$19.2bn. The PTI government during its tenure from 2018-22
couldn’t do better. After recording low GDP growth rates in the
initial years of its tenure, it succeeded in raising the GDP growth
rate to 6.1pc in 2021-22 but at the cost of an unsustainably high
current account deficit of $17.5bn.
The present P’M government, therefore, had to go through the
familiar exercise of slashing the GDP growth rate, estimated to be
about 0.3pc in 2022-23, to drastically lower the current account
deficit which declined to $3.3bn in the first ten months of 2022-23
as against $13.7bn in the corresponding period a year earlier. Thus,
the country, despite changes in government, unfortunately remains
stuck on the path of a low GDP growth rate so as to maintain a
sustainable balance in its external account.
The country needs capital inflows in the form of loans or foreign
assistance.
The fundamental cause of Pakistan’s low economic growth rate
and persistent current account deficits is its low national saving
rate which translates into low national investment and GDP growth
rates. Consequently, any attempt by the government to raise the
national investment rate for accelerating economic growth results
in a current account deficit which, as any student of economics
knows, is equivalent to national investments minus national
savings. The country then needs capital inflows in the form of
loans or foreign assistance from bilateral and multilateral sources
to finance the current account deficit or the gap between national
investments and national savings.
The only way to balance our external account while maintaining a
high growth rate of the economy is to raise our currently low
national saving rate of about 12pc to at least 25pc of GDP or even
higher so that our national savings are sufficient to finance a high
rate of national investment needed for accelerating our GDP
growth rate. This effort should be combined with economic
policies designed to promote exports and import substitution. This
should not be an impossible task. After all, in our region the
national saving rates of Bangladesh and India are well above 30pc
of GDP. China’s national saving rate exceeds 45pc of GDP.
The main reason for Pakistan’s chronically low national saving rate
and the consequent slow economic growth and huge current
account deficits is the addiction to conspicuous consumption of our
decadent elite consisting of the top echelons of its civil and
military bureaucracy, political leadership, feudal landlords,
professionals, and business community. Until they mend their ways
and adopt austerity as their motto or a strong and stable
government forces this through appropriate economic, financial,
and administrative measures, Pakistan will remain stuck on the
path of slow economic growth while lurching from one economic
crisis to another. The latest budget presented by the government
could have done more to embody the strong and far-reaching
measures needed to push the country in the right direction.

De-dollarisation of the global financial system

After the Ukrainian incursion, US and European sanctions on
Russia accelerated the global urge for de-dollarisation
Ahmer Shahzad
July 03, 2023
China’s ascendancy on the world stage as a major power is
facilitated by the fast-transforming global economic order. China’s
strategy includes targeting “de-dollarisation” in the international
financial system as a key enabler of its preeminence. The dollar’s
rule dates back to the 1944 Bretton Woods Agreement when it
replaced the pound sterling for international trade and central
currency reserves, and also led to the establishment of the IMF and
the World Bank. Since then, the dollar has been widely used for
international trade and as the primary global reserve currency.
Currently, 84% of cross-border transactions are conducted in
dollars, and 58% of global currency reserves are held in the same
currency. The use of the dollar in international transactions has
given the US considerable oversight through the SWIFT financial
transfers network, granting it significant influence over global
financial systems and the ability to impose sanctions on foreign
entities and individuals.
This dollar dominance led to its weaponisation in global dynamics
until 1999, when the introduction of the Euro questioned its
position. The Euro quickly became the sole medium of Europe’s
financial system and gained outreach in the international financial
system. As a result, the percentage of dollar-based currency
reserves declined from 71% in 2001 to 58% in 2022, with Euros
accounting for 20%, followed by the Japanese Yen at 5.5%, Pound
Sterling at 4.6%, and Chinese Yuan at 2.7%.
During the early 21st century, China’s economic strength continued
to surge, challenging the US’s position in the world economic
sphere. China’s increasing economic influence in Africa, Asia, and
Europe, coupled with the US’s coercive economic policies through
the IMF and the World Bank, raised concerns for nations
dependent on these institutions. Countries under dollar debt faced
hardships due to higher interest rates and appreciation in the
dollar’s value, leading them to seek alternatives.
After the Ukrainian incursion, US and European sanctions on
Russia accelerated the global urge for de-dollarisation. Russia,
facing economic punishment, turned to China and boosted yuan-
based energy trade instead of using dollars. Other countries, such
as India, Argentina, Brazil, and Venezuela, followed suit and made
agreements with China for mutual trade in yuan.
The BRICS platform – consisting of Brazil, Russia, India, China,
and South Africa — is actively pursuing de-dollarisation by
introducing its own currency. With a collective GDP of $28 trillion,
BRICS already outweighs not only the US but the entire G-7
combined. The group plans to expand further with the possible
inclusion of 20 additional countries, which would enhance the de-
dollarisation process even further.
The “Belt and Road Initiative” involves 151 countries, covering
almost 75% of the world’s population and more than half of the
world’s GDP. China’s investments in the BRI region exceed $1.0
trillion. China also has significant engagement with ASEAN in
terms of trade, which amounted to $970 billion in 2022. As trade in
the BRI and ASEAN regions expand, the financial system is
expected to increasingly use the yuan, further squeezing the
dollar’s space.
In 2016, China established the Asia Infrastructure Investment Bank
(AIIB), representing a seismic shift in economic power from the
US to China. The AIIB, with 92 member states, including US and
European allies, Middle Eastern states, and India, poses a challenge
to the World Bank and IMF.
Despite the prevalent decline of the dollar and the rise of the yuan
in the global currency matrix, certain factors limit the complete
replacement of dollar-based reserves with other currencies in the
near future. The shift could affect exchange rates and cause
instability in domestic economic hubs and international trade.
Major economies like Japan, China, and the UK continue to hold
significant amounts of US treasury securities, ensuring the dollar’s
continued dominance in the international financial system.
The BRICS, despite its potential, only delivers 23% of total global
output and 18% of trade. Member states have fundamental mutual
differences, and even if they introduce a common currency, their
inclusive trade cannot be limited to block members, implicitly
relying on the dollar.
While the dollar-based financial system has been exploitative in
nature and has failed to address poverty in weaker economies
through the IMF and World Bank programs, it has ensured
financial stability in international markets in the past decades. It
will take time for the yuan and other currencies to qualify as
reserve currencies, and the global financial system will closely
scrutinise the functioning of Chinese financial alternatives,
including interest rates, collateral conditions, and the credibility of
emerging financial arrangements.
Countries like Pakistan, which have economic vulnerabilities and
rely on the Western financial system, must make conscious
decisions as they become willing participants in the de-
dollarisation process, particularly in trade transactions and foreign
investments related to the emerging Chinese global financial
system.

Broadening tax base

Mansoor Ahmad July 06, 2023
LAHORE: The state must utilise the services of idle Federal Board
of Revenue (FBR) staff in broadening the tax base, as most of the
taxes, including income tax are collected indirectly in the form of
withholding tax that requires no efforts.
The FBR is praised frequently for increasing tax collection
annually although each year the revenue target is not achieved. Tax
collection increases because every year the tax rate on compliant
taxpayers is increased or some additional taxes are imposed on
them. This includes increasing the tax rate, introducing new tax
like super tax or increasing import duties.
Almost 80 percent of the taxes in Pakistan are collected without
much effort by revenue officials. In the documented sector,
everything from sales tax to income tax on salary is collected at
source. Import levies are collected without effort.
It is now an accepted fact that 50 percent of Pakistan’s economy is
not documented. As the documented companies grow, their
incomes increase and so do their taxes. But the undocumented
sector pockets every penny as it grows.
In many cases, the growth rate of undocumented sectors is much
higher than the compliant taxpaying sectors. Bringing the
undocumented sector into the tax net requires effort. You cannot
bring those who do not pay any taxes by sitting in the cosy FBR
offices.
High ranking revenue officials cannot leave the duty of
documenting the economy to lower level staff. They will have to
come out of their offices and confront them on a regular basis.
The revenue department has the record of the number of shops
operating in all known markets in the cities. They also have the
information of the number of shops or traders paying taxes
(however nominal it may be).
In many cases 30-40 percent shops in posh markets do not pay any
taxes. Those shopkeepers must be confronted on a regular basis till
they register into the tax net.
It should in fact be made mandatory for all tax collectors to add at
least additional tax of 15 percent from new taxpayers’ equivalent to
their average 5 year tax collection. The inability to meet this target
should carry penalties for the revenue staff.
The practice of collecting higher taxes from noncompliant sectors
may be continued, but the next step should be to ask them to give
money trail or pay heavy penalties. It is criminal to enjoy a high
quality lifestyle without paying any taxes.
Bringing tax evaders into the tax net can be a complex task that
requires a comprehensive approach involving legislation,
enforcement, and public awareness. The government must review
and amend tax laws to close any loopholes that allow tax evasion.
This may involve stricter regulations, increased penalties, and
transparency and accountability measures.
At the same time, the state must invest in technology for better data
collection and analysis, increasing the number of trained tax
officials, and implementing risk-based audit strategies to target
high-risk individuals and businesses.
The government introduced initiatives to promote voluntary tax
compliance, but that did not work. Utilising advanced data
analytics tools can identify patterns and anomalies that can indicate
potential tax evasion.
The state must impose stricter penalties for tax evasion, including
fines, penalties, and, in extreme cases, criminal charges. No one in
Pakistan has been jailed for tax evasion. It is a norm in developed
countries.
Non-functional economy
By Malik Tariq Ali, July 2023
A nation state that cannot collect taxes from citizens, earning above
a certain declared uniform threshold income, is a country that is
bound to become economically non-functional, susceptible to
compromising its sovereignty with a possibility of even losing its
vital defence deterrence capability. There exists a top heavy
overstaffed Internal Revenue department, a customs and excise
department and all the other paraphernalia, with an astounding
administrative non-development budget, exclusive housing
colonies for officers and a fleet of limousines, all at state expense,
yet the basic objective for their existence, which is uniform tax
collection from all, has never been achieved, nor is it likely to be
achieved.
The assets owned by these state employees and their families
reveal the decadence going on for decades. Irrespective of the
political rhetoric and loud claim by state institutions, Pakistan faces
a crisis threatening its very survival. Pakistan became a member of
IMF regime, but did not sign any Standby Agreements with them
until December 1958 for $25Million , followed by second on 16
March 1965 for $37.5Million and a third on 17October 1968 for
$75Million. Thereafter every successive government, followed its
predecessor in widening the gap between revenues collected
through direct taxation and exports etc and expenditure.
The ostentatious lifestyle of the paid or elected elite, with fleet of
executive jets and imported limousines increased, whilst the
national exchequer revenues and forex reserves shrank, and the
deficit was bridged by taking more loans to bridge deficit and
paying interests or returning the original loan back. Today the
black economy overshadows the documented economy and the
State is patronizing the former, because of the conflicts of interest
of few at helm and their insatiable greed for more, with no sense of
remorse.
We can learn lessons from our arch rival India, which immediately
after independence adopted their constitution by 1950, became a
democracy and embarked on a plan to focus on human resource
development such as Indian Institute of Technology. They broke
away from British Raj legacy eliminating allotments of state lands
to paid elite, even confiscating those given by Colonial Raj. From
the onset austerity was adopted by the state, starting from the very
top. The 1970s oil crisis and rising agricultural subsidies etc.
resulted in a huge budget deficit, which by 1990-91 had risen to
9.4%.
In March 1991, India’s foreign debts stood at $72 Billion and their
forex reserves dropped to$5.8Billion. There was political turmoil.
RBI was forced to lease 20 tons of gold to raise $234Million.
Finally, PM Narasimha Rao took over and stood like a rock behind
his Finance minister Dr Manmohan Singh who restructured
economy through bold steps, and presented a 1991-92 budget,
which laid down the foundations of boosting India. Today it has
become a major economic power in the world. Pakistan’s economy
on the other hand has been hounded by likes of Shoaib Mohd, V A
Jafri, Shaukat Aziz, Hafeez Shaikh, Raza Bakr or the likes of Dar
and other cronies.
Aiding investment
Editorial Published July 11, 2023 0
THE new Pakistan Investment Policy 2023 appears to have been
driven by the government’s short- to medium-term objective of
facilitating ‘promised’ investment from the Gulf countries, and the
longer-term goal of improving the overall business environment at
home to enhance investment-to-GDP ratio to 20pc.
The World Bank estimates that investment will plunge to 13.3pc as
a ratio of GDP during the present financial year from 15pc in
FY20. Designed in collaboration with multilateral financial
institutions, the policy is expected to attract $20-25bn in
investment over the next few years.
The government has indicated that the GCC nations are very
interested in investing in different segments of Pakistan’s economy
to support development. The prime minister has already formed a
Special Investment Facilitation Council to overcome any obstacles
in the way of the project.
The policy will focus on reducing the cost and facilitating the ease
of doing business, streamlining business processes and promoting
the convergence of trade, industrial and monetary policies. It offers
numerous incentives to foreign investors, including elimination of
the minimum equity requirement and permission to invest in all
sectors, barring a few.
The Investors will be able to remit their entire profits back home in
their own currencies and receive special protection. They will be
also allowed to lease land without restriction, and transfer any land
they hold without limitation. The policy lifts restrictions on foreign
real estate developers.
Foreign investors will be permitted to hold a 60pc stake in
agricultural projects and 100pc equity in corporate farming.
Recent trends show that FDI flows are directed mostly towards
politically and economically stable economies that have strong
foundations for future growth and can access broader markets.

Other factors that influence foreign investors’ decisions include tax

rates, regulatory transparency, policy consistency, technological
infrastructure and a secure environment. Sadly, we lag far behind
even regional countries on these counts. No wonder foreign firms
are exiting our market.
Even Chinese firms looking for relocation of their manufacturing
facilities for export back home and elsewhere in the world are
reluctant to invest here. Pakistan stands at a critical juncture in its
history: it can turn its economic crisis into an opportunity by
quickly implementing governance and structural reforms to attract
investment or suffer on account of inaction.
The new policy will likely woo official Investment from friendly
foreign governments. But private foreign investment flows will not
materialise unless we fix all our systems that can affect an investor
in any way.
Published in Dawn, July 11th, 2023

Rebuilding trust with the IMF

Saeed Ahmed Published July 21, 2023
The writer is a former senior IMF adviser. He represented Pakistan
on the IMF Executive Board from January 2020 to January 2023
and has a PhD degree in economics from the University of
Cambridge.
THE International Monetary Fund has now approved a $3 billion
nine-month Stand-by Arrangement with Pakistan, to support its
urgent external financing needs.
This SBA builds on the long-drawn negotiations between Pakistani
authorities and the IMF for completion of the ninth review under
the 48-month Extended Fund Facility (EFF) programme, which for
a variety of reasons remained incomplete and expired in end-June
2023.
For the most part, the incomplete programme’s implementation
remained uneven including due to the Covid pandemic and floods.
What is worrisome is that, on occasions, the programme saw policy
reversals and slow progress in the implementation of agreed
structural benchmarks and targets, partly owing to intense political
developments.
These caused deep mistrust with the Fund’s staff and management
and resulted in the loss of the country’s credibility, besides causing
a colossal loss to the economy.
Nonetheless, the difficult situation was resolved after interactions
between the prime minister of Pakistan and the IMF’s managing
director, and only after the authorities took all the measures to the
satisfaction of the Fund staff.
However, the incomplete programme has left a legacy of
confidence crisis between the Fund and Pakistani authorities that
must be overcome. Thus, reflecting on where we went wrong in the
IMF programme and how to avoid those mistakes in a future
engagement with the Fund is in order.
This is important since Pakistan’s new government, once elected,
will need to negotiate a successor EFF programme to address its
medium-term balance-of-payments problems.
Reflecting on where we went wrong in the IMF programme and
how to avoid those mistakes in future is in order.
Granted that during the course of the 2019-2023 EFF programme
implementation Pakistani authorities at times wavered in
implementing their policy commitments. Notably, soon after the
completion of four combined reviews in March 2021, the
authorities reversed policies and programme commitments.
Such actions were seen by the Fund as the lack of ownership of
and commitment to economic policies and targets agreed under the
programme. Thus, despite the support during the pandemic, the
IMF staff was not as flexible during the 2022 floods.
In the wake of these floods, the IMF team was apprehensive of the
intent of the government to implement policy commitments.
Repeated assurances by the government to complete the ongoing
programme went unheeded.
Amid increasing political noise, the Fund while adopting a ‘wait-
and-see’ approach did not dispatch its mission to Pakistan to
undertake discussions on the ninth review until February 2023,
which was originally scheduled for October 2022.
Pakistan’s difficult macroeconomic situation post-floods warranted
urgent support and flexibility from the IMF; as it demonstrated in
the case of Ukraine when the Fund hurriedly approved the second
emergency financing support in October 2022 even without
assessment of debt sustainability — a precondition for all Fund
financing arrangements — and medium-term macro framework.
This, however, was not the case with Pakistan, which was
grappling with the havoc caused by the floods affecting 33 million
people. The Fund delayed the review mission to Pakistan, even in
the post-floods environment, on the pretext that they needed to see
the authorities’ changed policy priorities, particularly the fiscal
position.
When Pakistani authorities met all the IMF conditions beyond
what was originally expected for the completion of ninth review,
the IMF untenably asked Pakistan to arrange for the financing
assurances to meet the full external financing needs. The
stringency demonstrated by the IMF, even in a situation
accentuated by natural disaster, goes to show the extent of the
confidence crisis.
Nonetheless, it is important to recognise that under the IMF’s
governance framework, its staff, management, and the Executive
Board enjoy much independence in their analytical work and do
not interfere in each other’s domain for decision-making.
Though the IMF is occasionally criticised for lack of even-
handedness, the Fund staff, management and Board are generally
responsive to the integrated policy framework and organisational
policies and tend to show flexibility in response to rational
arguments to support any missed programme performance criteria
or indicative target.
When a country is facing a severe balance-of-payments crisis, the
onus is on it to put its house in order. Therefore, the best course of
action is to implement the agreed policies and actions, rather than
portraying them as the IMF’s ‘dictates’ or ‘demands’ or ‘a fait
accompli’ to absolve oneself of the responsibility for the economic
woes or missteps. Not doing so would send a strong signal that the
authorities do not own the economic reforms package.
Going forward, the mistakes committed during the 2019-2023 EFF
programme must be avoided. We must adhere to policy
commitments and the programme conditionality as formally agreed
by the authorities with IMF and enunciated in the IMF staff reports
and try to resolve any implementation issues with research and
analysis and citing examples of flexibility from other Fund
arrangements.
Delaying the implementation of adjustment policies is not just
costly in economic terms, it also erodes the trust of the IMF staff,
management and Board, which makes it harder to convince the
Fund even on an otherwise plausible missed action or target. We
must avoid occurrence of such happenings in any future Fund
programme.
At the same time, it is crucial to build the capacity of our economic
team negotiating the next extended financing arrangement under
the EFF to agree on sound economic policies suited to our own
country context.
The policy team needs to be competent, well versed in
international financial architecture and knowledge of other country
programmes to effectively engage in policy discussions.
It is critical to rebuild trust and credibility with the IMF for a more
productive engagement and improved economic management
aimed at increasing the country’s macroeconomic resilience and
external sustainability in the future programme.
Once we enter an IMF programme, the engagement with the Fund
should be seen as a partnership rather than portrayed as a monster
responsible for the hardships of the people. We must realise that
people are suffering not because of the IMF programme but due to
the ailment caused by perpetually misaligned policies and
inefficiencies of the public institutions.
The writer is a former senior IMF adviser. He represented Pakistan
on the IMF Executive Board from January 2020 to January 2023
and has a PhD degree in economics from the University of
Cambridge.
Published in Dawn, July 21st, 2023

Pakistan facing ‘exceptionally high’ risks, says IMF

Khaleeq Kiani Published July 19, 2023
ISLAMABAD: Pakistan needs another International Monetary
Fund (IMF) programme and support from other multilateral lenders
beyond the coming election cycle and the ongoing standby
arrangement, the lender said in a report released on Tuesday.
“Resolving Pakistan’s structural challenges, including long-term
BOP [balance of payments] pressures, will require continued
adjustment and creditor support beyond the current programme
period,” the Fund said in a 120-page report analysing Pakistan’s
macroeconomic outlook.
The report Is based on the Memorandum of Economic and Fiscal
Policies (MEFP) signed by Finance Minister Ishaq Dar and State
Bank Governor Jameel Ahmed.
“A possible successor arrangement could help anchor the policy
adjustment needed to restore Pakistan’s medium-term viability and
capacity to repay,” it said.
The IMF assessment noted that Pakistan’s economic challenges
were complex and multifaceted, and risks were exceptionally high.
“Addressing them requires steadfast implementation of agreed
policies, as well as continued financial support from external
partners. Consistent and decisive implementation of programme
agreements will be essential to reduce risks and maintain
macroeconomic stability,” it said.
Lender insists addressing structural challenges will require
sustained support, another IMF programme
On its part, according to the report, the government has given an
international undertaking for immediately notifying about a Rs5
per unit increase in electricity rates and over 40pc increase in gas
rates, as the gas sector circular debt is now competing with power
sector losses.
It has committed to address drivers of circular debt flow in the
power sector by notifying recent tariff increases determined by
Nepra with effect from July 1, and notification of quarterly and
monthly tariff adjustments without delays stand ready to take quick
additional measures in case set revenue targets are missed.
The government has also promised renegotiation of power-
purchase agreements with remaining power producers (including
Chinese) or prolonging their debt servicing tenors.
In the gas sector, the government has committed to immediate
notification of gas tariff adjustments determined by Ogra, besides
merging the gas rates for both local and imported natural gas
through a weighted average tariff.
The government has also given an undertaking to ringfence fiscal
programme as envisaged in the recent budget and other
commitments with the IMF.
For this, the government will not allow supplementary grants for
any additional unbudgeted spending over the parliamentary
approved level in the current fiscal year, at least until the formation
of a new government after the elections (except in case of a severe
natural disaster).
The government has also given a “commitment not to launch any
new tax amnesties or grant further any new tax exemptions in
2023-24 including through the budget or statutory regulatory
orders without prior [assembly] approval”.
The government has also provided agreements with each province
on their commitment to achieving an end-FY24 fiscal position
consistent with the fiscal year’s general government primary
balance goal of Rs401bn and continuing focus on critically urgent
energy sector policies, including not to introduce any fuel subsidy,
or cross-subsidy scheme, in FY23 and beyond.
In addition, the government has committed to ensuring monetary
and financial stability by returning to a market-determined
exchange rate, lowering inflation toward the target, and rebuilding
foreign exchange reserves.
It said the authorities would refrain from providing guidance or
expressing a preference to market participants regarding the
exchange rate or regulating demand for forex through (either
formal or informal) administrative action.
Once proper market functioning is restored, the authorities have
committed to maintaining the average premium between the
interbank and open market rates at no more than 1.25pc and no less
than minus 1.25pc during any consecutive five business day-period
and publish daily interbank and open market exchange rates.

