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ISLAMABAD: The entrenched special interest groups in Pakistan that benefit from the status quo, maintain unfair and distortive economic policies and use state patronage to gain an advantage in public procurement, have made it very difficult to implement far-reaching reforms, according to a report from the International Finance Corporation (IFC) and the World Bank.

The report, the Pakistan Country Private Sector Diagnostic (CPSD), stated that Pakistan has tremendous untapped economic potential that may be realised through key policy actions to help create new market opportunities, mobilize private investments to create more jobs and help the country in coping with the impact of Covid-19 on its economy. The GDP is projected to grow by 1.5 percent in fiscal year 2021 following a contraction of 0.4 percent in fiscal year 2020, it added.

The report noted that Pakistan’s entrepreneurs are facing competition from entrenched special interest groups that benefit from the status quo, maintain unfair and distortive economic policies, and use state patronage to gain an advantage in public procurement.

The Pakistani elite configuration is heterogeneous and includes the public administration, the military complex, industrial conglomerates; business houses religious groups, large landowners or other local elite groups.

Some elites straddle all the clusters, but each category of the elites is strong and affects development in different ways.

The influence of these special interest groups has made it very difficult to implement far-reaching reforms.

It further stated that elections are viewed by urban powerbrokers and regional elites as an extension of age-old systems of kinship and intertribal rivalry, which offer an opportunity to gain access to government largesse.

The landowning class dictates economic policy for its own benefit through political channels.

Rural landowners in some areas still dictate the political choices of their tenants, and key elites, including business houses, use all means to influence election outcomes.

Excessive government interventions and failed sector policies have resulted in economic distortions maintained by special interest groups.

The government has traditionally intervened in agricultural input and output markets through subsidies and procurement prices.

Reforms fell short of eliminating major sources of distortion, especially price floors for wheat, sugarcane and fertiliser subsidies, which continue to distort crop choices, uphold entry barriers and constrain competition.

Some analysts argue that members of the landowning class successfully resist the implementation of reforms as they benefit from the status quo.

In the water sector, irrigation water tariffs are subsidised and occur on a flat-fee basis per acre of land.

To date, no major reform of the irrigation water-pricing system has been implemented.

Large landowners benefit disproportionately from the low water rates and preferential access.

The report further stated that the military is an active stakeholder in economic policymaking and controls various businesses.

Direct and indirect participation of the military and its affiliated institutions in commercial activities is widespread in Pakistan.

In a report presented to the Pakistani Senate in 2016, 50 commercial entities were reported to be run by the military and welfare organisations established for retired army officers.

An estimate from 2019 suggests that military’s equity in businesses in the country exceeds $100 billion.

These organisations are not formally defined as state-owned entities and they are hence free to participate in tenders for public procurement and PPPs.

The report stated that a chief cause of the regular boom-bust cycles of the economy is its very high dependency on consumption rather than investment and exports.

The investment-to-GDP ratio has remained below 20 percent over the last four decades and fluctuated around 15 percent over the last five years.

Public investment is critical to crowd in private investment and catalyze private enterprise and it has typically been half of private investment.

COVID-19 pandemic will likely put even further downward pressure on the investment to GDP ratio: the GoP will raise less tax income and many businesses will lose money, it added.

A more vibrant private sector is needed to offer more and higher quality jobs to the 2.1 million youth (ages 15-24) who enter the labor force every year.

Pakistan’s private sector is dominated by SMEs that are often informal and mostly family run.

Data on new business registrations show that Pakistan has a much lower incidence of entrepreneurship per capita than its peers.

Growth-oriented businesses are rare, and most businesses do not grow over their life cycle.

It further noted that trade and regional integration remain Pakistan’s greatest (untapped) growth potential.

Economic models find that intra-regional liberalisation of trade in goods could result in additional economic growth of 30 percent by 2047.

Trade with India alone has the potential to increase from roughly $2 billion in recent years to $35 billion.

Regional tensions continue to shape economic outcomes.

The government of Pakistan spends 32 percent of its annual budget on defense (3.6 percent of GDP), curtailing the fiscal space to invest in human and economic development.

These regional dynamics have had a direct bearing on economic growth and private enterprise by hampering public and private investment.

A recent escalation in tensions with India had an immediate impact on investor sentiment as manifested by the country’s stock market performance.

Pakistan’s SOE portfolio has made large aggregate losses in recent years and SOE debt and GoP guarantees to SOEs have risen rapidly.

Private investors have shunned sectors where SOEs distort competition and investors are not interested in buying SOEs with opaque finances and operations.

In FY19, the federal budget financing for SOEs equaled two percent of GDP, nine percent of total consolidated expenditure, and 23 percent of the fiscal deficit.

In the same year, SOE debt with sovereign guarantee was 3.3 percent of the GDP. SOE debt and losses have grown rapidly in recent years with SOE debt equaling 5.3 percent of GDP (Rs2 trillion) in FY19.

An estimated 49 SOEs are financially unviable (i.e. 58 percent of the SOEs excluding subsidiaries) with 17 SOEs having negative equity.

Four SOEs remain de facto but lack operations, including in steel production and energy. Another 17 SOEs have negative equity and accrued losses in sectors such as air transport, banking, broadcasting, printing, metals, power, telecom and tourism.

And 13 SOEs made losses in the three last consecutive years (FY16-18) that were reported in sectors as wide ranging as highways, postal services, power, railways, SME banking, television and textiles.

The state-owned power sector comprising numerous businesses is a liability to the GoP. State patronage has protected incumbents from competition and come at a high cost to taxpayers.

Pakistan’s aviation sector illustrates the impact of state patronage on competition, sectoral dynamics and investment.

A serious attempt to restructure the SOE portfolio could reduce fiscal leakages, promote competition and revitalize important sectors of the economy.

In the short-term, the GoP should seek to contain the liabilities of SOE debt, close non-essential, unviable and defunct SOEs while divesting assets when possible.

This would require stricter rules and conditions for budget financing and guarantees to SOEs, a redirection of subsidies from SOEs to consumers, stronger cost and performance metrics and agreements, divestiture of minority stakes, and the voluntary separation or re-deployment of staff.

Digital finance could boost GDP by seven percent through the mobilization of $260 billion in deposits and associated increases in investment and productivity.

It could also help create an estimated 4 million jobs, promote formalization and empower SMEs and households.

Copyright Business Recorder, 2021


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