Unlocking Pakistan's Growth: What can Macro Policy Achieve?

28 Oct 2019

The Centre for Economic Research in Pakistan (CERP) in collaboration with Evidence for Policy Design (EPoD), a research programme at Harvard Kennedy School (HKS), co-hosted the inaugural Pakistan Development Forum, at Harvard University on October 21, 2019.

Dr. Hafeez Shaikh, Adviser to the Prime Minister of Pakistan on Finance; Dr. Reza Baqir, Governor State Bank of Pakistan and Dr. Carmen M. Reinhart, Professor at HKS came together to talk about the essential macroeconomic policy challenges faced by Pakistan today. The high-powered panel was moderated by Dr. Asim Khwaja, co-founder and board member CERP, Professor at HKS and Faculty Director, Center for International Development.

The discussion started off with Dr. Shaikh enlisting key development facts associated with Pakistan pertaining to its complex geography, poor strategic alliances, short-lived and unsustainable growth spurts, and inability to engage women to contribute to the economy. Highlighting the bleak situation of the country that the current government inherited, Dr. Shaikh showed confidence in the measures taken by the current government to revive and stabilise Pakistan’s economy.

“As a result of tough decisions, we are seeing some good initial results. The current account deficit was brought down by 30 per cent-plus last year, exports are finally beginning to pick up, so that’s a good sign, and it’s because of targeted support to the export sector.” He also pointed out that both tax revenues and spending on social safety net programmes have risen in the current administration.

Answering a question on government’s policy to spur domestic productivity, Dr. Shaikh said, “We are trying to get rid (as much as possible) of government participation in businesses by accelerating our privatisation programme, because we believe if the government ministers are involved in policymaking, regulation, ownership and managing of assets, there are too many conflicts of interest.”

While concluding the discussion, Dr. Shaikh emphasised on the importance of strengthening institutions and giving them autonomy in order to support a country’s development.

Speaking on the International Monetary Fund bailout package, Governor of the State Bank of Pakistan Reza Baqir cited reasons on how the current IMF programme is not only different from the programmes offered to other countries but also different from the 22 past programmes, that Pakistan has received. “Since 2018 when the real effective exchange rate began to depreciate through a series of devaluations, the current account deficit began to turn around. It has now halved from its peak,” he shared. He added, “The IMF programme comes at the end of this time horizon (exemplifying through data on inflation and policy rate over the years), which is to say that a lot of the external adjustment has been done before the start of the programme.” This augers well for the success of the program, he said.

Stating fiscal deficit as the other key cause of requiring external financial assistance, Governor Baqir said, “The fiscal adjustment is off to a good start, tax revenues have already begun to grow after having fallen for a number of months.” On inflation, Governor Baqir noted that “factors like exchange rate adjustments and the fiscal adjustment that is under way with associated increase in taxes and utility prices—adjustments that were necessary to address the accumulated imbalances of the past—led to an increase in inflation, which necessitated a tightening of interest rates.”

On the question of access and transparency of data, Governor Baqir said, “One thing that we are doing at SBP is collecting a lot of new survey data and that is an area we are going to push more to enrich our analysis and policy making. 

Professor Reinhart, former Deputy Director of the IMF, identified ‘Low Saving Rate’, prevalent in many emerging markets, as an additional challenge for Pakistan. According to her, the issue of hidden debts is a usual source of weakness during a financial crisis and as per her experience, private-sector liabilities become public liabilities and stated as a note of caution to the government officials.

Dr. Khwaja acknowledged the efforts of the current government and government officials towards stabilising the economy through monetary and fiscal tightening, however, inquired about the signs or signals from a tightening situation to an easing situation from the perspective of an investor.

The Pakistan Development Forum is an annual conference that will convene key policy stakeholders, business leaders, and academic experts to discuss and debate the most pressing development and policy challenges facing Pakistan.