Pakistan has made significant progress in regaining macroeconomic stability over the past three years. Pakistan has achieved macroeconomic stability in the past three years: the fiscal deficit has shrunk from 8 percent to below 5 percent, international reserves have tripled to over $18b, and the rate of growth has increased by a full percentage point to 4.7 percent.
Economic indicators in the first half of FY17 suggest that pressures are mounting for both fiscal consolidation and external balances. The current account deficit will more than double in FY19 from 1.1 percent of GDP in FY16. Reserves are forecast to be around $18b by FY19, still well above three months of imports. The fiscal deficit will widen from 4.5 percent of GDP in FY16 to 5.1 percent in FY18, and will decline slightly to 4.9 percent in FY19. Pakistan has also embarked on an ambitious structural reforms program. Implementation record has been mixed. There were early successes in taxation, the financial sector, the business environment (at both the national and provincial levels), and the electricity sector. However, significant reforms undertaken in the electricity sector have stalled since the Government stopped privatization a year ago.
Circular debt cleared earlier has piled up again nearly to its 2013 levels. There have been efforts to reduce the electricity regulator’s independence. Progress in improving development outcomes have been mixed and investment levels remain very low, at around 15 percent of GDP (both public and private). Maintaining macroeconomic stability and further progress in structural reforms will be necessary to accelerate growth and ensure it is inclusive and sustainable.
Growth, though volatile and low in some periods, has been quite pro-poor in Pakistan over the past decade and a half. The headcount poverty rate has fallen consistently over this period, from 34.7 percent in FY01/02 to 9.3 percent in FY13/14 (using the latest survey data and the old poverty line). Using incidence curves that plot the growth rate in consumption at each percentile of the distribution, it is evident that growth has been pro-poor in Pakistan through much of this period. Looking at the bottom 40 percent of the population—a measure of shared prosperity—we see a similar pattern. The Government adopted a revised methodology to measure poverty and a new poverty line in 2016. Under the revised poverty line, the poverty head count has declined from 64.3 percent in FY01/02 to 29.5 percent in FY13/14. Our understanding of what has caused this significant decline in poverty remains incomplete. Important contributors are higher GDP growth in the earlier years, strong growth in remittances, effective social assistance programs as well as rapid and ‘hidden’ urbanization which has led to a very vibrant informal sector.
Pakistan remains one of the lowest performers in the South Asia Region on human development indicators, especially in education and stunting. The Net Enrollment Rates in education have been increasing in Pakistan but still lag behind other South Asia countries. Infant and under five mortality rates represent a similar story. Gender disparities persist in education, health and all economic sectors. Pakistan has one of the lowest female labor force participation rates in the region. Nutrition also remains a significant cross-cutting challenge, as 44% of children under five are stunted. The spending on health, nutrition, and education, now totaling 3 percent of GDP, significantly lower than most other countries. Increased allocation will only be possible after increasing government revenues. The tax-to-GDP ratio, at 12.4 percent, is one of the lowest in the world and it is still half of what it could be for Pakistan. Continued reforms to broaden the tax base and increase revenues will therefore need to remain a priority. Service delivery is the responsibility of subnational governments, whose capacity varies, but the federal Government needs to play an assertive stewardship role as increased financing has to be accompanied by meaningful improvements in quality of services. A strategy to greatly improve development outcomes would therefore need to combine efforts to increase the level of public spending as well as improving its quality, with a focus on provincial level capacity.
Over the past couple of years, greater decision-making authority has been assigned to provincial governments. The Eighteenth Constitutional Amendment has devolved a number of key functions to the provinces. In total, functions in 17 federal ministries have been devolved, including Agriculture, Education, Environment, and Health. In addition, a greater share of revenues has been passed to the provinces through the National Finance Commission Award (NFC) in order to enable them to perform these functions. As expected, the devolution has posed institutional and capacity challenges at the provincial level, and meeting these challenges will require concerted efforts to enhance sub-national capacity and institutional development, which varies across provinces.
Last Updated: Apr 14, 2017