Structural weaknesses exist in economy: ADB

January 29, 2021 11:47 pm by Web Desk

ISLAMABAD: While committing to provide over $10 billion to Pakistan in five years under the Country Partnership Strategy (CPS) from 2021-2025, the Asian Development Bank (ADB) has pointed out that Pakistan’s economy exhibits an episodic pattern of growth characterized by boom-and-bust periods.

The ADB highlighted rising unemployment and poverty in the aftermath of COVID-19 pandemic. It emphasized upon the need of continuous monitoring to ensure debt sustainability. According to CPS for 2021-2025 released by the ADB on Thursday, a narrow production and export base makes the economy less resilient to adverse economic shocks, which results in a binding balance-of payment constraint to growth.

A large fiscal deficit, a weak external position, and eroded macroeconomic buffers reflect structural weaknesses in economic management. The Coronavirus disease (COVID-19) pandemic, which led to a sharp contraction in growth, has heightened the vulnerability and compounded the economic difficulties. Pakistan’s limited fiscal space holds it back from tackling its infrastructure and social sector deficits, critical to building the resilience of the population. The high cost of doing business for the private sector restricts its international competitiveness. Governance bottlenecks and institutional capacity challenges persist.

The Country Partnership Strategy (CPS) 2021–2025 of the Asian Development Bank (ADB) for Pakistan responds to the economic and social challenges thrown up by the pandemic and supports the country in addressing its persistent structural challenges. It fully aligns with the Government of Pakistan’s development strategy, ADB’s Strategy 2030, and the Sustainable Development Goals (SDGs). The ADB’s assistance over the next five years prioritizes support for three interlinked pillars: (i) improving economic management to restore stability and growth, (ii) building resilience through human capital development and social protection to enhance productivity and people’s well-being, and (iii) boosting competitiveness and private sector development to create jobs and expand economic opportunities. Considerations of gender equality, climate change and disaster resilience, governance, and regional cooperation and integration will cut across these pillars. Selectivity and focus of the CPS will be ensured through carefully chosen high-priority projects within the given resource envelope, in line with ADB’s comparative advantages and the division of labor between development partners Pakistan, the world’s fifth-most populous country, is a lower middle-income country with a gross national income per capita of $1,383 in 2019. A growing young population underscores the potential for rapid economic growth to reap a rich demographic dividend.

Largely because of the COVID-19 pandemic, gross domestic product (GDP) contracted by 0.38% in fiscal year (FY) 2020. The pandemic is likely to force more people into poverty. Women and girls are likely to be affected disproportionately. Leaving the pandemic aside, Pakistan’s growth has in any case been highly cyclical because of unresolved structural challenges, including insufficient export capacity, weak domestic revenue mobilization, failing public sector enterprises (PSEs), and an under-reformed energy sector that requires massive public subsidies to stay afloat. As the economy starts to recover in the post-COVID-19 era, macroeconomic stabilization and reform measures supported by international development partners should help it regain stability and restore a higher growth trajectory.

Pakistan’s external account has improved, partly because of the introduction of a market-driven exchange rate policy in 2019. Import contraction amid the COVID-19 impact also helped, with the result that the current account deficit was trimmed from 4.8% of GDP in FY2019 to 1.1% of GDP in FY2020. International reserves reached $12.1 billion at the end of FY2020, and import coverage increased to 2.9 months.

However, Pakistan’s exports reversed the rising trend seen at the beginning of FY2020 to decline by 7.2% in the fiscal year. The major export goods, concentrated on textiles and food items, are not sophisticated, and their value addition remains low.

Robust reform is needed on the fiscal front to reduce the fiscal deficit and to generate fiscal space for productivity-enhancing capital spending. Some significant steps are being taken already under an ongoing International Monetary Fund (IMF) program, such as eliminating new exemptions and preferential tax treatment, bringing large retailers into the tax net, and establishing a tax policy unit in the Ministry of Finance. Pakistan still needs to improve its tax policy and administration, ensure broader tax compliance, and rationalize fiscal transfers to loss-making PSEs. Its ratio of tax to GDP remains low (11.4% in FY2020), and far below its estimated potential.

Debt sustainability needs monitoring. Pakistan’s public debt, including guarantees, is high, estimated at 87.2% of GDP in FY2020. However, the large part (i.e. 55.8% of GDP) of public debt is domestic debt. Efforts are being made to improve debt sustainability, including possible refinancing of external loans from major bilateral creditors. A careful prioritization of government expenditures and the curtailment of losses by PSEs, together with efforts to raise higher revenues, are needed for a sustainable improvement in the country’s debt profile.

A quarter of Pakistan’s population still lives below the poverty line. While the poverty headcount had declined from 64.3% in FY2001 to 24.3% in FY2015, progress across different regions of Pakistan remained uneven. In particular, the rural poverty headcount ratio of 30.7% is more than twice the urban at 12.5%, with rural areas still accounting for four out of five poor individuals. Additionally, about 20 million people are near-poor and highly vulnerable to shocks that can pull them below the poverty line. The COVID-19 crisis may have pushed more people into poverty, vulnerability, and unemployment.

ADB’s CPS 2015–2019 for Pakistan focused on (i) infrastructure development to improve economic connectivity and better access to basic public services; and (ii) institutional reforms to improve policy and regulatory systems and public financial management. The final review of the CPS 2015–2019 suggests that ADB’s country program should continue to reflect its comparative advantage and be aligned with the people-centered priorities of the government. It also recommends broadening the sector focus and strengthening ADB’s support for the social sectors to back the government’s inclusive growth priority. The review concludes that ADB needs to step up efforts to improve project readiness and reduce start-up delays.

The validation report of ADB’s Independent Evaluation Department recommends that ADB (i) combine support for infrastructure development and institutional reforms more explicitly to help Pakistan break the recurring cycle of financial crises; (ii) set out clear institutional reform objectives and targets in the CPS and its results framework, and ensure room for flexibility and course corrections during implementation; (iii) aim for greater synergy across sovereign and non-sovereign operations; (iv) focus attention on the social sectors, given Pakistan’s ongoing experience in managing the COVID-19 pandemic; and (v) carefully monitor the country program with respect to policy actions taken under policy-based loans.

Pakistan is classified as a group B developing member country with access to regular ordinary capital resources (OCR) lending and concessional OCR lending. The indicative resources available for commitment during the first 3 years of the CPS period (2021–2023) total $5.4 billion, comprising $3.6 billion for regular OCR lending and $1.8 billion for concessional OCR lending. Additional grant resources have been allocated for a project in 2021 from the ADF-13 thematic pool worth $5 million, to increase gender equity. The final allocation for the complete 5-year CPS period will depend on available resources, project readiness, and the outcome of the country performance assessments. Sovereign operations will be supplemented with ADB’s non-sovereign operations, subject to headroom constraints, as well as official and commercial co-financing. The existing cost-sharing and financing parameters will continue to be applied during 2021–2025, with ADB financing up to 85% of the loan project costs and 90% for the TA costs, on an overall portfolio-wide basis. Actual shares for specific ADB projects will be determined by project-specific considerations and available co-financing.

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