No quick fix to Pakistan’s economic problems: Elizabeth Horst

Anwar Iqbal Published July 23, 2023
WASHINGTON: There’s no quick fix to Pakistan’s economic
problems but following the arrangement it has made with the
International Monetary Fund (IMF) can help it overcome the crisis,
says US Principal Deputy Assistant Secretary of State for South
and Central Asia Elizabeth Horst.
“We support the arrangement. It provides a breathing space” to
Pakistan, Ms Horst said in a conversation with Washington-based
Pakistani journalists on Friday.
“Pakistan should continue to work with the IMF,” said the US
official who heads the State Department’s Pakistan bureau.
“There’s no quick fix but there’s a fix.” Ms Horst acknowledged
that the coming days would be very tough for the people of
Pakistan, but they have to go through this difficult phase to
improve the economy.
She assured Pakistanis that the United States and Pakistan “have an
enduring partnership,” which would not be affected by the current
political situation.
Top US official says IMF bailout provides breathing space
The United States, she said, was encouraged by the current
Pakistani government’s promise to hold elections soon, but it had
no favourites in the country.
“It’s for the Pakistani people to decide who they want to elect. We
do not support one party against the other. We support the rule of
law and democracy in Pakistan,” she said.
The United States and Pakistan, she said, had a bilateral trade of
$9bn in 2022, which makes the US Pakistan’s biggest trading
partner.
She also shared some statistics showing that US companies
invested about $250 million in Pakistan in 2022, 120,000
Pakistanis are employed by US companies, and the US provided
$215m in flood assistance in 2022. This does not include the $33m
sent by Pakistani Americans.
Ms Horst said that the US has provided over $20bn to Pakistan in
the last 20 years.
“Last year, we had a Trade and Investment Framework Agreement
(TIFA) meeting after eight years, climate, energy, health dialogues
were also held. We are also working on a green alliance
framework,” she said. “So, we are resetting the relationship.”
Ms Horst noted that there were at least 550,000 Pakistanis in the
US, who could play a key role in maintaining the US-Pakistan
partnership.
She said that climate change, economy, and terrorism were
Pakistan’s most pressing issues, and the United States was helping
Pakistan deal with these issues.
The US official noted that about 80,000 Pakistanis have been the
victims of terrorism, and that’s why she believed Pakistan had a
vested interest in combating terrorism.
Ms Horst pointed out that terrorism was both a regional and
domestic issue for Pakistan, while the United States considers it a
threat to world peace.
“The two countries have a common interest in countering
terrorism,” she added.

Five-point agenda for tax reform

Saeed Ahmed Published August 4, 2023
PAKISTAN has a history of turning to international financial
institutions (IFIs) for a solution to its long-drawn tax issues. The
World Bank, Asian Development Bank (ADB), IMF, and the UK’s
FCDO have been supporting tax reforms at the federal and
provincial levels for years. Since FY20, the IMF has been
providing technical assistance to the FBR on medium-term tax
policy and revenue administration. In August 2022, the ADB
announced a loan of $200 million to Pakistan for a resource
mobilisation programme. From a macroeconomic perspective,
given the critical role of revenue mobilisation in Pakistan’s fiscal
sustainability, the donor-funded tax reforms seem conceptually
tenable.
The 2019-2023 IMF programme had envisaged an increase in tax
revenue mobilisation by four to five per cent of GDP through
reforms of personal and corporate income taxes and GST to bring it
close to the tax level in lower- and middle-income countries at
15pc to 20pc. However, at the end of the programme,
notwithstanding an increase in absolute terms, Pakistan’s tax
collection as a ratio to GDP declined.
Ironically, despite multiple foreign-funded tax reform projects, the
outcomes have been disappointing. The history of World Bank’s
2005-2011 Tax Administration Reforms for Pakistan is a classic
example; the bank itself noted in the project evaluation report that
“the project [TARP] was not able to substantially contribute to
strengthening revenue mobilisation capability of the government of
Pakistan, the primary development challenge that the project aimed
to address … the overall outcome is rated moderately
unsatisfactory”. Similarly,the outcome of the bank’s 2019 Pakistan
— Raises Revenue Project also does not seem too fruitful: by the
end of FY23, Pakistan’s tax-to-GDP ratio was 10pc (of which FBR
taxes constitute 8.5pc) compared to the project’s target of 17pc by
FY24.
In part, the reason why IFI-led reforms fell short of the objectives
is because external technical consultants typically come up with
one-size-fits-all solutions, which in most cases do not work. For
instance, it was delusional to expect the system of voluntary tax
compliance (on which TARP was centred) to deliver in a country
where it is hard to implement procedures of strong and effective
tax audits, enforcement, and strict penal actions against tax
evaders. At the same time, however, a lot boils down to the lack of
political will, loopholes in tax policy rooted in fiscal federalism,
institutional weaknesses, and corrupt practices within the tax
system.
The country needs tailored, strategic solutions to our tax woes that
address the underlying issues.
Ergo, the country needs tailored, strategic solutions to our tax woes
that address the underlying issues and are supported by domestic
efforts, strong political determination, and equitable taxation
policies. Coming to home-grown solutions, we need to deal with
everything ranging from addressing policy-related gaps to issues of
implementation and interface with taxpayers. Here I propose a
five-point agenda, that confronts the realities of Pakistan’s
underlying problems, as the foundation of various facets of reform.
First, there is a need to define and clearly communicate the vision
of our tax policy and exercise strict adherence to it. The principle
of equity — both horizontal and vertical — should supersede all
other tax objectives. Horizontal equity means that all equals should
be taxed equally, and vertical equity means that all unequals should
be taxed unequally. In Pakistan, both these principles have been
consistently compromised. The rich pay the least, whereas the
salaried class and a few industrial and business sectors carry the
entire tax burden.
Second, weak provincial tax collection means that the centre
remains under pressure to spend on matters that lie under the
provincial domain. In addition, weak provincial taxation
exacerbates the problem of equity. Although provinces enjoy the
constitutional authority to levy and collect agriculture income tax,
sales tax on services, and provincial property tax, the slackness in
their efforts is evident from the fact that they collectively cannot
mobilise taxes even up to 1pc of GDP. Despite such performance,
provincial tax authorities do not receive the kind of flak the FBR
gets for low resource mobilisation.
Third, adhocism has to be done away with. In their desperate
attempts to meet revenue targets, governments take stopgap
measures to improve tax numbers. The use of tax/duty rate
increases, imposition of advance/withholding taxes, or withdrawal
of exemptions are the easiest tools to raise incremental tax
revenues. The frequent recourse to these measures has made our
tax system highly inelastic and is often in conflict with long-term
economic policy objectives and strategic goals. For instance, the
imposition of withholding taxes on cash withdrawals and non-cash
banking transactions in the not-too-distant past impaired financial
inclusion and increased informality in the economy.
Fourth, there needs to be a strong and effective audit mechanism in
place. Voluntary compliance is important. However, results from
over-reliance on half-hearted administrative measures to minimise
evasion have been elusive. Therefore, voluntary compliance must
be backed by robust audits along with stern enforcement against
tax dodgers and delinquents. Heightened risk of being caught and
associated penalties can be a strong deterrent to concealment and
under-reporting of income.
Fifth, a serious institutional reform of the FBR is crucially needed.
This institution needs to be restructured into a professional,
autonomous organisation with an independent board consisting of
eminent personalities qualified in the fields of economics, public
policy, law, chartered accountancy, finance, business
administration, and IT. The board should drive the vision and
strategic direction of tax policy and exercise oversight over the
management of tax administration. Its members, having no conflict
of interest, should be appointed for a fixed term with legal
protection against undue pressure. A change in the incentive
structure in FBR will promote a culture of transparency and
integrity. Such a restructuring plan is also needed in provincial
revenue authorities. Indeed, without first fixing the institutions, all
other types of reforms may be akin to throwing good money (often
borrowed foreign exchange) after bad!

Borrowing heavily
Editorial Published August 4, 2023 0
THE government’s desire to find ways around the long-standing
reforms agenda and frequent deviations from previous IMF
programme goals for political reasons is imposing unbearable costs
on the nation’s budget and debt sustainability. The country’s total
debt soared by 23.3pc to Rs59tr, with domestic debt rising by
19.2pc to Rs37tr during the July-May period of the last fiscal as the
government borrowed extensively to cover the gap between its
expenditure and tax revenues. Simultaneously, the hefty increase in
interest rates to contain inflation and the current account deficit has
also jacked up debt-servicing costs exponentially during FY24 by
85pc to Rs7.3tr — or slightly more than half of the total budget
outlay of Rs14.46tr for the fiscal — from last year. No wonder the
government borrowed Rs500bn from the banks in the first three
weeks of the year to July 21 compared to Rs120bn from a year ago,
to pay off loans and meet its budget expenditure, according to the
State Bank. Another recent report said the government has to
borrow more than Rs11tr during the first quarter to make payments
of its domestic debt coming due as it is unable to generate enough
tax or non-tax revenues to meet its debt-servicing obligations.
The soaring debt-servicing costs are not only putting pressure on
the budget and forcing the government to squeeze development
spending but also crowding out the private sector from the credit
market. Private credit dropped by around 88pc in the last fiscal to
just Rs211bn. The unwillingness of the government to effectively
tax the undertaxed but large segments of the economy — retail,
agriculture income and real estate — has left it with no choice but
to borrow left, right and centre to meet its debt obligations and
finance its huge fiscal deficit of nearly 7pc. There is consensus
among economic analysts that the debt burden wouldn’t have
grown so much had the government continued on the path laid for
it by the IMF and steadfastly implemented reforms to improve the
tax-to-GDP ratio — one of the lowest in the world — cut down on
unnecessary expenditures and staunched the massive resource
hemorrhaging caused by loss-making businesses in the public
sector. All is still not lost and the situation can still be salvaged
over the next few years provided the reforms agenda is resolutely
pursued.

Foreign direct investment falls 23pc in July

The Newspaper’s Staff Reporter Published August 19, 2023
KARACHI: Foreign direct investment (FDI) shrank 23.27 per cent
month-on-month to $87.7 million in July amid prevailing
unfavourable political and economic conditions.
However, data released by the State Bank of Pakistan (SBP) on
Friday showed that the FDI increased by $12.9m or 17.3pc when
compared with an inflow of $74.8m the country received in July
2022.
The central bank data showed that the foreign portfolio inflows
were significantly higher than the previous year. The portfolio
investment in July was $16.3m which collectively increased the
total inflows to $104m.
The FDI in July 2022 was $74.8m and after adding a $3.7m
portfolio investment the total rose to $78.5m.
Year-on-year, FDI inflows show a rise of 17pc
The highest FDI inflows were from China totalling $18m in July
much higher than $7.1m in the same month last year. China has
been the largest investor in Pakistan for last many years.
The inflows from Hong Kong were $16.9m, Netherlands $12.1m,
Switzerland $10.1m and UAE $8.3m. The highest foreign portfolio
investment came from the US totalling $7.9m in July.
The interim government has taken charge but it needs time to bring
economic and political stability.

Federal budget process in pakistan

WRITTEN BY MALIK MASHHOOD• JUNE 12, 2023
Pakistan’s Federal Budget Process: Unlocking Efficiency and
Accountability
The Evolution of Budgeting: From Robert Walpole to Today
Budgeting continues to be a fundamental component of financial
administration worldwide. The idea traces its origin back to 1733
when Robert Walpole, Britain’s Prime Minister and Chancellor of
the Exchequer, opened his bag in the House of Commons to take
out and describe his proposals on taxation. Today, centuries later,
almost all countries devise a budget that illustrates their estimated
revenues and expenditures for the subsequent financial year.
In Pakistan, the Federal Government is required to devise and
approve its budget from the parliament before its financial year
kicks off on 1st July. Recently, the coalition government in Pakistan
introduced the 2023-24 federal budget. Every year, with the
introduction of the federal budget, the debate on why there is a
need to reform the budget process in Pakistan resurfaces.
The significance of the federal budget In Pakistan has enhanced
over the past few years, owing to the country’s crumbling
economic situation. Clearly, reforms in Pakistan’s budget-making
have become a need of the hour – specifically in the current
situation where Pakistan is already struggling for finances.
How Pakistan’s Federal Budget Process Starts
The budget process in Pakistan is initiated when the Ministry of
Finance issues a ‘Budget Call Circular’ to all federal ministries,
divisions, and provincial governments. The ministries then devise
proposals highlighting their expected revenues and expenditures.
This is sent back to the Ministry of Finance who then conducts a
detailed scrutiny of their proposal. It reviews and assesses the
feasibility and alignment of the proposals with the government’s
overall fiscal policy and development goals for the year.
After the budget has been finalized, it is presented before the
federal cabinet. The cabinet then reviews, discusses, and if
required, makes necessary adjustments before giving their final
approval. The budget is approved by the cabinet usually in the
month of May. In June, the budget is introduced to the National
Assembly for legislative purposes. Parliamentarians engage in
discussions and debates concerning the budget before it is
approved.
Finally, the budget is sent as a ‘schedule of authorized expenditure’
(SAE) to the President of Pakistan for his final assent. This marks
the completion of the federal budget process in Pakistan. It is clear
that in Pakistan, like in any other country, budget-making is a
crucial process because it involves not only the expected revenues
and expenditures of the government for the upcoming year but also
highlights the areas where the government plans to allocate its
resources.
Article 84: Empowering The Federal Government
The budget document also reveals the economic priorities of the
government. For this purpose, it is high time that the federal budget
process in Pakistan is reformed to make it more transparent and
efficient. The constitution of Pakistan mentions the provisions
regarding the finances of the government in part 3, chapter 2 –
which focuses on the role of Majlis-e-Shoora (Parliament). Article
84 sheds light on supplementary and excess grants by the federal
government.
According to analysts, article 84 has given the federal government
the right to give supplementary grants without prior approval from
the parliament. This article needs to be amended because huge
sums of money are given as supplementary grants to different
departments without proper scrutiny by the legislature.
To quote an example, in May 2023, the federal government
allocated Rs.11 billion in supplementary grants including
additional funds of Rs. 1 billion before the next general elections to
parliamentarians. Out of the total Rs.11 billion, Rs.550 million was
given to the Ministry of Information and Broadcasting for the
publicity of the federal government.
Parliamentary Committees
The role of the parliamentary committees also becomes extremely
crucial. Unfortunately, the committees play a very trivial role
throughout the budget-making process in Pakistan. The reason why
committees, specifically the committee on finance and revenue are
significant is that these committees contain members who are
experts in finance and economics.
Hence, they are in a better position to oversee and scrutinize the
budget, highlight the loopholes, and give better recommendations
to make the overall process of budgeting more transparent.
Parliamentarians
Apart from committees, another stakeholder that ends up playing a
very insignificant role is the parliamentarians despite the fact that
they are the actual representatives of the people. Apart from the
Finance Minister, most of the ministers are unaware of the
technicalities associated with the budget. Even the cabinet
members, who are to take the collective responsibility for
government decisions, often have a limited understanding of the
budget till it is formally presented in the parliament.
National Assembly Pakistan
Since parliamentarians are supposed to have a deeper
understanding of the problems, issues, and the needs of people in
their constituency, they are often quick to highlight the potential
growth sectors. They can also help identify the key avenues where
resources are needed and also those areas which can yield higher
returns on investment. Doing so leads to targeted investments and
can eventually stimulate economic growth.
Process of Budget in India and South Korea
As mentioned earlier, the federal budget is usually presented in the
National Assembly in the first week of June and it is the same
month in which the National Assembly is supposed to approve it.
This makes the time allocated to budgetary discussions in the
parliament inadequate. According to statistics, the average
discussion time in Pakistan ranges from 10-17 days, whereas in
India this discussion time is approximately 75 days.
It is no doubt that understanding the budget is indeed a complex
task that might require plenty of time. Hence, it often becomes
extremely difficult for parliamentarians to understand the facts,
figures, and other technicalities in such a short time span. It is
significant to mention the example of South Korea here.
Since the early 2000s, South Korea has been trying to make its
budgeting process more inclusive. For this purpose, the
parliamentarians in South Korea now invite members from the
general public to participate in the budget formulation through
discussions. These people include researchers, teachers, and other
experts. A similar method can be opted for in Pakistan where both
parliamentarians and other members of the civil society can hold
debates and can discuss the budget as a whole.
Recommendations
Undoubtedly, to positively transform Pakistan’s economy, it is
important to introduce and then effectively implement key reforms
in the budget-making process. An amendment in Article 84 of the
constitution will enhance parliamentary oversight of the budget.
The authority and mandate of parliamentary committees must also
be strengthened. Parliamentary Committees may begin by
scrutinizing the budget proposals and then if they feel the need,
they can make informed recommendations for resource allocation.
Furthermore, increasing the discussion time in parliament is also
vital. It will provide an opportunity for proper understanding and
an in-depth analysis of the budget. It is essential for policymakers
and stakeholders to prioritize these reforms and work collectively
towards building a more robust and efficient budgetary framework.
If these reforms are implemented, there is a high probability that it
will help Pakistan would unlock its economic potential and pave
the way for a prosperous future in the years to come.
If you want to submit your articles, research papers, and book
reviews, please check the Submissions page.
The views and opinions expressed in this article/paper are the
author’s own and do not necessarily reflect the editorial position of
Paradigm Shift.

