IMF spells out factors behind country’s underperformance

ISLAMABAD: Several macroeconomic distortions and policy-related restrictions including protectionist interventions, a cumbersome regulatory and fiscal environment, and insufficient investment in human capital have contributed to the country’s underperformance

This has been stated in the International Monetary Fund (IMF) latest paper “Pakistan selected issues”, which also noted that placing Pakistan on a new economic trajectory requires addressing many distortions, as well as, improving the quality and level of public investment including in human capital.

The Fund stated that from 2000 to 2022, Pakistan’s GDP per capita grew at an average annual rate of only 1.9 percent. By contrast, Pakistan’s peers achieved more than twice this rate: Bangladesh averaged growth of 4.5 percent, India reached 4.9 percent, Vietnam 5 percent, and China a growth of about 7.5 percent.

As a result, Pakistan has moved further and further behind its peers in terms of living standards, underscoring the need for urgent policy correction.

Compared to regional peers, the country’s export growth has been weak, while its competitiveness has declined given an appreciated real exchange rate relative to productivity growth.

Compared to other regional peers, Pakistan’s export growth has been weak, with sales to the world particularly stagnant during the 2010s. Its many trade restrictions (including exchange measures, restrictions to payments, as well as tariff and non-tariff barriers to imports) have consistently placed Pakistan around the 90th percentile of the Measurement of Aggregate Trade Restrictions index.

Agriculture provides an extreme example of government policies hindering transformation by trapping resources in low-productivity activities. The agriculture sector suffers from one of the lowest levels of labour productivity and has shown both the smallest reallocation relative to peers and the smallest improvement in labour productivity. The government’s large scale interventions in agricultural markets have included support prices for raw and processed goods, and significant preferential taxation treatment, for both income and inputs, has led to calcification of the resources in the agricultural sector at the expense of more productive segments of the economy.

Despite the significant policy inducements, misallocation and investment in physical capital has significantly underperformed peers due to Pakistan’s high level of volatility, poor regulatory environment, poor public investment management, crowding out by government financing requirements, and poor public services.

A cumbersome and inconsistent regulatory regime has significantly deterred domestic and foreign direct investment. Pakistan has received relatively low FDI net inflows compared to its peers exacerbated by a challenging business environment marked by onerous and discretionary regulatory enforcement. These create significant costs as firms spend resources navigating these regulatory hurdles, which could otherwise be directed towards productive activities, thus hampering investment (including FDI).

The paper further noted that fiscal deficits and over reliance on the banking sector for government financing have crowded out financing for the private sector as private credit to GDP is significantly lower than peers and the regional average. This has resulted in a persistent decline in private investment, despite much of industrial private financing being subsidised with a sizable discount below the policy rate, while credit to the government reached 72 percent of total bank lending in fiscal year 2023.

Copyright Business Recorder, 2024