Beyond the headlines: Pakistan’s economic realities 

The recent IMF assessment on Pakistan indicates a stabilizing economy with falling inflation. However, long-term growth prospects remain constrained by persistent structural challenges. The assessment acknowledges the government’s efforts in achieving macroeconomic stability. Growth could be slightly above 3 percent in the fiscal year 2024-25 (still far below peers), with inflation remaining in single digits and foreign exchange reserves increasing further. But are these positive developments paving the way for the politically challenging reforms in tax, trade, energy, and debt management space that all governments have tried to push under the rug?

This is not the first IMF program begging the government to do things which have been advocated for decades. Why has reform been elusive then? Pakistan’s capacity to effectively design, implement, and monitor the economic reforms agenda suggested by the IMF is often hindered by factors including a lack of shared vision at a political level, limited technical expertise, civil service turnover, and a lack of cohesive policy frameworks.

Take energy reform, for example. The Power Division, provincial governments, Alternative Energy Development Board, National Energy Efficiency and Conservation Authority, and Planning Commission have all formulated their visions for addressing energy woes with rather good intent. The only issue is that these plans don’t communicate with each other. All point toward a different diagnostic and solution. This lack of coherence within the government bodies reflects the weak update and use of evidence for policymaking, even when the evidence is produced by the government’s own officials. 

The absence of institutional mechanisms to tackle constraints to investment raises concerns about the long-term sustainability of Pakistan’s investment promotion efforts.

Dr. Vaqar Ahmed 

This breakdown in the use of evidence in policymaking in Pakistan is attributed to political interference which overrides evidence-based decisions, leading to policies driven by short-term gains rather than long-term benefits. The lack of institutional mechanisms for monitoring work plans also hampers the systematic use of evidence. Frequent changes in civil service – usually trained in evidence-based planning and budgeting also disrupt continuity. 

The above mentioned has implications for Pakistan’s trade and investment partners. For example, when foreign investors from GCC countries visit Pakistan, they often encounter new faces, which can be disorienting and hinder relationship-building. A great deal has been written on this subject already. The Finance Minister, limited to the Ministry of Finance, is not in charge of broader reforms, while the Foreign Minister oversees multiple economic coordination forums, adding another layer of complexity and increasing time and search costs for investors. In the case of China as was seen recently, visitors often need to meet with military officials to ensure that reforms promised by the IMF and development partners will be upheld. They want this confidence so that they are fully certain they can repatriate profits smoothly, a process that becomes problematic when Pakistan’s foreign exchange reserves are low. 

Recent assessments by development partners also suggests that Pakistan’s investment climate is challenging due to its opaque tax structure. The Federal Board of Revenue (FBR) and provincial tax authorities operate with limited coordination, leading to inconsistencies and inefficiencies in tax collection and enforcement. This complexity not only increases compliance costs for businesses but also creates opportunities for corruption and tax evasion.

The narrow tax base exacerbates these issues, placing a disproportionate burden on existing taxpayers and preventing business expansion. High tax rates on a limited number of taxpayers discourage investment and formalization of the economy. Moreover, the lack of a unified tax policy across federal and provincial levels further complicates the landscape for investors. 

While the FBR holds vast amounts of data on taxpayers and the non-compliant, it struggles to utilize this information effectively to improve audits. Following a data breach, it was decided that access to this data would be restricted to the Chairman FBR alone. This highly conservative approach hinders the potential for meaningful reform and modernization within the organization. 

The SCO summit offered Pakistan a valuable platform to attract investment from several economies interested in the world’s fifth-largest population. However, Pakistan’s limited integration in global trade and investment value chains, strained relations with neighboring countries like India, weak regional energy cooperation, and low revenue mobilization for infrastructure investment pose significant challenges to realizing this potential.

While the websites of Boards of Investment and Trade Development Authorities feature a long list of upcoming exhibitions, it remains unclear whether these events have borne tangible investment inflows. An independent evaluation of these exhibitions’ effectiveness is lacking. Moreover, the underlying bottlenecks hindering investment in Pakistan, such as the absence of institutional mechanisms to tackle binding constraints to investment raises concerns about the long-term sustainability of Pakistan’s investment promotion efforts.

– Dr. Vaqar Ahmed is an award-winning economist and former civil servant. He supported the formulation of various tax and trade policies during his tenure at Pakistan’s Planning Commission, Federal Board of Revenue, and the Ministries of Finance and Commerce. X: @vaqarahmed​