Independent Power Producers in Pakistan

WRITTEN BY HAFSA AMMAR• OCTOBER 6, 2023
Independent Power Producers (IPPs) are private companies that
generate power/electricity before selling it to the national grid
competitively. They are also called Non-utility generators (NUGs)
which only further emphasize private ownership. There can be a
variety of sources that IPPs can use to generate electricity such as
wind, solar, and nuclear energy. Although they contribute to
Pakistan’s circular debt, they are still a necessary evil.
PIA
Pakistan International Airlines (PIA): From a Glorious Take-
Off to a Potential Touchdown?
WRITTEN BY FATIMAH NAEEM• OCTOBER 5, 2023
With a history dating back to 1946, PIA enjoyed a golden era
characterized by top-notch service, innovative initiatives, and a
reputation for safety and reliability. However, its status has
changed dramatically over the years. Fatimah Naeem delves into
the turbulent journey of Pakistan International Airlines (PIA), once
an emblem of national pride and a symbol of excellence in the
aviation industry. She examines the factors that have led to PIA’s
decline and raises the question of whether the PIA can reclaim its
former glory or if it’s headed for a potential touchdown,
symbolizing a fall from grace.
Womansplaining by Sherry Rehman
WRITTEN BY WAJEEHA BATOOL• OCTOBER 4, 2023
Sherry Rehman’s ‘Womansplaining’ narrates the history of the
women’s rights movement, tracing its origins in the 1980s, the
establishment of the Women’s Action Forum (WAF), and its
opposition to the misguided Islamization project until Zia’s demise
in 1988. It also discusses the introduction of the Lady Health
Workers (LHW) Program in 1994 and the ongoing challenges
faced by post-millennial activism.

Privatization: What It Is, How It Works, Examples

By MARSHALL HARGRAVE Updated July 27, 2022
Reviewed by KHADIJA KHARTIT
Privatization: The process by which a piece of property or business
goes from being owned by the government to being privately
owned.
What Is Privatization?
Privatization occurs when a government-owned business,
operation, or property becomes owned by a private, non-
government party.
Privatization may also describe a transition that takes a company
from being publicly traded to becoming privately held. This is
referred to as corporate privatization.
KEY TAKEAWAYS
Privatization describes the process by which a piece of property or
business goes from being owned by the government to being
privately owned.
It generally helps governments save money and increase efficiency,
where private companies can move goods quicker and more
efficiently.
Critics of privatization suggest that basic services, such as
education, shouldn’t be subject to market forces.
Privatization may also refer to a public company becoming
privately-held once again.
How Privatization Works
Privatization of specific government operations happens in a
number of ways, though generally, the government transfers
ownership of specific facilities or business processes to a private,
for-profit company. Privatization generally helps governments save
money and increase efficiency.
In general, two main sectors compose an economy: the public
sector and the private sector. Government agencies generally run
operations and industries within the public sector. In the U.S., the
public sector includes the U.S. Postal Service, public schools and
universities, the police and firefighter departments, the national
park service, and the national security and defense services.
Enterprises not run by the government comprise the private sector.
Private companies include the majority of firms in the consumer
discretionary, consumer staples, finance, information technology,
industrial, real estate, materials, and healthcare sectors.
There are two types of privatization: government and corporate;
although the term generally applies to government-to-private
transfers.
Public-to-Private Privatization vs. Corporate Privatization
Corporate privatization, on the other hand, allows a company to
manage its business or restructure its operations without the strict
regulatory or shareholders’ oversight imposed on publicly listed
companies.
This often appeals to companies if the leadership wants to make
structural changes that would negatively impact shareholders.
Corporate privatization sometimes takes place after a merger or
following a tender offer to purchase a company’s shares. In order
to be considered privately owned, a company cannot get financing
through public trading via a stock exchange.
Dell Inc. is an example of a company that transitioned from being
publicly traded to privately held. In 2013, with approval from its
shareholders, Dell offered shareholders a fixed amount per share,
plus a specified dividend as a way to buy back its stock and delist.
Once the company paid off its existing shareholders, it ceased any
public trading and removed its shares from the NASDAQ Stock
Exchange, completing the transition to being privately held.
In 2018, Dell reverted back to being a public company.
Advantages and Disadvantages of Privatization
Proponents of privatization argue that privately-owned companies
run businesses more economically and efficiently because they are
profit incentivized to eliminate wasteful spending. Furthermore,
private entities don’t have to contend with the bureaucratic red tape
that can plague government entities.
On the other hand, privatization naysayers believe necessities like
electricity, water, and schools shouldn’t be vulnerable to market
forces or driven by profit. In certain states and municipalities,
liquor stores and other non-essential businesses are run by public
sectors, as revenue-generating operations.
Real-World Examples of Privatization
Before 2012, the state of Washington controlled all sales of liquor
within the state, meaning that only the state could operate liquor
stores. This policy allowed the state to regulate how and when
liquor was sold, and to collect all revenue from liquor sales within
the state. However, in 2012, the state moved to privatize liquor
sales.
Once privatized, private businesses such as Costco and Walmart
could sell liquor to the general public. All previously state-run
stores were sold to private owners or closed, and the state ceased
collecting all revenue from liquor sales.
One of the most famous and historically important examples of
privatization occurred after the fall of the Soviet Union. The Soviet
Union’s form of government was communism, where everything
was owned and run by the state; there was no private property or
business. Privatization began before the collapse of the Soviet
Union under Mikhail Gorbachev, its then-leader, who implemented
reforms to hand over certain government enterprises to the private
sector. After the Soviet Union collapsed, there was mass
privatization of previous government enterprises to a select portion
of the populace in Russia, known as oligarchs, that dramatically
increased inequality within the nation.
There have been several attempts to privatize the Social Security
system in the U.S., where supporters believe returns would be
greater for citizens and there would be increased economic growth.
What Types of Institutions Can Become Privatized?
Many types of institutions and facilities typically run by public
officials, or governments can and have been privatized. These
include, among others: prisons; public schools & universities,
hospitals; highways; airports and harbors; public utilities (e.g.,
water, electricity); waste disposal; mail delivery; and
communications infrastructure.
Why Are Some Prisons Privatized?
Prisons and jails are often owned and operated by local or state
governments. But, there has been a trend to privatize these
facilities as governments seek to lower costs, raise capital, and
create jobs in their communities. Proponents argue that specialist
companies are better-equipped and skilled at controlling prison
populations, Critics, however, argue that for-profit prisons are rife
with scandal, cutting corners, prisoner abuse, and other ethics
violations.
Do Shareholders Get Anything if a Company Goes Private?
Yes. Shareholders first must agree to give up ownership in the
company in exchange for some amount of money. If approved, all
shareholders will receive a certain amount per share, often at a
premium to the market price. Afterward, they are no longer
shareholders and the company’s shares would be de-listed from
exchanges.

Economic transformation
Riaz Riazuddin Published September 2, 2023 0
BEFORE we dwell on Pakistan’s 76-year economic
transformation, it is important to review what it means in the
context of countries that transformed themselves from mostly
agriculture-driven to modern industrialised nations.
Nobel laureate Simon Kuznets described this long-term, complex
structural transformation in terms of three simple shares of GDP of
any country: agriculture, industry and services.
At the beginning of the transformation, a country’s GDP has a very
large share of agriculture. As the country starts to develop, the
share of industry begins to rise, that of agriculture to fall, and the
share of services increases slowly. As the country moves toward
greater industrialisation, industry’s share continues to increase,
peaking when the country becomes highly industrialised. During
this time, the share of services continues to rise, and, in advanced
economies, becomes very high as the share of industry starts to go
down. During this transformation, the share of agriculture
continues to go down, too.
In the US, for example, this transformation is at a very advanced
stage. The share of agriculture in GDP fell from 35 per cent in
1850 to 7pc in 1950 to only 0.9pc in 2016, while that of industry
rose from 25pc in 1850, peaking in 1942 at 41pc.
Since then, it fell to 33.7pc in 1950 and 17.3pc in 2016. In contrast,
the share of services continued to rise from 35pc in 1850 to 59.9pc
in 1950 to 81.9pc in 2016.
In other words, during the process of structural transformation,
which is synonymous with the reallocation of resources within the
broad sectors of America’s GDP, the share of agriculture continued
to fall and that of services to rise, while the share of industry rose
first, reached its peak, and then started to fall, showing a humped
curve in the graph. This behaviour of structural change is common
to all advanced economies.
Why does the share of agriculture fall in the industrialisation
process? The reason is that there is an ample surplus of labour
(unemployed or underemployed) available in this sector. Since
wages (and productivity) in agriculture are lower than industry,
labour moves towards industry to expand its contribution to GDP.
Reduction in labour’s share improves its own productivity, as well
as that of the economy overall. It also induces modernisation of
agriculture. As farmers adopt newer modes of production,
agricultural output continues to increase, while its share of GDP
decreases.
In contrast, if industry’s share begins to stagnate or fall in the
initial stages of industrialisation, it is a bad omen for the economy
because industrial and manufacturing activities are highly
productive and have the potential to absorb a lot of labour and
reduce unemployment.
What is alarming is the behaviour of long-term change in the share
of industry.
Let us now review the structural change of our economy which, of
course, is incomplete, as we are still a developing country. The
share of agriculture in Pakistan’s GDP was 53.2pc in FY50.
Halfway through its history, it fell to 26.3pc in FY87, representing
a reduction of 26.9 percentage points. During the next half of our
76 years, it reduced by only 2.3 percentage points to 24pc in FY23.
This is an indication that the rate of structural transformation in our
economy has slowed down considerably.
The share of the services sector has increased from 37.2pc in FY50
to 49.7pc in FY87. While it continued to increase in the next 38
years, its pace of increase went down, as it gained only 4.6
percentage points on reaching 54.3pc in FY23.
What is alarming is the behaviour of long-term change in the share
of industry. It increased from 9.6pc in 1950 to 24pc in FY87, an
increase of 14.4 percentage points during the first 38 years of our
history. Since then, instead of registering an increase, it has gone
down by 2.3 percentage points to 21.7pc in FY23. This seems like
premature de-industrialisation of our economy, contrary to the
experience of nations who are developing successfully.
The most important and dynamic subsector within industry is the
large-scale manufacturing sector in our economy. The long-term
trend in the share of manufacturing activities in GDP gives a bleak
picture of our industrial transformation. The share of LSM in GDP
was only 2.2pc in 1950 and touched its highest value 13.1pc in
FY71. Since then, it has first stagnated around 12pc till FY08,
declining to 11pc in FY23.
The process of economic and Industrial transformation is not an
automatic one; it is driven by economic policies and innovation.
Good macroeconomic policies fuel this process, and bad policies
retard or slow it down, undermining the process of economic
development. Our industrial policies of nationalisation in the early
1970s played such havoc that we have still not come out of the
subsequent retardation and decline in manufacturing’s share in
GDP.
Bad industrial policies combined with imprudent fiscal, monetary
and exchange rate policies have not only produced financial and
balance-of-payments crises, they have also constrained our overall
GDP from rising faster, affecting all its subsectors. The
manufacturing sector acts as the engine of growth because of its
high productivity compared to agriculture and services. Bad
policies have taken all the steam propelling growth out of the
manufacturing sector.
While premature de-industrialisation in Pakistan is not a unique
phenomenon among developing countries, the extent of slowing
down and retardation in the manufacturing sector is more severe
compared to India. In India, the share of agriculture in GDP has
fallen from about 50.6pc in FY54 to 18.3pc in 2023. The shares of
industry and services have gone up from 14.5pc and 34.3pc in
FY54 to 28.2pc and 53.5pc respectively in FY23. The current share
of industry in India is 6.5 percentage points higher than that in
Pakistan.
We need to adopt policies that expand the share of industry in GDP.
We should remove inequities in taxation among three broad sectors
of GDP. The relative level of taxation is much higher in industry
compared to agriculture and the services sector. This does not mean
that we reduce taxation in industry. Rather, we should impose
direct taxes in agriculture and reduce tax avoidance in services.
Prolonging the existing tax regime will continue to retard our
economic transformation.

Pakistan needs energy reforms to break free of debt: US

official
Anwar Iqbal Published September 3, 2023 0
WASHINGTON: Pakistan needs to undertake energy reforms and
opt for renewable energy sources, said a senior US official,
stressing that reforms suggested by the International Monetary
Fund (IMF) would help Islamabad break the “vicious circle of debt
and international financing”.
Principal Deputy Assistant Secretary Elizabeth Horst, who heads
the Bureau of South and Central Affairs at the State Department,
emphasised the need to implement reforms to meet future
challenges.
Caretaker Prime Minister Anwaarul Haq Kakar is expected to
discuss the economic crisis with US and IMF officials when he
meets them in New York later this month. His delegation also
includes the finance minister.
“These are tough economic times — in Pakistan, in the United
States, and around the world,” said Ms Horst when asked how
Washington could help Islamabad avoid an economic collapse.
“We are working every day to help Pakistan make progress on
economic reforms that will make it more competitive and better
prepared to meet future challenges,” she added.
Elizabeth Horst says Washington helping Islamabad on economic
front
The US official then underlined recent US efforts to help ease the
pressure of economic distress, including assistance for the victims
of last year’s devastating floods, which includes more than $215
million for emergency shelter, disaster relief, and food.
“At the same time, we are building for the future helping Pakistan
move from recovery to resilience. Through the US-Pakistan Green
Alliance, we are making strategic investments in energy, water, and
agriculture that strengthen climate resilience, drive forward energy
transformation, and foster inclusive economic growth,” she said.
‘Need for investment’
Underlining the need to encourage foreign investments in Pakistan,
she said, “We want to see Pakistan succeed in an increasingly
competitive market for US trade and investment. It is no secret that
there are huge upsides for both countries when US companies
invest in Pakistan.”
US investments in Pakistan create high-paying, 21 st-century jobs,
offer training and skill development for workers, and help ensure
respect for international labour standards, she said.
Without mentioning investments by other nations, such as China,
which Washington claims has increased Pakistan’s debt burden, the
official said, “US companies bring investment, not loans, and they
give back to local communities through corporate social
responsibility initiatives. That’s why it’s so important that Pakistan
makes progress on economic reforms – to instil the confidence and
certainty needed for companies to invest.”
When reminded that consumers in Pakistan were refusing to pay
their electricity bills because they could not and because of an
agreement with the IMF the government cannot lower the bills, she
said with global economic conditions driving up commodity prices,
many countries were grappling with high inflation and its “very
real impacts on people’s lives and livelihoods.”
Energy reforms
But she defended the IMF-backed programmes. “One of the things
people frequently overlook is that the IMF is working to help
Pakistan make needed reforms to break free from a vicious cycle of
debt and international financing,” she said. “Reform in the energy
sector has been needed for a long time. And there are actually
programmes in place to help mitigate the burden on the poorest.”
Acknowledging that “it is a universal truth that no one likes paying
more bills”, she warned: “Without energy sector reform, Pakistan’s
entire economy will continue to struggle” and “we, and Pakistan’s
other friends, are here to support Pakistan’s efforts in that regard.”
Such reforms, however, “will take strong leadership and patience,
but without making these changes on issues like taxation and
investment, for example, Pakistan will not be able to stand on its
two feet,” the US official said.
The IMF programme, she said, was only a part of the reforms that
Pakistan needs to take. “A prosperous, economically stable
Pakistan marked by inclusive growth that provides opportunity to
future generations is in the Pakistan people’s interest, and in our
interest as well,” Ms Horst explained.
The fever breaks
Khurram Husain Published July 6, 2023 0
THE fever is breaking. Rarely have I seen so many indicators of
the economy reverse their momentum in tandem, and so fast. From
the start of this week, Pakistani bonds in international markets have
rebounded from default level pricing to normal pricing, inflation
peaked, the foreign exchange reserves rose by $500 million, the
trade deficit fell, the stock market registered the sharpest single-
day jump in its history and the exchange rate rose by Rs10 with
possibly more gains to come.
Of course, not all of these changes were linked to the IMF deal
announced last week. Inflation and the trade deficit data, for
example, was for the full month of June. But the reversal in bond
pricing, the stock market rally, the exchange rate adjustment and
possibly the reserves increase, seemed to be connected with the
successful completion of the IMF deal.
For the past 18 months, Pakistan has been in the throes of a turbo-
charged power struggle that paralysed decision-making at the top
while the economy veered dangerously close to a situation
popularly being described as ‘default’. This toxic combination —
massive political uncertainty coupled with rapidly depleting
foreign exchange reserves — was fuelling a sense of drift. To
outsiders, it looked like Pakistan was veering towards a cliff and
nobody was in charge.
The looming election calendar made things worse. It seemed
Pakistan would be without a strong leadership precisely at the time
when the depletion of its foreign exchange reserves would reach
crisis proportions (around October).
During the year 2022 and the opening months of 2023, I hosted
more investor calls from holders of Pakistani debt than at any time
in the past, a sign that foreign investors were trying hard to discern
the direction in which the country was moving. In all of them, the
questions I was asked were the same: will Imran Khan return to
power? Will the government keep to the IMF programme?
None of the pain and anxiety of the last nine months was necessary
had we stayed the course from September.

By the end of June, the facts had answered both of these questions.
Pakistani bonds began rallying in the third week of May once the
defections from the PTI gained momentum and it became clear that
the instability that had wracked Pakistan’s politics since early 2022
with Khan’s slash-and-burn bid for returning to power now looked
set to recede. And the IMF’s announcement of a Stand-by
Arrangement for nine months starting from July cleared the air
around the depletion of the reserves.
What followed was a rapid repricing of Pakistani assets — both
financial and fixed. And the result was a massive reversal in the
erosion of the country’s asset prices that had priced in a near
certainty of default in the next 12 months.
This is important to understand because none of it means the
economy is out of the woods. What we have seen is not a
turnaround in the fortunes of the economy. It is basically a
repricing of its assets given the clarity around whether or not a
sovereign default could occur in the next 12 months.
The Consumer Price Index, the main measure of inflation, showed
slowing momentum not because the prices of goods and services
began coming down; it slowed because prices last year had
increased so rapidly that the increases this year appeared smaller
relative to them.
Economists call this the ‘base effect’, because the CPI measures
the prices of a basket of goods relative to what they were last year
(and last month as well). The month-on-month change in the price
level was a nominal drop of 0.3 per cent, which shows prices
plateauing out rather than falling.
Looming large over the whole show is the question of debt.
Pakistan’s external debt is growing faster than its ability to carry
this debt. There are various reasons for this, and rectifying those is
a long-haul job.
For the more immediate term, it is important to note that the build-
up of debt service obligations is now so large that the country’s
foreign exchange reserves deplete in less than a year if it is not on
an IMF programme and receiving concessional inflows from
bilateral partners like China and Saudi Arabia.
The reserves peaked at $20 billion in August 2021 and began their
downward slide from there. By June 2022, they had dropped to
$9.8bn despite nearly $5bn of borrowing in that fiscal year.
Had that borrowing not taken place, we would have landed up in
our present predicament last year. Today, those reserves have
dropped to $4bn, mainly because fresh borrowing was far lower on
account of the troubles with the IMF programme, and also because
debt-service payments were very large this year. This debt spiral
has to break.
Increasingly, people are saying that debt restructuring will be
necessary, and the sooner this is done the better it is. Those voices
are worth paying attention to.
Meanwhile, virtually every commitment given to the IMF back in
September, which Ishaq Dar came in promising to reverse, has had
to be lived up to. The interest rate is at 22pc, the highest ever. The
exchange rate crossed Rs300 to a dollar (open market) before
dropping in recent days.
GDP growth came in close to zero. The revenue target had to be
revised upward, and fresh taxes applied back in February. The
country was brought to the edge of a near catastrophic situation,
and for what? None of the pain and anxiety of the last nine months
was necessary had we stayed the course from September.

