What measures would you suggest to improve the economy of Pakistan particularly in the areas of debt reduction and enhancing export capacity?

Introduction

In Shakespeare's Hamlet, Polonius advises his son: "Neither a borrower nor a lender be." Pakistan has long ignored this advice, financing its spending and its trade deficits with loans. By 2016, public debt had risen to about two-thirds of GDP, while exports had fallen for two years in a row, from about US$25 billion in fiscal year 2014 to about US$21 billion in fiscal year 2016. High debt and weak exports are two sides of the same problem: an economy that spends more than it earns and imports more than it sells. Improving it requires measures that cut debt and build the capacity to export.

Overview

Pakistan's public debt had grown rapidly after 2008, driven by fiscal deficits, losses of state-owned enterprises and the power-sector circular debt. The Fiscal Responsibility and Debt Limitation (FRDL) Act 2005 set a limit of 60 per cent of GDP, which had been breached. In 2016, Parliament amended the Act to bring debt back down gradually. The country was completing an IMF programme (2013–2016). On the trade side, Pakistan had gained GSP Plus status in the EU from January 2014, and the government announced a Strategic Trade Policy Framework 2015–18 with an ambitious export target, but energy shortages, high costs and an overvalued rupee held exports back.

Measures for debt reduction

1. A primary surplus through tax reform.

Pakistan's tax-to-GDP ratio of around 10–11 per cent is among the lowest in the world. Taxing retail, real estate and agricultural income, ending exemptions and documenting the economy would allow the government to run a primary surplus and stop new borrowing. (Reference: Federal Board of Revenue, Year Book 2015–16; IMF, Pakistan Extended Fund Facility reviews, 2013–2016.)

2. Cutting the losses of state enterprises.

PIA, Pakistan Steel Mills, Pakistan Railways and the power distribution companies lost hundreds of billions of rupees a year, financed by debt. Restructuring or privatising them would stop this drain. (Reference: Ministry of Finance, Federal SOEs Annual Report; Privatisation Commission of Pakistan.)

3. Ending the circular debt.

Power-sector losses from theft, poor recovery and unpaid subsidies accumulate as circular debt, which the government eventually pays through borrowing. Reforming the power sector directly reduces debt. (Reference: NEPRA, State of Industry Report 2016; Ministry of Water and Power.)

4. Respecting the FRDL Act.

The FRDL (Amendment) Act 2016 required public debt to fall to 60 per cent of GDP and then gradually to 50 per cent over the long term, and limited the fiscal deficit. Making these limits binding, with parliamentary oversight, would discipline future governments. (Reference: Fiscal Responsibility and Debt Limitation (Amendment) Act, 2016.)

5. Better debt management.

A strong Debt Management Office, longer maturities, more concessional loans and less expensive short-term commercial borrowing would reduce refinancing risk and interest costs. (Reference: Ministry of Finance, Medium-Term Debt Management Strategy 2015/16–2018/19.)

6. Shifting from debt to equity.

Attracting foreign direct investment rather than loans brings capital without repayment obligations; a better investment climate is therefore a debt strategy. (Reference: Board of Investment, FDI data; World Bank, Doing Business 2017, Pakistan profile.)

7. Privatisation proceeds for debt retirement.

Proceeds from selling state assets should be used to retire debt rather than to finance current spending. (Reference: Privatisation Commission Ordinance, 2000, provisions on use of proceeds; IMF programme documents.)

8. Higher national savings.

Pakistan's national savings rate of about 14 per cent of GDP is too low to finance investment. Encouraging savings through pension reform, financial inclusion and Islamic finance products reduces the need for foreign borrowing. (Reference: Ministry of Finance, Pakistan Economic Survey 2015–16; State Bank of Pakistan, National Financial Inclusion Strategy, 2015.)

Measures to enhance export capacity

1. Lower cost of doing business.

Exporters faced high electricity and gas tariffs, frequent shortages and slow procedures. Reliable, competitively priced energy and simpler regulation would make exports more competitive. (Reference: All Pakistan Textile Mills Association statements, 2015–2016; World Bank, Doing Business 2017.)

2. A competitive exchange rate.

The rupee was widely considered overvalued in 2015–2016, making exports expensive. A market-based, competitive exchange rate supports exporters. (Reference: IMF, Pakistan Article IV Consultation, 2016; State Bank of Pakistan, real effective exchange rate data.)

3. Timely refunds and export finance.

Delays in sales tax refunds locked up exporters' working capital. Paying refunds quickly and expanding the State Bank's Export Finance Scheme and Long-Term Financing Facility would ease liquidity. (Reference: State Bank of Pakistan, Export Finance Scheme; Prime Minister's export package, January 2017.)

4. Diversification and value addition.

Exports were concentrated in textiles, rice and leather. Moving into higher-value garments, engineering goods, pharmaceuticals, IT services and processed food would raise export earnings. (Reference: Ministry of Commerce, Strategic Trade Policy Framework 2015–18; Harvard Growth Lab, Atlas of Economic Complexity.)

5. Using GSP Plus and new markets.

The EU's GSP Plus scheme gave duty-free access for many Pakistani products; exporters needed support to use it fully, while also exploring markets in Africa, Central Asia and Latin America. (Reference: European Commission, GSP Plus assessments of Pakistan, 2016; Ministry of Commerce.)

6. Regional trade.

Trade with neighbours, including China under the FTA, Afghanistan, Iran and Central Asia, and, if politics permits, India, could expand exports at lower transport costs. (Reference: Pakistan-China Free Trade Agreement, 2006; World Bank studies on South Asian trade.)

7. SMEs and skills.

Small and medium enterprises need credit, technology and training to become exporters, and the workforce needs technical skills to produce higher-value goods. (Reference: SMEDA, SME Policy; National Vocational and Technical Training Commission.)

8. Standards, branding and trade diplomacy.

Meeting international quality and compliance standards, building "Made in Pakistan" brands and strengthening commercial sections in embassies would improve market access. (Reference: Trade Development Authority of Pakistan; Pakistan National Accreditation Council.)

Conclusion

At the opening of the State Bank of Pakistan on 1 July 1948, Quaid-e-Azam Muhammad Ali Jinnah urged Pakistanis to "work our destiny in our own way." Economic independence is impossible while the country lives on borrowed money and sells too little to the world. Reducing debt through tax reform, SOE and power-sector reform and fiscal discipline, and expanding exports through lower costs, a competitive exchange rate, diversification and new markets, are two halves of one strategy. Together they can break Pakistan's cycle of borrowing and build a self-reliant economy.