The IFC-BM report lists the factors that hinder the implementation of reforms

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

The report, the Pakistani Country Private Sector Diagnosis (CPSD), said Pakistan has huge untapped economic potential which can be realized through key policy measures to help create new market opportunities, mobilize private investment to create more jobs and help the country cope with the impact of Covid-19 on its economy. GDP is expected to grow 1.5% in FY2021 after contracting 0.4% in FY2020, he added.

The report notes that Pakistani entrepreneurs face competition from entrenched special interest groups that benefit from the status quo, maintain unfair and distorting economic policies, and use state patronage to gain an advantage in government procurement.

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

Some elites straddle all clusters, but each category of 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.

He further said the elections are viewed by urban brokers and regional elites as an extension of age-old systems of kinship and intertribal rivalry, which provide an opportunity to access government largesse.

The landowner 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 results.

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

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

The reforms have failed to remove the main sources of distortion, in particular the floor prices for wheat, sugarcane and fertilizer subsidies, which continue to distort crop choices, maintain barriers to growth. entry and restrict competition.

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

In the water sector, irrigation water tariffs are subsidized and are billed at a flat rate per acre of land.

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

Large landowners benefit disproportionately from low water prices and preferential access.

The report further stated that the military was an active stakeholder in economic policy making and controlled various businesses.

The direct and indirect involvement of the military and its affiliated institutions in business activities is widespread in Pakistan.

In a report presented to the Pakistani Senate in 2016, 50 business entities are said to be headed by military and welfare organizations created for retired army officers.

A 2019 estimate suggests that military holdings in businesses across the country exceed $ 100 billion.

These organizations are not formally defined as public entities and are therefore free to participate in tenders for public contracts and PPPs.

The report says that one of the main causes of the economy’s steady boom-bust cycles is its very heavy reliance on consumption rather than investment and exports.

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

Public investment is essential to attract private investment and catalyze private business and typically accounts for half of private investment.

The COVID-19 pandemic will likely put even more downward pressure on the investment-to-GDP ratio: GoP will increase less tax revenue and many businesses will lose money, he added.

A more vibrant private sector is needed to provide more and better jobs for the 2.1 million young people (aged 15-24) who enter the workforce each year.

The Pakistani private sector is dominated by SMEs which are often informal and mostly family owned.

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 during their lifecycle.

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

Economic models show that intra-regional merchandise trade liberalization could lead to additional economic growth of 30 percent by 2047.

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

Regional tensions continue to shape economic outcomes.

The Pakistani government spends 32% of its annual budget on defense (3.6% of GDP), reducing fiscal space to invest in human and economic development.

These regional dynamics have had a direct impact 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 evidenced by the country’s stock market performance.

The Pakistani SOE portfolio has recorded large overall losses in recent years, and SOE debt and Republic government guarantees to SOEs have grown rapidly.

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

In fiscal year 19, the federal budget financing of public enterprises represented 2% of GDP, 9% of total consolidated expenditure and 23% of the budget deficit.

In the same year, the debt of public enterprises with sovereign guarantee represented 3.3% of GDP. Debt and losses of SOEs have grown rapidly in recent years, with SOE debt accounting for 5.3% of GDP (2 trillion rupees) in FY19.

49 SOEs are estimated to be financially unsustainable (i.e. 58 percent of SOEs excluding subsidiaries) and 17 SOEs have negative equity.

Four state-owned enterprises remain de facto but lack activities, particularly in steel production and energy. 17 other state-owned enterprises have negative equity and accumulated losses in sectors such as air transport, banking, broadcasting, printing, metals, energy, telecommunications and tourism.

And 13 state-owned enterprises have recorded losses in the last three consecutive years (FY16-18) in sectors as diverse as highways, postal services, electricity, railways, banking services to SMEs, television. and textiles.

The state-owned electricity sector, which includes many companies, is a responsibility of the GoP. State patronage has protected incumbents from competition and comes at a high cost to taxpayers.

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

A serious attempt to restructure the portfolio of state-owned enterprises could reduce budget leakage, promote competition and revitalize important sectors of the economy.

In the short term, the GoP should seek to contain the debt liabilities of public enterprises, shutting down non-core, non-viable, and dead public enterprises while divesting assets where possible.

This would require stricter rules and conditions for budget financing and guarantees to SOEs, a reorientation of subsidies from SOEs to consumers, more robust cost and performance measures and arrangements, the divestiture of minority stakes and the voluntary separation or redeployment of staff.

Digital finance could increase GDP by 7% through the mobilization of $ 260 billion in deposits and associated increases in investment and productivity.

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

Copyright recorder, 2021

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