EXPLAINER: Making sense of ‘sky-high’ power bills

What are the factors behind the sudden jump in the price of
electricity?
Zain Siddiqui Published September 3, 2023
PROTESTS against a sharp increase in electricity prices flared up
across the length and breadth of the country as the month of August
2023 neared its end, with the inflation-weary citizenry taking to the
streets to burn bills and vent their anger against power utilities.
Why had the citizenry taken weeks to wake up to a decision made
by the PDM government in July, and what are the factors behind
the sudden jump in the price of electricity?
Nepra, the federal authority that sets electricity prices for all power
consumers in Pakistan, recently announced a revised electricity
tariff that became effective from July 1. The tariff for residential
consumers — which is the same for consumers all over the country
— was increased by as much as Rs7.50 per unit, or 27 per cent.
Even though the increase in prices was substantial, most citizens
remained unaware of the big hit they were about to take for weeks
because of the timing of a key notification.
The new electricity tariff was oka”ed in the last few days of July,
more than three weeks after the date on which it was supposed to
come into effect (July 1). By that time, most electricity companies
— or DISCOs, as they are properly known — had already
dispatched July’s electricity bills to their customers based on the
old tariff. However, because they had been lawfully allowed to
charge customers a higher tariff from July 1, they were told to
cover the difference in the old and new rates through the next bill
— i.e., the bills for the month of August.

Meanwhile, the PDM government, which had actually lobbed this

electricity price grenade at the unsuspecting citizenry, quietly
packed up and exited the picture on August 10, leaving it to the
caretaker set up to deal with the aftermath of its decision.
Snowballed
Your electricity billing cycle does not follow the calendar: ie, your
August bill is not a bill for electricity consumed in the month of
August alone. For logistical reasons, electricity companies send
meter readers to get readings from specific areas on different days
of the month. On the assigned date, a meter reader(s) comes up to
your home, takes a picture of your meter’s display as ‘proof’ of
your usage, records the reading in his device, and later reports it
back to the company. If your meter is read every 10 th day of the
month, your electricity usage of the first 10 days of the month, as
well as the preceding 20 days of the previous month, are therefore
factored into the company’s calculations for your bill.
In our example, the ‘August’ bill received by a customer would,
therefore, be based on their electricity consumption in the one-
month period from July 10 to August 10, and calculated using the
higher tariff since it was in effect by that period. However, because
the companies also needed to recover the difference in the lower
rate they had charged in the customer’s July bill and the new tariff,
the higher tariff — which was applicable on any units consumed
between July 1 to July 10 — was also adjusted in the August bill.
For another customer, however, their August bill could cover the
period from July 24 to August 24. Assuming that these two
customers used the same amount of electricity in both months, the
second customer would have received an even higher bill because
it would have included an adjustment for the 24 days of July they
were earlier undercharged for, compared to the first customer’s 10.
Due to the staggered nature of Discos’ billing cycles, the number of
people becoming aware of the new tariff only started increasing as
time went on and more and more batches of customers received
their bills. Widespread protests eventually broke out when the
number of people who had received electricity bills under the new
tariff reached a critical mass around the middle of the month.
Breaking down the bill
Before getting into a discussion on why electricity suddenly seems
so unaffordable, it is important to understand how the price of each
unit of electricity is determined, and how energy is billed to
domestic consumers. Here’s a look at the various components of an
electricity bill you can expect to receive if you do not qualify to be
considered a ‘protected’ consumer.
Variable charges are calculated based on your monthly
consumption and the tariff approved by Nepra. This tariff is
calculated based on several underlying costs, which can broadly be
categorised as:
The power purchase price, which includes capacity charges, energy
charges (cost of fuel) and operation and maintenance charges
demanded by independent power producers and publicly owned
power generation companies (Gencos); a Use of System charge,
which goes to the NTDC, which ‘transmits’ power through the
national grid; the Distribution Margin, which includes operation
and maintenance costs for Discos, their salaries, wages and other
benefits, depreciation, opex and other expenses, as well as allowed
profit; and, finally, transmission and distribution losses, which
account for theft of electricity and the loss of electricity during
transmission due to poor infrastructure.
On top of the electricity tariff, the following charges are added (and
sometimes subtracted) from your bill.
Fuel Charge Adjustment
Electricity utilities may add a Fuel Charge Adjustment for the
previous month to the bill after getting approval from Nepra. This
charge covers any extra cost they incurred in the production of
electricity above the tariff they have been allowed. It varies with
changes in the cost of fuel, variations in the types of fuel used to
generate electricity (called the generation mix) or any costs
incurred due to changes in generation volume.
Uniform Quarterly Adjustment
A Uniform Quarterly Adjustment charge may also show up on your
bill periodically due to many of the same reasons as a fuel charge
adjustment. However, quarterly adjustments also take into account
variations in transmission and distribution losses, the exchange
rate, capacity payments to IPPs (which are made in dollars),
prevailing interest rates (which affect financing costs), as well as
several other factors.
PHL surcharge
The PHL surcharge is, to put it simply, the price the government
forces bill-paying customers to pay for its own failure to manage
circular debt in the power sector. It is currently as high as Rs3.23
per unit for anyone who consumes more than 300 units of
electricity or is billed under a Time of Use tariff. ‘PHL’ stands for
Power Holding Limited, a company established to fund the
ballooning payables to power sector entities. The amount recovered
from this levy is used to pay off the interest on loans granted by
PHL to various players in the power sector.
Electricity Duty
The Electricity Duty is a provincial tax levied at a rate of 1-1.5pc
for domestic users. As such, it is a negligible component of the bill.
TV License
The TV License fee is a charge used to subsidise PTV, which
remains unable to achieve operational sustainability on its own.
Sales Tax
Finally, the government adds 17pc as its own cut from the total bill
as a General Sales Tax.
Income Tax
The income tax is the last piece of bad news. If, after the sales tax
has been added on, your bill crosses the Rs25,000 threshold, you
become liable to be charged another 7.5pc of the total as
‘withholding income tax’. This is just a fancy way if making
ordinary citizens pay for the Federal Board of Revenue’s failure to
get tax cheats to pay up.
This tax is, however, waived if you live in a property that is
registered to an active taxpayer.
Why has there been such a massive increase in electricity prices?
Very simply, the electricity tariff has increased sharply due to the
last government’s failure to adequately manage the financial crisis.
Thanks to the wizard who led the finance ministry till the PDM
government’s last days, the country no longer has enough in the
kitty to continue subsidising electricity for most electricity
consumers. The focus is now on protecting the most vulnerable —
particularly those who do not consume more than 200 units of
electricity in any given month. Everyone else is being made to
shoulder the entire burden of the inefficiencies building up in the
power sector over the past few decades or so.
As mentioned earlier, the electricity tariff includes a large
component that just goes towards paying IPPs what industry
people call ‘capacity charges’. These ‘capacity charges’ are simply
payments that are guaranteed to IPPs whether or not they actually
make any electricity. These charges will top Rs2 trillion in 2024,
and these will need to be covered, for the most part, by ordinary
people.
Capacity payments were made part of IPPs’ contracts because our
state once believed they were necessary to make it more financially
attractive for private firms to invest in the country. However, the
governments responsible for these agreements grossly
overestimated the benefits of these agreements, and we are now in
a situation where we’re damned if we buy power from these IPPs,
and damned if we don’t.
Capacity charges have mostly become a headache because they are
indexed to the exchange rate, domestic interest rates and foreign
interest rates, among other factors. None of these has moved in a
favourable direction for Pakistan over the past year, thereby
increasing the cost burden of these contracts without any net
benefit for the country.
Another component of the variable charges are transmission and
distribution losses, which can broadly be categorised into losses
due to electricity theft, and losses arising from the poor state of the
transmission infrastructure. Data shows that some power
distribution companies — such as those operating in Peshawar and
Sukkur, for example — are responsible for substantially higher
theft of electricity compared to, for example, Islamabad, Karachi or
Lahore. However, because of the government’s policy to have a
uniform tariff across the country, the cost of this theft is eventually
shared by all bill-paying customers all over the country. Bill-
paying customers also pay the bill for around 190,000 lucky
households that receive electricity almost free of charge from the
state.
So, can the government give end users any relief? The answer is
yes, and no. The government can start by cutting some of the taxes
added onto electricity bills, especially the PHL surcharge and the
withholding income tax. Both these taxes have been levied because
of the failures of the power sector and the FBR to do their jobs, and
it is unfair that ordinary people should pay for these inefficiencies
when they are facing unprecedented financial stress themselves.
The revenue shortfall ought to be covered by taxing the undertaxed
retail and real estate sectors, and pushing the FBR to be better at its
job. The rest of the measures discussed by analysts are more
technical and for experts to figure out. They also need considerable
time. They chiefly involve resolving the issue of high transmission
and despatch losses, ensuring the availablity of fuel, especially gas,
on rationalised prices, prioritising more efficient generation plants
over others, and so on.
In conclusion, it must be underlined, highlighted and stressed that
the poor meter reader or worker assigned by your power utility to
disconnect your power supply or take meter readings has no role in
this entire mess. It is tragic that these ordinary workers have been
facing the brunt of the public’s anger, when the actual culprits are
still spouting nonsense and pointing fingers at each other without
taking any responsibility for past mistakes.

Pakistan amidst a polycrisis

By Dr Abid Qaiyum SuleriSeptember 05, 2023
The caretaker government has made a sensible decision to link any
possible relief in electricity bills to the consent of the IMF in order
not to jeopardize the ongoing standby agreement.
Pakistan needs to stay under the IMF umbrella for at least the next
few years, not only to overcome its chronic balance-of-payments
challenges (dollar shortage) and take much-needed policy and
structural reforms under IMF scrutiny but also to regain the trust of
local and international investors. This trust is crucial to ensure both
a steady flow of dollars and prevent their hoarding or outflow.
Without overcoming the trust deficit, the value of the rupee will
remain under pressure.
As I write this piece, the dollar is trading at Rs305.50 in the
interbank market, Rs330 in the open market, and Rs345-355 in the
hawala market. Despite appreciating by Rs17 against the rupee in
the last 13 days, the interbank rate of the dollar is still far behind
the open market rate, breaching the difference threshold that
Pakistan committed with the IMF.
On the other hand, high demand for imports, negative market
sentiments, hoarding, smuggling of greenbacks to Afghanistan, and
uncertainty on election dates are pushing up the price of dollar
against rupee in the open market. In fact, the difference between
the hawala and interbank rates, as well as open market and
interbank rates, has once again widened. This makes it unappealing
for remitters to send their remittances through official banking
channels.
Wonder why I am discussing the exchange rate in a piece on
energy prices? Please keep in mind that the depreciation of the
rupee has serious repercussions for the electricity sector. Assuming
that all other factors, including the international oil, coal and gas
prices, remain unchanged, the current rupee weakening would
result in higher electricity bills after two months.
This is due to two reasons: a higher fuel import bill (reflected as
fuel price adjustment every two months), and higher capacity
payment charges (which are denominated in dollars) that the
government is bound to pay to electricity generation companies
even if it does not buy a single unit of electricity from them.
Politically motivated delays in recovering the cost of generation of
electricity during the last 16 years resulted in accumulation of
energy circular debt (ECD), which, along with transmission and
distribution losses and cross-subsidies on tariff, piled up to Rs2.6
trillion by June 2023. For comparison, the ECD is one and a half
times higher than Pakistan’s current year’s defense budget. An
attempt to contain ECD in FY24 at the Rs2.6 trillion level means
full recovery of all costs from consumers during the current
financial year. The result was exceptionally high electricity bills in
August, which will further inflate as the rupee depreciates further.
We should also remember that it is not only the fuel and
transmission-distribution costs that are pinching the consumers. A
major chunk of our electricity bills also consists of taxes and
surcharges on those taxes, which every consumer, regardless of
his/her income (and in some cases electricity consumption level),
has to pay to meet the government’s growing revenue requirement.
Before discussing why the government uses electricity bills for the
generation of revenue, let us continue with the impact of the
depreciated rupee.
The depreciated rupee also increases the domestic prices of petrol
and diesel. The current rise in fuel prices will result in another
round of inflation and likely another round of public discontent.
The textbook way of curbing inflation is to increase the interest
rate. However, high interest rates not only adversely affect
businesses and export competitiveness but also increase the
government’s domestic debt servicing cost, requiring additional
revenue. Due to chronic failure to generate revenue through direct
taxation, the government ends up relying on indirect taxation.
Electricity bills are one such tool for collecting indirect taxes and
that is why successive governments are tempted to keep adding
taxes to them.
Amidst this vicious cycle where one economic problem leads to
another, the pressure on caretakers will mount to provide relief,
especially on energy costs. However, in the current fiscal
framework, they have no cushion to provide such relief. To address
the growing discomfort among consumers, the caretaker
government should try to redesign the fiscal framework. It needs to
enhance revenue mobilization and reduce its expenditure.
Additional revenue can be mobilized by bringing the ‘taxable
untouchables’, both elite individuals and pampered sectors of the
economy, into the tax net. Everyone knows who they are and why
– due to different political-economy considerations, successive
governments failed to tax them.
On expenditure reduction: besides many symbolic austerity
measures, one of the ways to reduce expenditures is to privatize the
loss-making public-sector enterprises (including electricity
distribution companies). The caretaker government must kickstart
the process of privatization of such units. However, the time is too
short for them to successfully complete any privatization deal. The
quickest way to reduce expenditures is to slash ‘politically
motivated’ brick-and-mortar projects from federal and provincial
development plans. If the amount spent on proposed relief in the
energy sector is offset by a reduction in PSDP, then the IMF may
not object.
A cushion for such relief can also be created by reducing the unit
cost of electricity by reducing the chronic inefficiencies, power
theft, and misuse of entitlements in the power system.
To contain the depreciation of the rupee, the government would
have to improve the inflow of dollars. The two major sources of
dollar inflow, exports and remittances, are declining and must be
improved. However, in the short run, caretakers should focus on
securing some of the $9 billion Geneva pledges for the 2022
floods. Those pledges could not be materialized during the last
fiscal year as the IMF’s support for Pakistan remained suspended
in that period.
Now that Pakistan is back in the Fund’s programme, access to
those pledges depends on the preparation of tangible and concrete
projects for flood rehabilitation and disaster preparedness. The best
way to do it is through a cabinet committee and inter-ministerial
coordination mechanism to prepare some convincing projects for
the Asian Development Bank, World Bank, and Islamic
Development Bank.
I can foresee some high-level visitors coming to Pakistan in mid-
September before or after the G-20 meeting in Delhi. Such visits
would help boost the market’s sentiments. However, a strong
follow-up is required to capitalize upon the bilateral consensus
achieved during such visits. Clarity on the expected length of the
present caretaker setup and the general elections’ timeline is a
prerequisite for such follow-up.
In the meantime, the caretakers should act swiftly and decisively to
break the vicious cycle of economic and energy crises and pave the
way for sustainable recovery.

A state of illusions
Zahid Hussain Published September 6, 2023 0
WE are living in a world of illusions. While the country is fast
hurtling towards an economic meltdown, we are told that our bad
days are over, with billions of dollars in investment soon expected
to be pouring into the country that would change our fortunes.
The caretaker prime minister says that Saudi Arabia will be
investing $25bn in the country over the next five years, while the
army chief is reported to have reassured a group of businessmen
that Pakistan has the potential to attract up to $100bn in
investments from countries such as Saudi Arabia, the UAE, Kuwait
and others to alleviate the suffering of the Pakistani people.
There is a sense that the army leadership is on a mission to steer
the country towards a new era of economic prosperity, by fixing
everything — from containing the dollar to stopping smuggling
and eradicating corruption in the next few months.
It believes that the recently formed Special Investment Facilitation
Council will be able to bring in investments in the energy, IT,
minerals, defence and agriculture sectors. The SIFC structure,
which includes the COAS as well as other military representatives
in key roles, aims to take a “unified approach” to get the country
out of the current state of economic turmoil in which it finds itself.
However, it appears to be part of the game of illusions long played
by our ruling elite. For a number of years, it was the China-
Pakistan Economic Corridor that was supposed to be a game
changer for the country. But after tens of billions of dollars of
Chinese investment, the country’s economic plight has continued
to slide. The promise of change never materialised, despite the
massive inflow of finances over the years.
While the CPEC project at least has something to show for it in
terms of some infrastructure and power sector development,
mobilising $100bn in investment is a pipe dream, especially as
there is no indication so far that the Gulf sheikhdoms have started
looking at a country riven by multiple crises as a lucrative
investment destination. Notwithstanding some of them acquiring
interests in certain state-owned ventures being offered for
disinvestment, there is no tangible commitment to invest in new
projects.
The biggest obstacle In the way of foreign investment is
deteriorating law and order.
But our caretaker prime minister is euphoric about the prospect of
$25bn in Saudi investment coming in various sectors, particularly
in mining, agriculture and information technology, in the next two
to three years. One can only wait to see such a wonder happening
that could change the fortunes of a country struggling to keep itself
afloat amid a massive foreign debt burden and looming stagflation.
Curiously, the civil and military leadership never gets tired of
hyping Pakistan’s rich untapped mineral resources. Their latest
estimate is that the country is sitting on precious minerals valued
up to $6 trillion. One former minister in the previous government
got very excited during a TV talk show, claiming that the amount
was only the value of the ‘dust’ and the real worth of the untapped
minerals was far more. There is no limit to such absurdities that
come in plenty, even at a time of extreme gloom.
It was not surprising that the pep talk delivered to the select group
of businessmen leaked to the media has evoked a mixed response.
Some elements in the media were quick to eulogise the COAS for
‘leading from the front’ in a bid to take the country to economic
recovery.
However, past experience has taught us that it has been a norm
under successive hybrid set-ups for the military leadership to be
involved in matters ranging from governance to economic policies.
The latest example is the SIFC, mentioned earlier, with
considerable military representation, formed under the Shehbaz
Sharif government as a one-window operation to facilitate foreign
investment in the country.
Indeed, we have seen such involvement in the economic
policymaking process quite a few times. The hybrid administration
under former prime minister Imran Khan in 2019 had established
the National Development Council with the aim to spur economic
growth. One of its members was the then army chief Gen Qamar
Bajwa. Very little was heard of the body that had hardly anything
to show for the revival of the economy.
But the current military leadership’s involvement in matters of
economic and investment policymaking process under the interim
administration has reinforced apprehensions about the
establishment’s long-term agenda. There is no ambiguity left now
about who is in charge.
The most worrying aspect, though, is the misplaced expectation of
massive inflows of foreign investment. One cannot deny the
importance of a unified approach and the removal of bureaucratic
hurdles in order to facilitate much-needed foreign investments in
the country. But far more is required to create an atmosphere to
give foreign investors some confidence in conditions here.
Crucial to this situation is a conducive economic and political
environment for foreign investors to come. It is not goodwill alone
that will lead Gulf countries to invest here. What we need is to
carry out long-pending structural reforms to stabilise our economy
which has been in the ICU for a long time. The countries which
have attracted foreign investments have first fixed their economies
and then have developed strong domestic investments.
A sick economy provides no incentive to attract domestic or
foreign investors. Wishful thinking cannot bring in investors. How
can we expect foreign investors to come in a situation where
domestic investment has been falling? The potential mineral
deposits have been known for decades but could not be tapped, not
only because of lack of will but also because of political and
security reasons.
Foreign investment will come when the economic fundamentals
are in place and security for investment is guaranteed. It’s not
enough to have a “unified approach”. With the prevailing political
and economic uncertainty, there is hardly any hope of any kind of
investment flowing in. The biggest obstacle in the way of foreign
investment is the deteriorating law-and-order situation, particularly
in the regions which are believed to have the major deposits of
minerals.
Surely, we badly need investments to make the country stand up on
its feet. But for that, we need to emerge from our state of illusion
and confront the reality. There is no magic wand the security
establishment has to fix our chronic problems within months.
Pakistan Market Monitor Report – June 2023
Source WFP
Originally published 24 Jul 2023
Food prices have been consistently rising for the past 15 months,
except for a slight decline in December 2022. In May 2023, CPI
food inflation increased by 48.65% compared to May 2022. This
upward trend is influenced by factors such as fuel price hikes,
higher energy/utility costs, rupee devaluation, and increased prices
of imported food and non-food items. Given the country’s
economic uncertainties, essential food and non-food items are
expected to remain expensive in the coming months.
Headline inflation based on the Consumer Price Index (CPI) is the
highest in 66 years (since 1957) and has increased to 38.0% on a
year-on-year basis in May 2023 compared to 13.8% in May 2022.
It should be noted that inflation rates in May in the neighbouring
countries stood at -1.0% in Afghanistan, 0.2% in China, and 4.3%
in India.
In May 2023, prices increased for staple cereals wheat flour
(subsidized) (+3.5%), wheat flour (Fine) (+1.4%), rice Basmati
(+4.5%), and rice Irri-6 (+4.9%) compared to April 2023,
representing an increase for wheat flour (subsidized) (+118.0%),
wheat flour (Fine) (+87.2%), rice Basmati (+92.7), and rice Irri-6
(+84.6%) from the same time a year ago.
On the other hand, the price decreased for wheat (-0.1%) in May
2023 compared to the previous month.
In May 2023, certain non-cereal food prices increased compared to
the previous month. Live chicken prices rose by 10.0%, eggs by
4.0%, and pulses as Mash, Masoor, and Moong increased by 3.8%,
3.3%, and 1.2% respectively. These figures also indicate significant
year-on-year increases, with live chicken prices up by 35.8%, eggs
by 84.6%, and pulses such as Mash, Masoor, and Moong rising by
61.6%, 19.9%, and 66.7% respectively. On the other hand, prices
for sugar, cooking oil, ghee, and pulse Gram decreased in May
2023 compared to the previous month.
Food commodity prices experienced substantial increases
following the July 2022 floods. For example, wheat flour prices
rose by up to 149%, rice Irri by 132%, potatoes by 90%, pulse
Moong by 68%, and milk by 53%.
In May 2023 the Terms of Trade (ToT) – the ratio of daily wage for
unskilled labor to the price of wheat flour, worsened by 3.0%
compared to the previous month and by 48.0% from May 2022.

