Development in Pakistan

What are the key developmental challenges Pakistan faces today, and what solutions has the Finance Ministry posed to address these challenges?
Our developmental challenges cover both the long term and short term. The long-term challenge is to develop the economy and bring prosperity to our citizens. We are a people-rich country and need to work harder to make our people realize their full potential, which can be achieved by greater investment, enhancement of skills, and access to opportunities. We know that it is not possible to be a developed country with underdeveloped people. This is the critical challenge if we want to get on a long-term sustainable path for economic growth. A related long-term challenge is to reorient the role of the state in the economy. We have to ensure that private businesses play a central role in the economy, and that they own and manage all commercial enterprises while the state is confined to the performance of important tasks of policy, regulation, and design of incentives.
Our immediate challenge is to maintain stability—achieved after considerable effort—and to navigate the economy safely through the current global turmoil. We need to build upon the record export performance of last year, continue with aggressive expenditure-management, and mobilize domestic taxes to keep fiscal discipline and check inflation. We also have to move faster in overcoming electricity and gas shortages to increase production and create jobs and growth, and ensure that the transitional burden does not fall disproportionately on the weaker groups. Therefore, while eliminating many general subsidies, we continue to provide social safety nets for the very poor and the vulnerable.
Indeed, these challenges are interlinked. For example, the fiscal deficit is to a large extent a reflection of low tax effort and untargeted subsidies on electricity and fuel consumption. This in turn has led to a circular debt that is threatening the viability of the otherwise highly profitable energy sector. The deficit also displaces private investment as government borrowing “crowds out” businesses by raising their cost of credit from the banks. The inefficiencies of the public sector corporations further aggravate the situation in the sector. The solutions are therefore complex, requiring a simultaneous attack—and success—on many fronts.

Currently we face an unprecedented security challenge, for which Pakistan is paying a heavy price in terms of lives, perception, and diminished economic activity in certain parts of the country. We will overcome this problem, but in the meantime it has slowed the pace of our economic progress.

What do you consider to be the main challenges the Finance Ministry will face over the next few years?
I think the stabilization we have achieved has to be protected. It will take some time for us to consolidate and move to a trajectory of higher economic growth. There are no quick fixes. We may be paying a price with a lag for our failure to take actions when those were warranted. In particular, when world oil prices peaked in 2008 at nearly US$150 per barrel, we did not rationalize prices due to political expediency and allowed a crisis-like situation to emerge.
During the stabilization phase, we hope to do away with regulated prices and untargeted subsidies. We have frozen all government expenditures in nominal terms, simplified the structure, and expanded the tax base. We are dealing with chronic problems of circular debt, injecting transparency in fiscal relations between states and the federation. Above all, with the comeback of democracy, we are allowing institutions to work. The government has given autonomy and mandate to institutions such as the State Bank, the Competition Commission, and the Security and Exchange Commission. Thus, a platform is being provided for long-term inclusive growth.

Today in Pakistan, lack of confidence in government has resulted in trends such as tax evasion that undermine the financial health of the country. What agency does the Finance Ministry hold, beyond the central government, to counteract such trends?
It is true that, as a country, our tax-to-GDP ratios have been low. This is not so much due to lack of confidence in government but due to a combination of limited effort, convoluted tax structures, and weak enforcement. We are trying to redress this historic failure. We have taken steps to simplify the tax system and improve the performance of the tax agency, Federal Board of Revenue (FBR).
Recent advances in technology and development of a population database have made it possible to acquire information on registered persons through a multitude of sources (home ownership, bank accounts, travel records). Using this data, we have identified 0.7 million potential taxpayers (living in posh areas, having several cars, multiple bank accounts, frequent international travel). Given that we only have 1.5 million taxpayers, this initiative can fundamentally enhance income tax revenues. Of the 0.7 million targeted for this fiscal year (July-June 2012), 0.1 million have been approached and several thousand new taxpayers have been added.
Other measures include expansion of the sales tax regime to previously exempt sectors, stricter audits, rigorous checks on input adjustments for sales tax, fast-tracking of stalled litigation in courts, and better use of technology to increase the pace of processing and minimize instances of corruption.

It is said that the main job of a finance ministry should be to raise adequate revenues to keep the country running. Do you agree? To what extent is revenue raising a challenge in Pakistan?
In Pakistan, the Finance Ministry complex is a cluster of the associated ministries of Finance, Economic Affairs, Revenue, and Planning and Development. Thus the overall role is broader than in many countries. It includes the management of the economy, the coordination of economic activities across provinces and federal ministries, optimal management of government debt, allocation of public investment, medium-term planning, and fiscal discipline including expenditure management and mobilization of taxes.
Nevertheless, it is true that revenue mobilization is a key component of the economic management performed by the FBR, under the Ministry of Revenue. The answer to the previous question has highlighted some of the steps taken by the government to increase tax revenues, which have increased from 1,327 billion to 1,550 billion Pakistani rupees, an increase of roughly 17 percent.

Public debt has become a big issue for many countries (e.g. Greece) in the wake of the global financial crisis. Are you comfortable with the level of Pakistan’s external debt? How can it be reduced?
By international standards our debt-to-GDP ratio (55 percent) is quite moderate and the share of external debt is less than 40 percent. Thus, while the situation requires careful management, it does not pose a serious challenge. The extraordinary performance on the external accounts front, with exports growing at 30 percent last year and remittances reaching US$1 billion a month, have helped raise reserves at an all-time high of US$18.3 billion. However, we cannot be complacent and are mindful that a Stand-By Program from the IMF has helped in the build-up of these reserves.
To guard against slipping into an external account problem, we have to remain on course with reforms to be internationally competitive, further boost our exports, attract foreign investment, and preserve the confidence of overseas Pakistanis.
We are also closely watching international capital markets and would look for opportunity to raise capital. We have an exchangeable bond linked to one of our best corporations (Oil and Gas Development Corporation), whose shares are already traded internationally. This bond will be launched as soon as the markets are stabilized.

You were previously an economist at the World Bank. What have you observed in moving from the world of policy advice to the world of policy-making and implementation?
In some ways, both jobs require similar skills. These include technical knowledge, an understanding of economic principles, detailed awareness of the issue at hand, and communication skills. As a World Bank official advising governments, there is greater reliance on international best practices, the development of confidence of government ministers, and the ability to motivate strong team members to deliver results. You are supported by international quality staff with strong institutional capability. As a government minister, you face greater pressures to solve complex problems and are under constant scrutiny by the media and Parliament, and endure criticism—often unjustified—of political opponents. Making decisions on a regular basis requires the quality of judgment and and understanding of the local institutional environment and political economy critical to success. It is also important to communicate effectively across multiple audiences and to develop coalitions for the passage of difficult decisions.

Are Pakistan’s development challenges mainly technical and capable of being solved by putting well-trained people in policy-making positions, or mainly political and thus requiring different solutions and capabilities?
The lessons of global development, including work done at international institutions, is that in order to develop you have to do many things right. This includes governance, institution building, design of appropriate incentives, and the right balance in the roles of the state and the markets. It also includes factors such as political stability, developments in the region, and luck.
Pakistan’s development challenges are both technical and political. On the political side, we are going through a transition where democracy has made a comeback, the media is free and providing a high level of scrutiny, the provincial governments have been empowered, and institutions are functioning independently.
The rules of the game are evolving in the right direction but the transition has to be managed so that economic considerations remain paramount. On the technical side, it is important that merit is not compromised for political considerations. Fortunately, Pakistan has a large pool of professionals both at home and abroad who can be motivated to enter into government service as well as develop civil service