Saudi Arabia’s multibillion-dollar investment plans:

Comforting prospects for Pakistan
DR. ZAFAR NAWAZ JASPAL
September 07, 2023 06:33
Pakistan’s agriculture, information technology, mineral, and mining
sectors have received great attention from international investors of
late. On September 4, Caretaker Prime Minister Anwaar-ul-Haq
Kakar claimed that Saudi Arabia will invest $25 billion in
Pakistan’s various sectors, including the above-mentioned,
following a two to five year timeframe. Indeed, Saudi billion-dollar
investments will encourage other Gulf states and multinational
companies to invest in Pakistan.
Pakistan’s mineral and mining sector is up-and-coming. The
estimated worth of precious minerals is up to $6 trillion.
Nonetheless, tapping deposits of minerals is an arduous task. Lack
of funds, bureaucratic hurdles, lack of mineral investment-friendly
policies, and weak state writ in minerally rich regions in provinces
of Balochistan and KPK, thwart exploration and mining initiatives.
To address these challenges, the Pakistan government has formed a
hybrid civil-military Special Investment Facilitation Council
(SIFC) this year.
The SIFC is designed for fast-track decision-making, i.e., a one-
window, one-stop, and bureaucratic red tape-free operation. From
the beginning, the Council has been working to attract foreign
investors, particularly GCC and Chinese investors. Besides, it is
also encouraging Pakistani financiers’ investments in the energy,
IT, minerals, defense, and agriculture sectors.
Pakistan needs help to ensure $100 billion in investments from
Arabian Gulf nations, especially Saudi Arabia, to alleviate its
economic suffering. To achieve this, the government approved 20
projects, including Saudi Aramco Refinery, hydropower projects of
245 MW in Gilgit-Baltistan, the establishment of cloud
infrastructure, and telecom infrastructure deployment to pitch for
multibillion-dollar investments from the Gulf and other states
under the SIFC umbrella.
Pakistan needs help to ensure $100 billion in investments from
Gulf nations, especially Saudi Arabia, to alleviate its economic
suffering.
Zafar Nawaz Jaspal
Besides contemplating investments in mineral and mining sectors,
Saudi Arabia has supported Pakistan in improving its agricultural
productivity. Pakistan’s agricultural productivity is far lower than
the world’s best averages for major commodities due to the high
cost of production, low average yield, and low-quality produce.
Moreover, the absence of soil testing on farms, the unavailability
and poor quality of fertilizers, loss during harvest, a lack of
warehouses, machinery, and equipment, and deterioration in soil
fertility have increased farmers’ woes.
The government Is introducing structural reforms in the agriculture
sector. In July, it established a Land Information and Management
System, Center of Excellence ((LIMS-CoE), to modernize its
agriculture. Significantly, Saudi Arabia agreed to provide an initial
$500 million investment to set up the facility.
Another flagship investment project of the Saudis will be a
greenfield oil refinery at Gwadar. On July 27, Saudi Arabia’s
Aramco signed a memorandum of understanding with four
Pakistani state-owned oil companies (OGDCL, PSO, PPL, and
GHPL) to build a $12 billion refinery with a daily production
capacity of 300,000 barrels.
Pakistan’s annual IT export potential is nearly $3.5 billion, which
can be boosted to $10 billion in the short term by undertaking
strategic interventions in the IT industry and online freelancing.
The Pakistani IT industry employs about 150,000 people and has
an export of approximately $2.6 billion. Islamabad has been
working closely with Riyadh to explore IT investment
opportunities. This is because Saudi Arabia is the fastest-growing
international market in technology adoption, and its government
ranks among the top five countries utilizing technology.
Last week, Saudi-based multinational Unifonic showcased its
products at a three-day exhibition titled ‘Declaring Pakistan the
Regional ICT Hub’ at the Expo Center, Karachi. Khurram Rahat,
senior country director of Unifonic, said, “We have started our
operations, and we see Pakistan as a big market because it’s a
country with 225 million people, a very vibrant and upcoming e-
commerce scenario from our perspective.”
Indeed, Saudi Arabia has shown incredible generosity to Pakistan,
which is encountering a severe economic crisis and a $25 billion
investment package could assist Islamabad in addressing its
financial woes, such as spiralling inflation and exorbitant
petroleum and electricity prices.
The SIFC’s unified approach attracts foreign investors, but
alleviating the deteriorating law and order situation is equally
significant. Without structural reforms in civil institutions,
governance and sustainable growth is a fantasy.
Saudi Arabia’s willingness to invest billions in various sectors
immensely contributes to stabilizing the country’s economy and
deepens the multifaceted relationship between Islamabad and
Riyadh.

Chasing mirages
Khurram Husain Published September 7, 2023 0
THE last time an army chief met the business community in the
midst of a sharply deteriorating economy, we saw a string of policy
gimmicks emerge as attempts to redress the grievances aired during
that meeting. This was in October 2019, when the country was only
a few months into an IMF programme that saw sharp devaluations
of the rupee and a hike in the interest rate.
The gimmicks included a massive amnesty scheme and a large
focus on spurring real estate speculation under the garb of a great
push to make housing and construction a motor force for the
economy. That effort did little more than spur speculation in plot
file rackets, while providing a brief impetus to sales of construction
material, achievements that were cited by the then prime minister
Imran Khan as signature successes of his government.
Once again, we have returned to the same point. This time, the
army chief has met a far larger group of people from the business
community, in separate meetings in Karachi and in Lahore. These
ones lasted longer, and seemed to cover a larger spectrum of
grievances than the ones Gen Bajwa had tackled. And so far, the
responses they have received sound like very large promises of
stability to come in the months ahead, but there are good grounds
to be sceptical.
First of all, the amounts being presented sound outlandish.
Participants of these meetings say $25 billion each from Saudi
Arabia and the UAE were mentioned, as investments in mining and
minerals as well as the agriculture sector of the country. And a
$10bn deposit of some sort also seems to have been mentioned,
going by the reports appearing in newspapers and sourced to
participants of the meetings.
For perspective, consider that $50bn is more foreign investment
than Pakistan attracted in the past 30 years. So we are now to
suppose that in the months ahead, a flood of investment is about to
come that will dwarf anything seen in the previous three decades,
including everything that came under the CPEC umbrella. And
$10bn in deposits is larger than the total deposits taken by Pakistan
in the past decade, when this business of using central bank
deposits from cash-rich countries got going in earnest.
We are now to suppose that in the months ahead, a flood of
investment is about to come that will dwarf anything seen in the
last three decades.
If funds on this scale, or even a fraction of it, do indeed materialise,
they will undoubtedly catalyse economic growth to a level perhaps
last seen in the years immediately following 9/11. If that happens
(and this is a big if), the political landscape will change
dramatically. The woes of the PTI and Imran Khan will be
forgotten in days, Nawaz Sharif will have to sit out in exile for
another round of the power game, and very likely people will flock
to the king’s party, that has so far had an abortive start, in droves.
The politics of the country will line up behind the ambitions of the
military leadership very rapidly.
But if these funds don’t materialise in quantities sufficient to
address the deep dysfunctions weighing on the economy, then we
will remain at square one. At the moment, Pakistan is staring down
the barrel of a very steep macroeconomic adjustment — sharp
devaluation and further interest rate hikes and more taxes.
The Special Investment Facilitation Council (SIFC) they are
creating to promote these inflows is not some radically new type of
vehicle. In large part, it is an admission that the business
environment in Pakistan is now so badly put together that it no can
longer mobilise domestic or foreign investment. It cannot secure
sanctity of contracts or provide a predictable policy and
macroeconomic future within which to plan long-term cash flows
for large-scale fixed investment.
One would think the appropriate response to such a situation is to
fix the business environment. But repeatedly, our response has
been to carve out spaces within this environment in which special
rules will apply that will be above those that normally operate in
the business environment.
Over the years, we have seen Special Economic Zones as examples
of such carve-outs. Amnesty schemes are another example, where
rules regarding disclosure of source of wealth are temporarily
suspended for a select few so that undeclared wealth can enter the
mainstream.
More recently, CPEC was another example, where special rules on
how payments are to be processed or what tariffs are to be given
were introduced to mobilise Chinese investment and other
infrastructure investments. Now we have the SIFC.
Having expanded the sway of the SIFC to allow domestic investors
to also participate in it, look out for two things. First, keep an eye
out for a proposal that will come from somewhere from the bowels
of the business community that will look much like an amnesty
scheme. If, at some point, somebody proposes that for investments
coming under the SIFC umbrella, disclosure requirements on
source of wealth should be loosened or suspended, you will know
what is happening.
Second, look out for a proposal in which some section of domestic
investors argue that construction and property development
projects should also be included under the SIFC umbrella. Once
this happens, you will know that an old game has got going under a
new acronym.
If proposals such as these are granted, they might as well rename it
the Special Interest Facilitation Council, because that is what it will
become if the body of domestic investors is given too much leeway
under it.
Whether or not the dollars actually materialise, we can wait to find
out. What we cannot wait to find out is the cost of not moving
ahead on the proper reform agenda to restore macroeconomic
stability because we were too preoccupied or too distracted chasing
mirages. Too much focus on one vehicle to drive the entire
economy is precisely what was wrong with engineered growth
attempts of the past.

Charter of economy
Dr Niaz Murtaza Published May 2, 2023 0
FOR many, a charter of economy is the panacea for our huge
problems that now spell doom. But this view wrongly assumes that
strong governance capacity already exists to implement it and that
our economic problems can be solved separately from the security,
political, social and external ones. So deep is our malaise and so
meshed are its causes that we need a much wider charter of
governance on all problems.
The 2006 Charter of Democracy that Inspires talks of a charter on
the economy made sense under an autocracy. With the latter gone,
the natural next step is a charter of governance. The 2006 charter
was on constitutional changes and democratic power transfers that
a mere accord between the two parties, while kept, could largely
deliver.
However, huge managerial and technical capacities are needed to
implement a charter of governance beyond mere parties’ accord.
Our huge issues urgently need new able hands, and our delicate
polity can’t afford undemocratic paths like technocratic rule to
infuse good governance.
Thus, the mandatory core of this charter is for major parties to
accept that while their vote-getting family (PPP and PML-N) or
person (PTI) are key to their electoral success, they all govern very
poorly. Since better parties will emerge slowly, the urgent solutions
we need can only come from these three abysmal (PTI most so)
parties.
So, they must adopt the Congress model where party heads only
run the parties and appoint able cabinets whom they fully support
politically to adopt tough policies. Otherwise, a charter will be a
paper exercise. The Congress model best weds political feasibility
and merit. Rajiv Gandhi’s death forced the Gandhis. Impending
national doom must force our major parties.
By agreeing to infuse merit in cabinets, parties can hugely increase
the range of issues they can resolve. But before going to economic
issues, one must focus on non-economic matters that impede our
economic prowess.
All parties must agree to reform the bureaucracy, police and
judiciary to enhance governance capacity and revamp our
Constitution given the many gaps that the current political crisis
has shown, eg, on concurrent polls nationally, electoral laws,
judicial overreach and assembly floor crossing laws. They must
also reaffirm the salience of the current devolved parliamentary
system and deepen it to local governance but eschew useless ideas
like presidentialism, recentralisation etc.
A charter of governance Is needed.

All parties must agree to end Pindi’s role in politics and foreign
policy in line with the establishment’s stated intent. But since
intent can change quickly, capacities should be cut by dismantling
the establishment’s political cell. Oddly, there is no talk of that yet,
raising questions about intent.
The bar on militant groups must be enhanced. Educational reforms
must be done to cut extremism and produce critical thinkers who
can run a dynamic economy. Parties must also agree to end Taliban
militancy via force and the Baloch one via talks. They should
pursue peace with India and balanced ties with the West, China and
the Gulf.
Instead of specific economic issues usually included in a charter of
economy such as upping exports and taxes, parties must first agree
on an overall development vision. Given our potential and
constraints, that vision must be poor-led progress to replace an
elite-led one.
The state must make huge social and economic investments in the
poor (with a key focus on women and minorities) not as a welfare
tool but a development policy to ignite fair and environmentally
friendly national progress through expanding incomes and
purchasing powers and hence the national market size and GDP.
This will also help improve equity and the quality of democracy
and check population growth.
With this vision in place, one can finally talk about specific
economic issues such as increasing exports and taxes, trade tariffs,
state enterprise and energy sector reforms etc. But even these must
support the poor-focused progress vision.
The focus on increasing exports must be on small businesses, and
in taxes on direct progressive taxes that burden the rich. So, the
charter of economy that many put their exclusive faith in as a
panacea is only one part of the charter of governance we urgently
need.
Party leaders must rise to the occasion and put national interest
above personal interest to adopt this charter as we now stand on the
edge of a deep cliff. But all societal stakeholders will have to apply
huge political pressure on our parties to adopt this charter of
governance as it runs against their grain. If the next regime after
polls is status quo too, it may push us into irreversible, terminal
decline.
Pakistan and the world debt problem
Once again, the world is faced with a similar situation
Shahid Javed Burki
May 08, 2023
The world debt problem – in particular the burden carried by low
income countries – is now recognised by global economic experts
to have become severe. It weighs heavily on the countries that have
borrowed heavily from external sources of finance to the point
where servicing the debt – paying interest on the money borrowed
and repaying what is due to the lenders – leaves little to meet
domestic needs for development and providing social services to
the citizenry. As I wrote in the article that appeared in this space
last week, this is not the first time in world economic history that
external debt became a big problem. The situation following the
end of the Second World War was one such event. Britain was a
major victor of the war. The war that defeated Germany and Italy
was financed largely by the United States which had to find a way
of being paid back but also to rebuild the European mainland that
had been left in ruins.
The victors assembled in the American resort of Bretton Woods in
the American state of New Hampshire adopted a solution that was
to work again several times. The victors created what came to be
known as the Bretton Woods institutions – the International
Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD). The latter developed
into what is now the World Bank Group. Large amounts of capital
for financing these institutions was promised by the world’s rich
countries. The promised money was divided into two parts – ‘paid
in’ and ‘call up’. Only a small amount was paid in but the callable
capital could be drawn in case the lending institutions had to take
care of the defaults by the borrowers. It was the call up capital that
made it possible for the international agencies to tap the capital
markets at relatively low interest rates for the money they needed.
This approach was repeated in the 1980s when the countries in
East Asia and Latin America had to pay large amounts of money to
finance oil and gas purchases from the Middle East. The group that
gave itself the name of Oil Producing and Exporting Countries
(OPEC) decided to raise several-fold the price of their exports.
This resulted in heavy debts for the energy importing countries
which they financed by tapping the capital markets. Once again,
the capital-rich countries went the way they had gone after the
Second World War. They provided back-up capital which could be
used by the heavily indebted countries to service the debt under
which they laboured.
Once again, the world is faced with a similar situation. This time,
many countries resorted to external borrowings to deal with the
Covid-19 pandemic and the damage that was done to their
economies. According to the IMF, 60 per cent of word’s low-
income countries are in financial distress or approaching it.
Pakistan is one of them. Without a plan to manage debt servicing,
their economies will flounder, sapping global growth. “The impacts
of debt crises do not respect boundaries; they can have cascading
effects on the global economy,” said Janet Yellen, the United States
Treasury Secretary while putting pressure on China when the world
nations met in Washington for the IMF-World Bank Group’s
annual spring meetings. The Trump administration also blamed
China for designing the projects it funded in ways to gain political
influence in the countries that were receiving financial support
from Beijing.
Once again international action is needed. Could this type of
solution be adopted once again to help the heavily indebted
countries remain solvent? The answer is yes but this time China
rather than the United States will have to take the lead. China is the
principal creditor, having lent billions of dollars to low-income
countries in Asia and Africa. Pakistan is one of the countries that
has borrowed heavily for Beijing which is financing projects
included in the China-Pakistan Economic Corridor (CPEC)
investment programme. China’s overseas lending carries an
average interest rate of 4 per cent, twice the typical for IMF funded
programs.
Work is underway on finding a solution to the world debt problem.
World leaders acting through the Group of 20 nations currently
headed by India met in November 2020 and established a debt
relief process aimed at benefitting several dozen of the world’s
poorest nations. The process was called the ‘Common Framework’
but it has made little progress. Beijing has blocked agreement by
insisting that the IMF and the World Bank – like private sector
banks and government lenders – take losses on their loans. But that
is not the way the international system is structured. Any losses
incurred by the institutions would land in the laps of rich nations
because of the provision of ‘callable capital’ that is part of the way
these institutions are funded.
Nations that are eligible for the Common Framework must repay
about $55 billion for serving their debt in 2023. However, they
were able to raise only $6 billion from selling their bonds this year
which was much less than the $17 billion raised in 2021. Some
especially risky near-defaulters such as Pakistan must offer likely
lenders a return that is 12 percentage points higher than what the
can earn by investing in US Treasuries. This is 8 percentage points
higher than was the case before the strike of the pandemic.
The main reason why China is holding out on activating the
Common Framework is its unhappiness with the lack of a strong
voice in the management of institutions such as the IMF and the
World Bank. These institutions are reckoning with the situation that
China now is a major financial power. According to Scott Morros,
senior fellow at the Center for Global Development, a Washington-
based think tank, “whether you’re head of the World Bank or the
United States Treasury Department, you’re stuck with the reality
that China is a much bigger bilateral creditor than anyone else,
certainly bigger than the United States.” At this time Pakistan with
close relations with China is on the right side of the global power
equation.
There is pressure being exercised by Washington to have Pakistan
leave China’s orbit and be more independent in shaping its foreign
affairs. It would be a great mistake if Islamabad succumbs to that
pressure and distances itself from Beijing. Not only that approach
would make it difficult to service the large amount of loans it has
secured from China-based institutions, it will also lose the position
it now occupies in developing land-based commerce with the
landlocked countries to its north. CPEC is a way to take advantage
of Pakistan’s location.

Monetary policy
Editorial Published September 15, 2023
DEFYING market expectations of a 100-300 bps hike in the
interest rates, the State Bank has again left its key policy rate
unchanged at 22pc.
In support of its decision, the bank cites a declining trend in
inflation from its peak of 38pc in May to 27.4pc last month, despite
the recent surge in global oil prices that are being passed on to
consumers.
Therefore, it maintains that the “real interest rates continue to
remain in positive territory on a forward-looking basis”.
The bank is also hopeful that “expected ease in supply constraints
owing to improved agriculture output” and the pick-up in high-
frequency indicators like the sale of petroleum products, cement
and fertilisers, as well as recent administrative actions against
speculative activity in the forex and commodity markets will
support the outlook.
The SBP dispels concerns over the recent resurgence of the current
account deficit of over $800m in July, after posting a surplus for
the previous four months, saying it is largely in line with the earlier
full-year projection that took into account import growth.
It underscores continued monitoring of the risks to the inflation
outlook, and taking appropriate actions to achieve the objective of
price stability if required.
At the same time, it urges the government to maintain a prudent
fiscal stance to keep aggregate demand in check, “to bring inflation
down on a sustainable basis and to attain the medium-term target of
5-7pc by end of fiscal 2025”.
Why is the rate to remain unchanged after it was increased in June
to meet a key goal for securing IMF funds?
Any other central bank would have raised the interest rates in view
of the consistently elevated inflation, continuous exchange rate
depreciation, and falling forex reserves over huge debt payments
and weakening capital inflows. But the bank’s reluctance is
understandable.
Previous hikes in rates to a multi-decade high of 22pc haven’t
helped increase savings, or check consumer spending and inflation.
The price rise is faster than rate hikes; the national savings rate is
falling; and the government continues to accumulate debt to meet
its inelastic expenditure.
Monetary policy as an instrument to check the price hike has lost
its effectiveness in the current economic structure and existing
political uncertainty.
For the last several years, headline prices in Pakistan are being
influenced primarily by cost-pushed administered adjustments of
domestic fuel and power prices, with the demand pull coming from
the government that remains the largest bank borrower.
Expecting a tighter monetary policy to tame soaring prices is
useless without a drastic change in the reckless fiscal behaviour of
the government.
Only fiscally responsible behaviour by the rulers can make it easier
for the SBP to effectively apply monetary policy tools and check
other inflation-producing factors for price stability.

Pakistan’s other crisis

Maleeha Lodhi Published September 18, 2023
PAKISTAN’S macroeconomic crisis, the most serious in its
history, continues to warrant urgent and sustained attention.
As is well known, the roots of this crisis lie in chronic fiscal
deficits and external imbalances that are responsible for its
perpetual balance-of-payments problems, high inflation and
macroeconomic instability, necessitating repeated financial
bailouts.
Today, this crisis has to be addressed in an adverse global
environment where financial market conditions remain tight. All
the economic trends for the country are negative and unlikely to be
reversed any time soon.
Internal and external financial imbalances remain wide, foreign
exchange reserves are fragile despite injections of funds from the
IMF and friendly countries, inflation is at a historic high, domestic
and foreign debt have reached unsustainable levels, the rupee has
lost record value against the dollar, exports have fallen, overseas
remittances have declined and foreign direct investment has
plunged to a new low.
But there is another crisis that is worsening and is also
consequential for Pakistan’s future. This is the crisis in human
development — with most indicators of literacy, education, health
and other aspects of social justice and human welfare deteriorating
in recent years.
The World Bank calls It a “silent, deep human capital crisis”. Its
recent report Pakistan Human Capital Review quantifies this
crisisand urges increased investment in human capital, pointing out
that lack of this will continue to limit the country’s growth and
development prospects. Many national and international reports
and documents paint a grim picture of the state of human
development.
According to UNDP’s Global Human Development Report of
2022, Pakistan’s Human Development Index rank remains at 161
out of 192 countries with no progress recorded from 2019 to 2022.
The WB report places Pakistan in the company of sub-Saharan
African countries in the Human Capital Index, which at 0.41, is the
lowest in South Asia.
The country’s education deficit should be treated as an emergency
but barely figures in government priorities. No issue is more
important for Pakistan’s future than the coverage and quality of
education available to our children.
Yet the facts remain dismal. Pakistan has the world’s second-
highest number of children, over 20 million (aged five to 16) out of
school. Twelve million are girls. It means 44 per cent of children in
this age group do not go to school. This violates the constitutional
obligation set out in Article 25A that enjoins the state to “provide
free and compulsory education to all children of the age of five to
16 years”.
The country Is sleepwalking into a human development disaster of
serious consequences for its future.
Of those who do go to school dropout rates are high. All this is the
result of decades of neglect and chronic underspending on
education. Just 2.4pc of GDP makes it among the lowest in South
Asia. Only 14 of 195 countries spend less on education than
Pakistan. Given Pakistan’s youthful demographic profile and
education poverty, young people face a jobless and hopeless future
unless the scale and quality of education is expanded.
Literacy levels have shown little improvement in recent years.
Latest available official sources put literacy at 59pc, which means
over 40pc of the population are illiterate. The literacy level has
been virtually stagnant for the past five years or more, with
spending on education also declining. No country has predicated
economic progress on an illiterate base. Yet these levels remain
largely unchanged.
In youth literacy, which is around 75pc, Pakistan is second from
the bottom in South Asia. The gender gap is telling. According to
the Pakistan Demographic and Health Survey 2017-18, almost half
of women in the age group 15-25 are uneducated. 61pc of rural
women are illiterate.
The poverty numbers are equally disturbing. With anaemic growth,
soaring inflation (especially food inflation) and limited job
creation, poverty has risen and become more severe. Of course, the
Covid pandemic and megafloods of 2022 (reflecting the effects of
climate change) contributed to this.
But the result is that more people have been driven below the
poverty line. According to the WB, poverty is estimated to have
risen by five percentage points to 39.4pc in FY23, with 12.5m
more people pushed into poverty as compared to the previous year.
One of the most troubling phenomena is that of child stunting,
which the Human Capital Review calls a “public health crisis”. The
report finds around 40pc of Pakistani children under five are
stunted — a shocking number.
This condemns these children to a life of physical disability,
poverty and deprivation and also exposes them to premature
mortality. This is mostly the result of malnutrition primarily
associated with poverty. Malnourished mothers are more likely to
have stunted children. It is also the result of high fertility.
Stunting is worse in Sindh where it is 50pc of under-five children
and in Khyber Pakhtunkhwa where it is 48pc. Again, this hardly
attracts the attention of governments. The HCR report rightly calls
for raising the national profile of stunting, which it describes as “a
major human capital catastrophe” that merits national and local
efforts to address it.
Progress in gender empowerment has been underwhelming despite
some modest gains. Gender gaps in education, health, access to
employment, financial services, information, political and other
opportunities continue to be wide. In the Human Development
Report’s (2022) Gender Inequality Index, Pakistan is ranked 161
out of 191 countries.
It does worse in the World Economic Forum’s Global Gender Gap
Report 2023, where it is 142 out of 146 countries — among the
bottom five countries. In educational attainment it is ranked 138
and at 132 for health and survival. Female labour force
participation remains low — among the lowest in Muslim
countries — 22pc compared to over 80pc for males. These
statistics do not fully capture the multiple deprivations and
injustices women face but they do underline how much needs to be
done for half the country’s population.
The overall picture of various dimensions of human development
is so bleak that it suggests Pakistan may be sleepwalking to a
disaster that can only be ignored at great peril to the country’s
stability, economic progress and prosperity.

Barrier to foreign investment

Ammar Ather Saeed Published September 22, 2023 0
THE words “to attract investments from friendly countries in
identified sectors through an empowered organisation that serves
as a ‘single-window’ platform for facilitation, and to improve the
ease of doing business for potential investors through a ‘Whole of
Government Approach’ — achieving optimal horizontal-vertical
synergy and facilitation by the Pakistan Army” of the mission
statement of the Special Investment Facilitation Council
demonstrate a powerful vision.
However, if we navigate the SIFC’s website, one significant aspect
is absent — substantial focus on contract enforcement. The
undeniable truth is that foreign investment is a vital driver of
economic development in any nation, igniting growth and job
creation, as well as raising living standards. Yet, the lack of
effective contract-enforcement mechanisms in the country stands
as a large roadblock that deters foreign investors from channelling
their capital into the country.
When contracts are enforced fairly and reliably, businesses and
consumers can enter into agreements with confidence, knowing
they will be held accountable for their promises. This creates an
environment conducive to economic growth and prosperity for all
stakeholders involved. Yet, the harsh reality is that contract
enforcement in Pakistan remains a challenging endeavour, and this
presents significant repercussions for foreign investment.
For instance, consider the case of a multinational company that
took the decision to file a suit for the appointment of an arbitrator
before a high court in the country three years ago. This legal action
was directed towards a government statutory authority, stemming
from a dispute related to a construction contract. Before initiating
the lawsuit, according to the MNC, it had made numerous attempts
to communicate with the statutory authority, urging them to
appoint an arbitrator.
The lack of effective contract-enforcement mechanisms in the
country deters foreign businesses.
Regrettably, these efforts yielded no results. It seemed that, for
reasons known only to them, the concerned authority was hesitant
to engage in a legal resolution of the matter and as of today, we
find ourselves in a situation where a decisive verdict has yet to be
delivered. Several urgent applications seeking an expedited hearing
have been submitted by lawyers representing the MNC, but these
efforts have yet to yield results.
On many occasions, the statutory authority’s legal representation
has been absent from court proceedings. Meanwhile, the court
either appears to lack the time to address the matter due to a busy
docket or, perhaps, for other reasons, may not be very interested in
moving the case forward. In such a situation, it is understandable
that the affected party’s frustration would grow, especially if the
claim amount, denominated in Pakistani rupees, continues to
decrease in value in terms of dollars due to the ongoing
depreciation of our currency.
Contracts are the cornerstone of modern business transactions,
providing a vital legal framework that ensures that parties fulfil
their obligations and receive their agreed-upon benefits. In
Pakistan, as in any other nation, contracts serve as the lifeblood of
commerce, governing everything from international trade
agreements to local partnerships. When contracts are honoured and
enforced consistently, they foster trust, reduce business risks, and
beckon foreign investors. Yet, enforcing contracts in Pakistan
presents a multifaceted challenge.
The legal system In Pakistan is notorious for its inefficiency and
backlog of cases, often causing contract disputes to linger in the
courts for years, resulting in substantial financial losses and
discouraging potential investors. This sluggish pace of justice
erodes trust in the legal system, making businesses hesitant to
invest here. Investors demand a predictable and steady legal
environment to commit their capital; the inability to enforce
contracts simply erodes their confidence and ends up making
Pakistan a less appealing destination for their investments.
Moreover, inconsistencies in how the laws here are interpreted and
applied can create confusion and unpredictability, qualities that
foreign investors abhor when seeking a stable and secure
environment for their investments. Vague or ambiguous contract
terms can lead to protracted legal battles, further deterring
investment. This, coupled with corruption, that is pervasive in
Pakistan’s public and private sectors, frequently infiltrates contract
enforcement, where bribery and undue influence can easily derail
the legal proceedings, ultimately favouring the party with greater
influence, and thus undermining the basic principle of equal
protection under the rule of law.
The repercussions of this lack of effective contract enforcement are
palpable in the realm of foreign investment. Investors demand a
predictable legal environment to commit their capital, and the
inability to enforce contracts erodes their confidence, making
Pakistan a less appealing destination. Consequently, economic
growth and job creation stagnate in the country.
To address this pressing issue and attract foreign investment,
Pakistan must adopt a comprehensive strategy. The government, in
collaboration with the judiciary, should invest in strengthening the
legal system by increasing the number of judges, introducing
specialised commercial courts, and implementing technology-
driven measures to expedite case disposal. Streamlining legal
processes will enhance investor confidence.
Simultaneously, Pakistan should consider revising and modernising
its contract and commercial laws in order to align them with
international standards, thereby reducing disputes and facilitating
smoother enforcement. In addition, vigorous anti-corruption efforts
are crucial to reducing bribery and undue influence in contract
enforcement. This involves enhancing transparency, implementing
strict penalties for corruption, and fostering a culture of
accountability in both the public and private sectors.
In conclusion, the lack of effective contract-enforcement
mechanisms in Pakistan stands as a major roadblock to attracting
foreign investment.
To unlock its true economic potential, Pakistan must create a
business-friendly environment where contracts are consistently
upheld, and make genuine efforts towards become a more
attractive destination for foreign investors, ultimately driving
economic growth and prosperity for its people.

Our trysts with IMF

Riaz Riazuddin Published September 22, 2023 0
WE had our first tryst with the IMF soon after the first martial law
imposed by Gen Ayub in 1958. Following this engagement, our
relationship with the IMF has been like an unhappy but lasting
marriage.
We have contracted 22 programmes with the Fund. The present
programme that started in July 2023 is the 23 rd. Can our economy
survive without IMF support? To answer this question, it is
important to review the history of IMF’s lending commitments to
Pakistan.
For 14 of these programmes, we were not successful in drawing the
entire amount committed by the IMF because of a breach in policy
steps that Pakistani authorities had committed themselves to
taking. For eight programmes, Pakistan was successful in drawing
the committed amount. Most of these were short-term programmes
such as the present Stand-by Arrangement.
Moreover, irrespective of whether or not Pakistan completed the
programme successfully, the country would plunge into a crisis
within a few years, requiring a new programme. Thus Pakistan
remained dependent on the IMF.
What this brief history shows is that Pakistan always ran out of the
steam of fiscal prudence after or even midway through a
programme. Not only did the loss of fiscal prudence put stress on
fiscal accounts, it also led to the widening of the current account
deficit that caused foreign exchange reserves to evaporate —
slowly at first, and then rapidly as fiscal and monetary imprudence
continued.
We are all familiar with the story of reserves build-up and
depletion accompanied by boom-and-bust cycles of growth with
high inflation. Will Pakistan’s future be any different? Will it be
able to get out of IMF programmes and start relying on home-
grown domestic resource mobilisation through tax revenues,
economising on expenditures and export promotion?
What kind of policy actions are needed to reduce dependency on
the IMF or other external creditors? Most of these actions lie,
ironically, in the area of macroeconomic stabilisation that is
prescribed by the IMF. Stabilisation policies help a country move
towards greater self-sufficiency as it tightens its financial belt and
reduces fiscal and external deficits, thus paving the way for
lowering debt in relation to the economy’s size.
So, stabilisation is a move towards autarky, whether it is under a
home-grown or an IMF programme. It should, therefore, be clear
that phasing out IMF deals requires the continuation of IMF-like
policies. This is the foremost reason it would be very difficult for
the government to get rid of the IMF, because the authorities
despise the macroeconomic prudence advocated by the Fund.
What kind of policy actions are needed to reduce our dependency
on the Fund?
The government’s current fiscal position is unsustainable. This can
be easily understood by reviewing the actual consolidated data on
fiscal affairs for FY23. Expenditure was 19.1 per cent of GDP
(Rs16.2 trillion), of which interest payments were 6.9pc of GDP
(Rs5.8tr). In contrast, revenue was only 11.4pc of GDP (Rs9.6tr),
ie, fiscal deficit (revenue minus expenditure) was 7.7pc of GDP
(Rs6.5tr).
In this state of fiscal affairs, even government expenditure,
excluding interest expenses, known as primary expenditure which
stood at 12.2pc of GDP (Rs10.4tr), was higher than revenues,
translating into a primary deficit of 0.8pc of GDP (Rs690 billion).
This means that the government is also borrowing to meet its
interest expenses. Whenever the primary deficit is higher than zero,
government debt increases. Clearly, this is not a fiscally sustainable
position. If this situation continues, debt will continue to increase,
and at some point, the government would be unable to meet its
debt-servicing obligations, ie, it will face default.
Therefore, it is essential for the government to at least fully cover
its primary expenditure and also generate a primary surplus, which
will help bring down the debt-to-GDP ratio in future. Under these
circumstances, irrespective of whether Pakistan is in or out of an
IMF programme, this is the only way to create stabilisation and
move towards self-sufficiency.
Pakistan’s public debt-to-GDP ratio in FY23 was 77.9pc. If it is to
be brought below 60pc, as prescribed by the Fiscal Responsibility
and the Debt Limitation Act, 2005, a fiscal adjustment of 17.9
percentage points would be required, in addition to 0.8 percentage
points for primary deficit to be converted into a surplus. The
arithmetic has been simplified for the purposes of this short article;
in reality, the calculations are complex.
At least five percentage points of GDP of fiscal space must be
created to put the debt-to-GDP ratio on a declining path. This fiscal
adjustment can be undertaken by raising the revenue-to-GDP ratio
in combination with reducing the expenditure-to-GDP ratio. Can
we increase our taxes from 9.2pc of GDP to 14.2pc? If we want to
rely on ourselves, we must. Otherwise, we will not be able to end
our dependency on the IMF.
Fiscal excesses by the government always widen current account
deficits. If the exchange rate is not managed properly, it plays
havoc with foreign exchange reserves. The Pakistani authorities’
fascination with a fixed or an overvalued exchange rate is well
known. This subsidises imports, penalises exports, promotes
consumption, and depletes precious reserves.
An accommodative monetary policy and unwise tinkering with the
exchange rate accentuates external sector problems. Whether or not
we are in an IMF programme, we need to pursue a market-
determined exchange rate that helps lessen the widening of
external account deficits. Would we be able to do this outside IMF
programmes? If we can, medium- to long-term prospects for
exports would become better. Otherwise, we will continue to be
overly import-dependent, besides being dependent on external
creditors.
Phasing out our dependence on the IMF would require the
implementation of wide-ranging reforms, not just the mobilisation
of foreign investment. Fiscal and administrative reforms are
needed to raise the tax-to-GDP ratio and to economise on
expenditures.
Privatisation or meaningful reform of state-owned enterprises is
needed to end their fiscal burden and increase their productivity.
Energy sector reforms are needed to eliminate the build-up of the
circular debt. Civil service reforms are needed to enhance
governance and efficiency.
This is not an exhaustive list; reforms are needed in every sector of
the economy. The weight of history is against Pakistan getting rid
of the IMF. What is ironic is that all these things are doable.

Pakistan: geo-economic targets, neighbours and the region

Shifting to human security and empowering the disempowered is
enshrined in National Security Policy 2022-2026
Raza Muhammad
September 24, 2023
Pakistan’s aspiration of shifting to human security and empowering
the disempowered is enshrined in its National Security Policy
2022-2026. This dream can come true only if Pakistan is well
connected with its neighbours, Eurasia and beyond for trade. The
tenuous relationship with neighbours, inconsistent economic
policies and internal instability are the major hurdles.
Pakistan remains hostage to territorial disputes with India that are
deeply embedded in history and psyche. India, however, portrays a
disregard to this conflictual situation in the wake of her relevance
to US global ambitions, more so America’s China containment
policy that engender ‘condoning’ its arrogance, deceitful
occupation of Kashmir and obstinate religious extremism. Despite
overtures by Pakistan, it disavows bilateral engagement on
unsubstantiated pretexts.

Notwithstanding the fact that people of Pakistan, Iran and

Afghanistan have socio-cultural and religious affinity, our relations
are marred by some real issues, but mostly misperceptions.
Pakistan acts as a lifeline for Afghanistan, and Afghanistan is a
conduit for Pakistan’s connectivity with Eurasia. According to a
VOA report of 31st August, Afghanistan has concluded $6.5 billion
gold, copper, lead, zinc and iron mining contracts with companies
from China, Iran, Turkey and the UK. India had won an iron ore
extraction contract worth $10.3 billion in 2011. In same year,
Canada was granted a site too. Afghanistan is exporting crude oil.
Pakistan buys coal in ample quantity from Afghanistan.
Comparative peace, reduced corruption and enhanced income from
trade royalty under Interim Afghan Government have helped
Afghanistan survive despite sanctions in the absence of its formal
recognition. Pakistan-Afghanistan bilateral trade has reported a
surge. Pakistan’s trade with Central Asian States through
Afghanistan has also increased by 70%. Despite its economic woes
and internal security issues, Pakistan hosts about 30 million Afghan
refugees for past forty years plus. These facts notwithstanding,
Pakistan is viewed as an unfriendly country by people of
Afghanistan — a misperception fostered by foreign sponsored
media indeed. The reasons may also reside in the blames of
Pakistan meddling into Afghan internal affairs, problems related to
issuance of Pakistani visas and inconvenient Pakistan-Afghanistan
border management wherefrom thousands cross every day. These
misperceptions could be removed by respecting Afghanistan as a
sovereign country, facilitation in visas and trade. Registration of
illegal Afghan immigrants with the Interim Afghan Government
cooperation is considered extremely essential to stem the rising
tide of terrorism in Pakistan and resolve border crossing issues.
Iran and Pakistan are cooperating in counterterrorism, drug-
trafficking and smuggling. Iranian electricity and commodities
including petrol contribute significantly to better life in the less
developed areas of Balochistan. Recent bilateral visits of
leadership and officials including military and intelligence have
contributed well to improving bilateral relations. In a recent talk at
Islamabad Policy Research Institute (IPRI), Ambassador of Iran
His Excellency Dr Reza Amiri Moghaddam echoed the same
sentiments. He emphasised closer economic cooperation by turning
the Pak-Iran border into an economic region. He said that land of
Iran would never be allowed to be used against Pakistan for
espionage or sabotage. Iran-China increasing collaboration, KSA-
Iran rapprochement adroitly brokered by China and Pakistan-China
multifaced ties further strengthened by CPEC are likely to catalyse
interdependence between Pakistan, Afghanistan, China and the
GCC countries. BRI complemented by China’s Global
Development Initiative can be helpful too.
In this whole matrix, India, though a big country of Eurasia, is
more west-leaning due to obvious advantages afforded by
favourable global politics woven around US-China competition.
SOAS, UK Professor Arshin Adib in an interview remarked that
India has a Eurasian DNA, but is west leaning. It will comeback,
however. One can hope that India will not be able to stay away
from the economic swirl moving around its border for long in
shape of BRI, and not benefit from it. Too extreme environment
within India and tense relations with her neighbours could
exacerbate fissiparous tendencies within India. This realisation
may take time. Maybe a leadership other than the hardliner, self-
centred myopic RSS-BJP could rethink, but it is hoped that India
will be integrated in the regional web of economics for good of its
people in due course.
Pakistan must continue to strive for resolution of disputes with
India through peaceful means and mutually beneficial relationship
for better future of generations of the region. “Complex
Interdependence” is likely to be the remedy, wherein people to
people and business to business connections complement the
formal ties. A future woven around this concept is likely to usher
peace and stability in the region through intertwined destinies. Our
good relations and economic cooperation with all the regional
countries, the West and more importantly with the neighbours is an
extremely essential prerequisite for realisation of Pakistan’s dream
of geo-economics as enshrined in National Security Policy of
Pakistan.

Tariff reforms
By Dr Muhammad ZeshanOctober 02, 2023
Theoretically speaking, high import tariffs increase the market
share of domestic products by making imported goods more
expensive, thus making locally produced goods more attractive to
local consumers.
This view was mainly followed by traditional economists to give
domestic industries a competitive edge over foreign competitors.
Hence, higher tariffs were considered to incentivize domestic
production, as local manufacturers may find it more cost-effective
to produce goods within the country rather than import them due to
the added expense of tariffs.
Do we see any industrial revolution in Pakistan as a result of
historically high import tariffs? The car industry is one of the most
protected industries in the country. The Pakistan Institute of
Development Economics (PIDE) finds that the total protection for
this industry is more than 45 per cent compared to international
prices, but it is hard to see any significant improvement in its scale
and level of innovation.
Locally manufactured cars have become extremely expensive, and
the manufacturers do not care to account for global safety measures
but prioritize profit maximization at the expense of consumers.
High tariffs just protect domestic auto manufacturers by making
imported vehicles more expensive for consumers, forcing them to
buy domestically produced vehicles. Import tariffs on vehicles and
parts raise the overall cost of vehicles, reducing consumer demand
and welfare. The supply of foreign cars also reduces because it is
harder for international suppliers to compete in the local market.
The unintended consequences of protecting domestic Industries are
complex. Market distortions emerge, creating an artificial
advantage for domestic industries. It leads to inefficiencies, as
domestic industries may not face the same level of competition
they would in an open market. It reduces the pressure on local
manufacturers to improve efficiency and innovate.
As a result, there is an inefficient allocation of resources, as
domestic industries may continue to operate even if they are not
the most efficient producers. This hinders economic growth and
productivity. High import tariffs disproportionately affect small-
and medium-sized enterprises that rely on imported raw materials
for their production, increasing their operational costs while
reducing competitiveness in both domestic and international
markets.
High tariffs also create an export bias where domestic industries
focus only on the local market and lose a competitive advantage in
the international market. The prevailing distortions and
inefficiencies do not allow them to compete in the international
market.
In the current era of global value chains, industries relying heavily
on imported raw materials and high tariffs might cause disruptions
in the supply chains due to increased costs. This can adversely
affect production schedules and the national level of output in
Pakistan since the industries use around 12 per cent imported
inputs in the overall production process on average.
Higher prices for imported goods adversely affect consumer
choices, as they have to pay more for these products, leading to a
higher cost of living. For instance, consumers in Pakistan pay 66
per cent higher prices for imported edible oil compared to the
international market price. To meet their budget constraint, a
household will have to let go of other expenses such as education
or health to run the kitchen.
Hence, a significant portion of a poor household’s budget is
allocated to purchasing such essential items, leaving less money for
other necessities and discretionary spending, also limiting their
savings for the future. It significantly lowers the overall standard of
living for poorer households because they may have to
compromise on the quality and quantity of food or find substitutes
for high-tariff products to manage their budget, potentially
affecting their nutrition and health.
Besides, higher prices of essential items contribute to overall
inflation in the economy, affecting not only households but also
businesses and the broader economy. It also incentivizes smuggling
or a rising informal economy, which is more than 50 per cent the
size of our formal economy. Hence, the intended protection of
domestic industries results in unintended revenue losses for the
government.
Therefore, import tariff reforms need to be carefully calibrated to
correct market distortions, which will increase our international
competitiveness, leading to sustainable economic growth. This can
be achieved in five years and three phases. In the first phase,
reduce import tariffs on the most protected industries until their
tariff rates reach the average tariff rate (around 12 per cent at
present) in the first two years.
In the second phase, uniformly reduce tariffs on all industries until
we achieve a tariff rate of 5.0 per cent in the next two years. In the
final phase, uniformly eliminate tariffs on all import products in the
next year.

Economic emergency
Aizaz Ahmad Chaudhry Published October 1, 2023 0
FOR most Pakistanis, the prevailing economic conditions have
unleashed unprecedented hardship. Steep power tariffs and high
fuel costs have made everything expensive. Even the basic
necessities are now beyond the reach of the public. Spending
consistently more than earning has indebted the country to the
core. We have mortgaged the future of even our grandchildren.
The irony is that while the rest of the country is expected to bear
the economic crunch, for the top tiers of government, it appears to
be business as usual. Foreign trips abroad have been in full force,
regardless of the expense involved. Let us bear in mind that foreign
policies are made at home, and not through meetings and tours
abroad.
It Is time our government, an interim one though it is, led the
austerity drive from the front, particularly when they expect the
rest of the country to bear the economic pressures. We can take a
cue from the present chief justice, who has voluntarily given up
protocol, privileges and all pomp and show attached to his high
office. The administration, too, needs to demonstrate to the people
through definitive actions that it stands with them in this time of
acute economic emergency.
As a general rule, official tours abroad should be suspended.
Online mediums are effective in today’s era, and our ambassadors
abroad can represent us. There should be no free electricity for
anyone — without exception. No free petrol or designated cars
either; only car pools from which vehicles can be requisitioned.
The Interim set-up must lead an austerity drive.
All loss-making state-owned enterprises should be closed down or
privatised in a manner which is transparent and judicious for
existing employees. When East Germany merged with West
Germany, a massive programme of privatisation of East German
SOEs was undertaken. They chose to sell only those that were
functional; rehabilitated some that were not beyond repair and then
sold them; and closed down the enterprises which were
dysfunctional and could not be set right.
In this time of emergency, we cannot sustain loss-making
enterprises, because it is not our own money but borrowed money
from which we subsidise their existence. The government’s
primary job is to regulate, not build financially unsustainable
enterprises. An even better option is exploring public-private
partnerships.
The centre as well as the provincial governments cannot create
more jobs than they have already done. More jobs can be created
only through industrialisation. Our industry is under pressure not
only from the high costs of inputs, but also regulatory bodies
whose officials hound industrialists, often in search of bribes.
True, industrialists make profits, but they also create jobs, reducing
poverty in the process. Barring those who exploit the system to
receive subsidies, when an industrialist expands his business, he
does so because he has the know-how and capital. He is not
exploiting the nation, but generating employment and economic
activity. That is the attitude our bureaucracy and regulators need to
develop towards our struggling industry. China has developed
because they encouraged industrial and technological growth. The
US is also boosting its manufacturing efforts. At our end, the long-
awaited Special Economic Zones should be constructed as a top
priority.
Red tape and corruption are discouraging foreign and even
domestic investors from setting up industries in Pakistan. The
constitution of the Special Investment Facilitation Council seems
to be a step in the right direction. This civil-military initiative seeks
to cut red tape and encourage investors to profit from Pakistan’s
investment potential in IT, agriculture, energy, and mining.
Circular debt is another big hole in the treasury. The agreements
negotiated with the IPPs are clearly loaded against the interests of
the people. All agreements must be renegotiated, including the
recent ones, invoking force majeure. This economic emergency
constitutes more than force majeure; it has the risk of making
Pakistan insolvent.
Let us be clear. There will be no easy money coming into our
country anymore. Not even in the name of climate justice. We must
learn to stand on our own feet. Our leadership needs to have faith
in our own experts and our own resources.
We need to do what is most essential: embrace austerity at all
layers of the executive, legislature, and judiciary; privatise
dysfunctional SOEs transparently; renegotiate terms with all IPPs;
and make policies that encourage domestic investors to put their
money in industry rather than in real estate. It is always difficult to
untie a complex knot. However, if these key areas of bad
governance are addressed, much of the rest will fall in place.

Accruing more debt

Editorial Published September 28, 2023 0
THE government has issued new debt of over Rs2.5tr during the
first three months of the current financial year to finance its
burgeoning fiscal deficit — the gap between its revenues and
expenditures — according to new estimates of a Karachi-based
brokerage firm.
The new borrowing is nearly 57pc of the total debt of Rs4.4tr it had
auctioned during FY23. The issuance of additional debt underlines
the government’s shrinking tax and other revenues, increased
spending and growing reliance on domestic sources to fund its
budgeted expenditures as external financing dries up.
External financing shrank to its seven-month low of $316m in
August. Cumulatively, Islamabad secured external financing of
$3.2bn in July and August, which also includes Saudi deposits of
$2bn and a guaranteed loan of $508m for the PAF.
This shows that expectations that multilateral and bilateral partners
would allow their coffers to flow to help Pakistan’s distressed
economy, following the IMF’s nod to the Stand-by Arrangement,
were very exaggerated.
The government is also facing difficulties in securing $6bn through
commercial loans and has dollar bond issues. Chances of achieving
the budgeted external financing target of $17.6bn for its
expenditures and of meeting its foreign debt and other payments
are slim.
Last year, the government was able to obtain $10.8bn in external
financing and had to impose strict restrictions on imports and even
on legitimate dollar outflows to avoid defaulting.
The centre has been running a large, unsustainable fiscal deficit of
around 7pc of GDP for the last many years, which is the main
reason for the accumulation of its huge domestic and foreign public
debt, external sector fragility and inflation.
The pace of debt accumulation has picked up in recent years. This
is especially true for domestic public debt, which has grown to
around Rs39tr from over Rs30tr a year ago, because of reduced
external inflows. Successive governments have tried to justify the
worsening fiscal imbalance on the basis of economic development
targets.
But these excuses are used only to mask the reality. The fact is that
we are in the midst of the worst and longest economic crisis in our
history because of the lavish lifestyles of powerful interests at the
expense of the people and the well-being of the economy.
The World Bank’s country chief had alluded to this a few days
back when he pointed fingers at the country’s military, business
and political elites for the economic mess we are struggling to
resolve today.
Pakistan is facing an existential crisis that has severely impacted
the majority of its citizens, especially the low- and middle-income
segments and small businesses.
Mounting debt and dwindling foreign exchange reserves are two of
our biggest challenges, which, without immediate fiscal reform,
could lead to total economic collapse.

How IMF policies undermine rights

Saroop Ijaz & Sarah Saadoun September 26, 2023
The deepening economic crisis in Pakistan has historical and
structural reasons. However, the recent spike in inflation, increase
in electricity and fuel prices, and currency depreciation comes as a
result of a $3 billion deal between the IMF and Pakistan in July
2022.
IMF deal requires the government
 to end energy and fuel subsidies
 increase taxes
 move to a market-based exchange rate
On Friday, September 22, 2023, IMF Managing Director Kristalina
Georgieva sent a message to the “people of Pakistan” in a tweet
that asked to “please collect more taxes from the wealthy and
please protect the poor people of Pakistan.” The government
should heed her request, but so should the IMF.
Pakistan is a stark example of IMF conditions that risk
undermining people’s economic, social, and cultural rights, but it’s
far from the only one. A new report from Human Rights Watch on
recent IMF loans around the world found that the vast majority are
conditioned on austerity policies that reduce government spending
or increase regressive taxes in ways likely to harm human rights.
By conditioning its loans on policies that have a long track record
of exacerbating poverty and inequality, the IMF is violating its own
commitment to respond to the current economic crisis in ways that
address deep-seated inequality and build more inclusive
economies.
Austerity measures reducing government spending or increasing
regressive taxes have a well-documented history of undermining
rights. The United Nations Human Rights Council in 2019 adopted
guiding principles to ensure that economic recovery measures
further “the benefit of the whole population, instead of only a few”.
The principles prohibit governments from pursuing austerity unless
they meet strict criteria, including avoiding, or if absolutely
necessary, limiting and mitigating, any negative effect on rights.
The IMF’s internal research indicates that these policies are not
effective in achieving its primary objective: to reduce debt. The
IMF’s World Economic Outlook, published in April, observed that
fiscal consolidations – a term usually linked to austerity programs
– “do not reduce debt ratios, on average”.
Human Rights Watch’s analysis of IMF programs approved to 38
countries since March 2020 finds that over half contain or reduce
spending on public wages, compromising governments’ ability to
deliver quality public services that are guaranteed as rights. Over
half impose value-added taxes, an indirect tax that tends to be
regressive and exacerbate inequalities since the rate is the same for
people regardless of income.
And over half remove or reduce consumption-based fuel or
electricity subsidies or develop plans to do so without adequately
investing in social security or other compensatory measures or in
clean sources of energy. Fossil fuel subsidies place enormous
economic burdens on governments, but they also artificially reduce
the costs of fossil fuel production and use, driving fossil fuel
dependence at a time when governments should be transitioning to
renewable energy to address the climate crisis. At the same time,
removing subsidies without adequately investing in social security
often means that price increases disproportionately affect those on
low incomes.
To mitigate the impacts of these programs, many IMF programs
rely on small improvements to cash transfer programs. In Pakistan,
increased spending on the Benazir Income Support Program, a
government cash transfer program that targets women living in
extreme poverty. The program was initiated in 2008 to mitigate the
impact of then-record levels of food and fuel inflation, and
continues to be Pakistan’s largest social safety net program.
BISP is an important initiative assisting millions of households,
and it needs to be expanded significantly to move toward universal
social protection that would provide benefits to a broader range of
people who have heightened risks of income insecurity, such as
children, older people, and people with disabilities. Research has
shown that these types of programs are far more effective than
those with eligibility-based on socioeconomic status.
A 47-year-old rickshaw driver in Lahore told us, “I can either get
medicine (insulin) for my diabetes or pay for my daughter to go to
school or keep the lights on at my house. I can do only one of the
three. The IMF should come and see how I am managing my life.”
Social security is a human right enshrined in various treaties
ratified by Pakistan, including the International Covenant on
Economic, Social and Cultural Rights. The right to social security
plays an important role in realizing a range of other rights,
including the rights to education, food, healthcare, and housing.
The IMF needs to change course and put people’s economic and
social rights at the front and center of their programs.

Political/economic stability must for national power

By Muhammad Hanif September 2023
AMERICAN political scientist Joseph Nye Jr., defined power as
“the ability to influence the behaviour of others to get the desired
outcome”.
Hans Morganthu had stated that every state tries to maximize its
power, as power plays a dominant role in the international politics
to influence other states’ behaviour.
There are three main types of power:
 Hard
It is hard power, when a country uses economic and military
coercion to influence the behaviour of other countries.
 Soft
Soft power is the kind that attracts and convinces, as opposed to
coercion, using negotiations.
 Smart
Smart power involves both that strategically applies
economic/military coercion, diplomacy and persuasion.
According to an article shared by Denish in “Your Article
Library” website, there are a number of elements of national
power, with
 Geography
 natural resources (raw material and food)
 population
 economic development
 industrial capacity
 technology
 military preparedness as the tangible elements
While
 ideology
 national character
  population’s age
 education skills and morale
 leadership quality
 organisational efficiency
 media power
 quality of government
 diplomacy are the intangible elements
Thus, the national power is defined as the sum of all resources
available to a nation in the pursuit of national objectives.
In international relations, a state uses the national power to
influence the actions of other actors.
As far as Pakistan is concerned, its current short term economic
downturn notwithstanding, looking at all attributes of the elements
of national power, it is a stronger country with a potential to rise to
its true level of national power in a short span of time. According
to the UN, the Islamic Republic of Pakistan is the thirty third
largest country in terms of area, and as per the world meter,
Pakistan is the 5th most populated country in the world with 240
million population in 2023, with 60 per cent youth/workforce.
According to the Wikipedia, Pakistanis the 23 rd-largest economy in
terms of GDP based on purchasing power parity (PPP). In the
agriculture sector, as per the Ayub Agricultural Research Institute,
Faisalabad, Pakistan is amongst the world’s top ten producers of
wheat, cotton, sugarcane, mango, dates and kinnow (oranges) and
is ranked 10th in rice production. Pakistan has a strong industrial
base and has also progressed well in the defence production sector.
Strategically, Pakistan is a powerful/important country. The Global
Fire Power (GFP) Index denotes Pakistan as a Top 10 th world
power, having 6th largest armed forces in the world and being the
seventh nuclear power, with a potent missile technology, air and
naval capabilities, establishing strategic parity with India, and
making it totally secure from the Indian threats to its security.
Pakistan’s strategic location at the confluence of South Asia,
Central Asia, West Asia, Gulf/Middle Eastern countries, the Indian
Ocean, China and Russia’s outreach to the warm waters,
(especially after its conflict with Ukraine) makes it a significant
player in regional and world affairs, especially as a regional trade
transit hub in the context of the CPEC (an economic-oriented
project) signed with China, and due to its role in the regional and
the world peace.
Pakistan’s economy, if managed efficiently, can pick up its growth
to six per cent within a few years time. For example, in 1960s,
Pakistan was seen as a model of economic development around the
world with 8 per cent average growth rate. Even in 1977,
Pakistan’s economic growth rate was 7.4 per cent, in 2004 it was
touching 8 per cent, in 2017 it was 6.1 per cent, and, in 2022, it
was 6.4 per cent. Therefore, Pakistan has the potential to raise its
economic growth speedily based on the CPEC supported
modernization of agriculture, industry, IT and tourism, and as a
trade transit hub.
In view of the above, Pakistan’s leadership, should accept that all
the past governments and heads of major national institutions since
1972 have a part in putting Pakistan in the current economic
quagmire by piling up a huge sum of foreign loans and failing to
enable it to return those without taking further loans, forget about
their past way of inefficient/sluggish/lavish governance, adopt
honest, corruption free, efficient and austere ways of governance
and prove their mettle by putting Pakistan on the road to political
calm, economic development, prosperity and regaining its national
power and strategic weight, by strengthening all elements of its
national power.
In the above context, Pakistan’s political leadership and heads of
important institutions can hold a pre-election dialogue, to reach at
an agreement to follow a consensus-based political stability/good
governance/good political culture agenda, and to
prepare/implement a consensus based economic recovery/progress
programme (including the tasks already planned and being
implemented by the caretaker government with the support of the
armed forces’ leadership), for at least next 15 years.
The political and socio-economic agenda to be prepared/pursued
by the Pakistan’s leadership/governments and the heads of
country’s important institutions should include, increasing
Pakistan’s internal revenues, increasing CPEC-based economic
growth rate, GDP and exports, increasing foreign remittances,
increasing tourism income, foreign investment and forex reserves,
reducing budget/trade deficits and stabilizing Pakistani rupee, to
enable Pakistan to return its loans without taking further loans and
substantially lowering the inflation/prices for the welfare of the
people and further boosting Pakistan’s defence capabilities. This
agenda should also include, addressing corruption, ending
nepotism, following a potent accountability system, holding free
and fair elections, making the national institutions
efficient/profitable, improving prosecution/judicial systems,
improving education and health facilities, encouraging nationalism,
nurturing political tolerance and reducing lust for power to
attain/maintain political stability and national harmony.
Global Economy
The Price of Fragmentation
Why the Global Economy Isn’t Ready for the Shocks Ahead
KRISTALINA GEORGIEVA
Sep-Oct 2023
WE are living through turbulent times, in a world that has become
richer but also more fragile. Russia’s war in Ukraine has painfully
demonstrated that we cannot take peace for granted. A deadly
pandemic and climate disasters remind us how brittle life is against
the force of nature. Major technological

Transformations such as artificial intelligence hold promise for

future growth but also carry significant risks. Collaboration among
nations is critical in a more uncertain and shock-prone world. Yet
international cooperation is in retreat. In its place, the world is
witnessing the rise of fragmentation: a process

That begins with increasing barriers to trade and investment and, in

its extreme form, ends with countries’ breaking into rival economic
blocs-an outcome that risks reversing the transformative gains that
global economic integration has produced.
A number of powerful forces are driving fragmentation. With
deepening geopolitical tensions, national security considerations
loom large for policymakers and companies, which tends to make
them wary of sharing technology or integrating supply chains.
Meanwhile, although the global economic integration that has
taken place in the past three decades has helped billions of people
become wealthier, healthier, and more productive, it has also led to
job losses in some sectors and contributed to rising inequality. That
in turn has fueled social tensions, creating fertile ground for
protectionism and adding to pressures to shift production back
home.

Fragmentation is costly even in normal times and makes it nearly

impossible to manage the tremendous global challenges that the
world now faces: war, climate change, pandemics. But
policymakers everywhere are nevertheless pursuing measures that
lead to further fragmentation. Although some of these policies can
be justified by the need to ensure the resilience of supply chains,
other measures are driven more by self-interest and protectionism,
which in the long term will put the world economy in a precarious
position.

The costs of fragmentation could not be clearer: as trade falls and

barriers rise, global growth will take a severe hit. According to the
latest International Monetary Fund projections, annual global GDP
growth in 2028 will be only three percent-the IMF’s lowest five-
year-ahead forecast in the past three decades, which spells trouble
for poverty reduction and for creating jobs among burgeoning
popu- lations of young people in developing countries.
Fragmentation risks making this already weak economic picture
even worse. As growth falls, opportunities vanish, and tension
builds, the world-already divided by geopolitical rivalries—could
splinter further into com- peting economic blocs.
Policymakers everywhere recognize that protectionism and decou-
pling come at a cost. And high-level engagements between the
world’s two largest economies, the United States and China, aim to
reduce the risks of further disintegration. But broadly speaking,
when it comes to trying to turn back the tide of fragmentation,
there is a troubling lack of urgency. Another pandemic could once
again push the world into global economic crisis. Military conflict,
whether in Ukraine or elsewhere, could again exacerbate food
insecurity, disrupt energy and commodity markets, and rupture
supply chains. Another severe drought or flood could turn millions
more people into climate refugees. None- theless, despite
widespread recognition of these risks, governments and the private
sector alike have been unable or unwilling to act.

A more shock-prone world means that economies will need to

become much more resilient-not just individually but also
collectively. Getting there will require a deliberate approach to
cooperation. The international community, supported by
institutions such as the IMF, should work together in a systematic
and pragmatic manner, pursuing targeted progress where common
ground exists and maintaining col- laboration in areas where
inaction would be devastating. Policymakers need to focus on the
issues that matter most not only to the wealth of nations but also to
the economic well-being of ordinary people. They must nurture the
bonds of trust among countries wherever possible so they can
quickly step up cooperation when the next major shock comes.
That would benefit poorer and richer economies alike by
supporting global growth and reducing the risk that instability will
spread across borders. Even for the richest and most powerful
countries, a fragmented world will be difficult to navigate, and
cooperation will become not only a matter of solidarity but of self-
interest, as well.

A FRAGILE WORLD

Two world wars in the twentieth century revealed that international

cooperation is critical for peace and prosperity and that it requires a
sound institutional foundation. Even as World War II was still
raging, the Allies came together to create a multilateral architecture
that would include the United Nations and the Bretton Woods
institutions—the IMF and the World Bank together with the
precursor to the World Trade Organization. Each organization was
entrusted with a special mandate to address the problems of the day
requiring collective action.
What ultimately followed was an explosion of trade and inte-
gration that transformed the world, culminating in what came to be
known as globalization. Integration had accelerated in previous
historical eras, especially in the wake of the Industrial Revolution.
But during the world wars and the interwar period, it had sharply
retreated, and in the immediate postwar era, the fragmentation of
the Cold War threatened to prevent it from recovering. The
international security and financial architecture the Allies built,
however, allowed integration to come roaring back. Since then, that
architecture has adapted to massive changes. The number of
countries in the world has grown from 99 in 1944 to nearly 200
today. In the same period, the earth’s population has more than
tripled, from around 2.3 billion to around 8.0 billion, and global
GDP has increased more than tenfold. All the while, the expansion
of trade in an increasingly integrated global economy has delivered
substantial benefits in terms of growth and poverty reduction.
These gains are now at risk. After the 2008 global financial crisis, a
period of “slowbalization” began, as growth became uneven and
countries began imposing barriers to trade. Convergence in living
standards within and across countries has stalled. And since the
pan- demic began, low-income countries have seen a collapse in
their capita GDP growth rates, which have fallen by more than
half, from an average of 3.1 per percent annually in the 15 years
before the pandemic to 1.4 percent since 2020. The decline has
been much more modest in rich countries, where per capita GDP
growth rates have fallen from 1.2 percent in the 15 pre-pandemic
years to 1.0 percent since 2020. Rising inequality is fostering
political instability and undermining the prospects for future
growth, especially for vulnerable economies and poorer people.
The existential threat of climate change is aggravating existing
vulnerabilities and introducing new shocks. Vulnerable coun- tries
are running out of buffers, and rising indebtedness is putting
economic sustainability at risk.

In a more fragile world, countries (or blocs of countries) may be

tempted to define their interests narrowly and retreat from cooper-
ation. But many countries lack the technology, financial resources,
and capacity to successfully contend with economic shocks on
their own-and their failure to do so will harm not only the well-
being of their own citizens but also that of people elsewhere. And
in a less secure world with weaker growth prospects, the risk of
fragmentation only grows, potentially creating a vicious downward
spiral.

Should this happen, the costs will be prohibitively high. Over the
long term, trade fragmentation-that is, increasing restrictions on the
trade in goods and services across countries-could reduce global
GDP by up to seven percent, or $7.4 trillion in today’s dollars, the
equiv- alent of the combined GDPS of France and Germany and
more than three times the size of the entire sub-Saharan African
economy. That is why policymakers should reconsider their
newfound embrace of trade barriers, which have proliferated at a
rapid clip in recent years: in 2019, countries imposed fewer than
1,000 restrictions on trade; in 2022, that number skyrocketed to
almost 3,000.

As protectionism spreads, the costs of technological decoupling-

that is, restrictions on the flow of high-tech goods, services, and
knowledge across countries-would only add to the misery, reduc-
ing the GDPS of some countries by up to 12 percent over the long
term. Fragmentation can also lead to severe disruption in
commodity markets and create food and energy insecurity: for
example, Russia’s blockade of Ukrainian wheat exports was a key
driver behind the sud- den 37 percent increase in global wheat
prices in the spring of 2022. This drove inflation in the prices of
other food items and exacerbated food insecurity, notably in low-
income countries in North Africa, the Middle East, and South Asia.
Finally, the fragmentation of capital flows, which would see
investors and countries diverting investments and financial
transactions to like-minded countries, would constitute another
blow to global growth. The combined losses from all facets of
fragmentation may be hard to quantify, but it is clear that they all
point to lower growth in productivity and in turn to lower living
standards, more poverty, and less investment in health, education,
and infrastructure. Global economic resilience and prosperity will
depend on the survival of economic integration.

A GLOBAL SAFETY NET

In a world with more frequent and severe shocks, countries have to
find ways to cushion the adverse impacts on their economies and
peo- ple. That will require building economic buffers in good times
that can then be deployed in bad times. One such buffer is a
country’s inter- national reserves that is, the foreign currency
holdings of its central bank, which provide a readily available
source of financing for coun- tries when hit by shocks. In the
aggregate, reserves have grown tre- mendously over the past two
decades, on par with the expansion of the world economy and in
response to financial crises. But those reserves are heavily
concentrated in a relatively small stronger group of economically
advanced and emerging market economies: just ten countries hold
two-thirds of global reserves. In contrast, reserve holdings in most
other countries remain modest, especially in sub-Saharan Africa,
parts of Latin America, oil-importing states in the Middle East, and
small island states-which, taken together, account for less than one
percent of global reserves. This uneven distribution of reserves
means that many countries remain highly vulnerable.
No country should rely on its reserves alone, of course. Consider
how a household, which cannot save enough money for every
conceivable shock, purchases insurance for a home, a car, and
health care. Similarly, countries are better off if they can
complement their own reserves with access to various international
insurance mechanisms that are collectively known as “the global
financial safety net.” At the center of the net is the IMF, which
pools the resources of its membership and acts as a cooperative
global lender of last resort. The net is buttressed by currency swap
lines, through which central banks provide one another with
liquidity backstops (typically to reduce financial stabil- ity risks),
and by financing arrangements that allow countries within specific
regions to pool resources that can be deployed if a crisis hits.
In a less secure world with weaker growth prospects, the risk of
fragmentation only grows.
Protecting countries and their people against shocks contributes to
stability beyond their borders: such protection is a global public
good. A global safety net that pools international resources to
provide liquid- ity to individual countries when they are struck by
calamities is thus in the interest of individual countries and the
world. The coVID-19 crisis provides a good example. With the
pooled resources of the IMF, mem- ber countries received liquidity
injections at an unprecedented speed and scale, helping them
finance essential imports such as medicines, food, and energy.
Since the pandemic, the IMF has approved over $300 billion in
new financing for 96 countries, the broadest support ever over such
a short period. Of this, over $140 billion has been provided since
Russia’s invasion of Ukraine to help the fund’s members address
financing pressures, including those resulting from the war.
Although the global financial safety net helped manage the fallout
from COVID and the effects of Russia’s invasion, it is sure to be
tested again by the next big shock. With reserves unevenly
distributed, there is a pressing need to expand the world’s pooled
resources to insure vulnerable countries against severe shocks. The
IMF’s nearly $1 trillion in lending capacity is now only a small
part of the overall safety net. Although self-insurance through
international reserves has sharply Increased for some countries,
pooled resources centered on the IMF have increased far less than
self-insurance and have shrunk markedly relative to measures of
global financial integration. That is why the international
community must strengthen the global financial safety net,
including by expanding the availability of pooled resources in the
IMF.

DEALING WITH DEBT

Even if the global financial safety net is strengthened, some

countries might exhaust their buffers in the face of global
economic shocks and accumulate economic imbalances over time-
notably, higher fiscal deficits and rising debt levels. Although debt
is up everywhere, the problem is particularly acute for many
vulnerable emerging-market and low-income countries as a result
of recent economic jolts, rising interest rates, and, in some cases,
policy errors on the part of govern-ments. By the end of 2022,
average debt levels in emerging-market countries had reached 58
percent of GDP, a significant increase from a decade earlier, when
that figure stood at 42 percent. Average debt lev- els in low-income
countries had increased even more sharply over that period, from
38 percent of GDP to 60 percent. About one-quarter of emerging-
market countries’ bonds are now trading at spreads indica- tive of
distress. And 25 years after the launch of a broad-based inter-
national debt relief initiative for poor countries, about 15 percent of
low-income countries are now considered to be in debt distress,
with another 40 percent at risk of ending up in that situation.

The costs of a full-blown debt crisis are most keenly felt by people
in debtor countries. According to one analysis by the World Bank,
on average, poverty levels spike by 30 percent after a country
defaults on its external obligations and remain elevated for a
decade, during which infant mortality rates rise on average by 13
percent and children face shorter life expectancies. Other countries
are affected as well. Savers lose their wealth. Borrowers’ access to
credit can become more limited.

To ensure debt sustainability in a world of more frequent climate

and health calamities, individual countries and international orga-
nizations must do everything they can to prevent the unsustainable
accumulation of debt in the first place and failing that, to support
the orderly restructuring of debt if it becomes necessary. If debt
crises mul- tiply, the gains that low-income countries have made in
recent decades could quickly evaporate. To prevent that from
happening, international institutions can help countries focus on
economic reforms that would spur growth, improve the
effectiveness of budgetary spending, enhance tax collection, and
strengthen debt management.

Reducing the costs of debt crises means resolving them quickly.

Doing so is not easy. The creditor landscape has changed signifi-
cantly over the past several decades, with new official creditors
such as China, India, and Saudi Arabia entering the scene and the
variety of private creditors expanding dramatically. Quick and
coordinated action by creditors requires mutual trust and under-
standing, but the increase in the number and type of creditors has
made that more challenging, especially since some key creditors
are divided along geopolitical lines.

Consider the case of Zambia, Africa’s second-biggest copper pro-

ducer. Over the past decade, it ramped up spending on public
invest- ment financed by debt, but economic growth failed to
follow, and the country ran out of resources to meet its debt
repayments, defaulting in 2020. Its official creditors took almost a
year to agree to a deal to restructure billions of dollars of loans.
This milestone required the mostly high-income group of creditors
known as the Paris Club to cooperate with the new creditor
countries. But the job will be fully complete only when private
creditors also come forward and agree to a comparable deal with
Zambia-work that is already underway.
Although reaching an agreement for Zambia took time, offi- cial
creditors have been learning how to work together, in this case
under a Common Framework established by the G-20. The
technical discussions taking place through the new Global Sov-
ereign Debt Roundtable—initiated in February 2023 by the IMF,
the World Bank, and the G-20 under India’s presidency are also
helping build a deeper common understanding across a broader set
of stakeholders, including the private sector and debtor coun- tries.
This development holds promise for highly indebted countries,
such as Sri Lanka and Ghana, that still need the international
community to decisively follow through on commitments to
provide critical debt relief. But creditors and international financial
institutions must do more. Debtors should receive a clearer road
map of what they can expect from creditors in the timing of key
decisions. Creditors also need to find ways to more quickly clear
hurdles to reaching consen- sus. For instance, earlier information
sharing can help creditors and debtors resolve debt crises in a more
cooperative fashion, with help from institutions such as the IMF.
And if private creditors demon- strate that they can do their part
and provide debt relief on terms comparable to those offered by
official creditors, it will reassure the official creditors and give
them the confidence to move faster.
Reducing the costs of debt crises means resolving them quickly.
International financial institutions and lenders must also develop
mechanisms to insure countries against debt crises in the event of
major shocks. Such mechanisms play a crucial role in ensuring that
a liquidity crunch does not tip countries into more costly debt
distress. One promising idea would be to take a contractual
approach to commercial debt. This could involve including clauses
in debt contracts that would automatically trigger a deferral of debt
repayments if a country experienced a natural disaster such as a
flood, drought, or earthquake.
Debtors must do their part, too, starting by being more proactive
when it comes to risk mitigation, and better coordinating their debt
management strategy with fiscal policy. Governments must also
show a willingness to tackle the underlying policy mistakes at the
heart of more fundamental debt challenges. For instance, Zambia’s
strong commitment to undertaking necessary economic reforms,
such as removing fuel subsidies that mostly benefited wealthier
households, meant that the IMF could move forward with its own
financial support and that official creditors were more willing to
provide debt relief.

THE FIGHT AGAINST FRAGMENTATION

The IMF has long played a central role in the global economy. It is
the only institution empowered by its 190 members to carry out
regular and thorough “health checks” of their economies. It is a
steward of macro- economic and financial stability, a source of
essential policy advice, and a lender of last resort, poised to help
protect countries against crises and instability. In a world of more
shocks and divisions, the fund’s universal membership and
oversight are a tremendous asset.

But the IMF is just one actor in the global economy and just one
among many important international financial institutions. And to
keep up with the pace of change in a fragmenting world, the fund’s
financial model and policies need a refresh. An important first step
would be completing the 16th General Review of Quotas. The
IMF’s quota resources- -the financial contributions paid by each
member- are the primary building blocks of the fund’s financial
structure, which pools the resources of all its members. Each
member of the IMF is assigned a quota based broadly on its
relative position in the world economy, and the IMF regularly
reviews its quota resources to make sure they are adequate to help
its members cope with shocks. An increase in quotas would
provide more permanent resources to support emerging and
developing economies and reduce the fund’s reliance on temporary
credit lines. It is essential that the IMF’s mem- bership come
together to bolster the institution’s quota resources by completing
the review by the December 2023 deadline.

The IMF's better-off members need to make a concerted effort to

urgently replenish the financial resources of the Poverty Reduc-
tion and Growth Trust. The trust, which is administered by the
IMF, has provided almost $30 billion in interest-free financing to
56 low-income countries since the onset of the pandemic, more
than quadruple its historical levels. This funding is critical to
ensure that the IMF can continue meeting the record demand for
support from its poorest member countries. And to address the
economic risks created by climate change and pandemics, the
fund’s better-off mem- bers should also scale up their channeling of
Special Drawing Rights (an IMF reserve asset, which it allocates to
all its members) to more vulnerable countries through the fund’s
newly created Resilience and Sustainability Trust.

The IMF must also continue working to enhance representation

inside the organization. It is important that the fund reflect the
economic reali- fies of today’s world, not that of the last century.
Decision-making at the fund requires a highly collaborative
approach and inclusive governance. This would support more
agility and adaptability in the IMF’s policies and financing
instruments to better serve the needs of its members.

Finally, the IMF cannot be truly effective in today’s fragmented

world unless it continues to deepen its ties with other international
organizations, including the World Bank, other multilateral
develop- ment banks such as the African Development Bank, and
institutions such as the Bank for International Settlements and the
World Trade Organization. All those international financial
institutions must join forces to foster international cooperation on
the most pressing chal- lenges facing the world.
In 1944, the 44 men (and zero women) who signed the Bretton
Woods agreement sat at one table in a modestly sized room. The
small number of players was an advantage, as was the fact that
most of the countries represented were allies fighting together in
World War II. Today, finding consensus among 190 members is
much more difficult, especially as trust among different groups of
countries is eroding and faith in the ability to pursue the common
good is at an all-time low. Yet the world’s people deserve a chance
at pursuing peace, prosperity, and life on a livable planet.

For nearly 80 years, the world has responded to major economic

challenges through a system of rules, shared principles, and institu-
tions, including those rooted in the Bretton Woods system. Now
that the world has entered a new era of increasing fragmentation,
interna- tional institutions are even more vital for bringing
countries together and solving the big global challenges of today.
But without enhanced support from higher-income countries and a
renewed commitment to collaboration, the IMF and other
international institutions will struggle.

The period of rapid globalization and Integration has come to an

end, and the forces of protectionism are on the rise. Perhaps the
only thing certain about this fragile, fragmented new global
economy is that it will face shocks. The IMF, other international
institutions, creditors, and borrowers must all adapt and prepare.
It’s going to be a bumpy ride; the international financial system
needs to buckle up.