Fit for growth?

Ehsan Malik

Published Date: 06 March 2025

Published in: Dawn

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AS the economy stabilises, the calls for growth are growing. It is, therefore, relevant to ask if we are fit for growth.To answer, we need to define the terms ‘we’, ‘fit’, and ‘growth’. ‘We’ are all the principal stakeholders in the economy. ‘Growth’ must be sustainable and inclusive and respond to the country’s need to balance its external and fiscal accounts. ‘Fit’ encompasses the entire ecosystem of the economy — political stability, security conditions, policy framework, productivity, judicial system, infrastructure, etc. Several factors determine fitness.

Businesses have a long list of issues that impede quality growth. Energy is not competitive, reliable, or universally available; a cumulative tax rate of 48 per cent is well above the regional norm — for banks, it is even higher; the 18pc sales tax in a poorly documented economy creates an uneven playing field, exacerbated by smuggling, under-invoicing, and misuse of the Afghan transit trade. Industry, representing 20pc of GDP, contributes 56pc of direct taxes, while retailers, wholesalers, and agriculture, comprising 40pc of GDP, pay just 2pc.

Businesses also note the impractical way taxes are levied to meet short-term revenue objectives. An example is the ADR tax on banks, which distorted bank balance sheets but failed to sustainably boost credit to the private sector or generate expected tax revenue. Another example is the levy of sales tax on domestic supply to exporters. Exporters reacted by importing $1.5 billion of these items free of GST to avoid waiting for tax refunds, impacting the current account and domestic industry. Yet another example is the levy of GST on packaged milk, making it the most expensive in the world, resulting in a drop in sales and failure to meet the intended tax revenue target.

Businesses also need a fiscal policy board independent of tax collection that aims to increase the tax-to-GDP ratio as an outcome of long-term policies that promote investment in priority sectors such as exports and indigenisation. The formal industry also raises concerns about a bias in favour of investment in land.

There is a need to remodel businesses and government.

Local and multinational businesses attract criticism for being inward-looking due to their focus on the domestic market. Instead of prioritising value addition to indigenous inputs such as minerals and agriculture, import substitution has focused on sectors in which we have no upstream industries to provide input and little hope of gaining scale to produce globally competitive products for export or domestic consumption. In defence of protection, these industries point to high costs of doing business, the investment that would become stranded, and jobs that would be lost without it.

In a recent PwC survey of Pakistani CEOs, the preferred choice for diversification was real estate, retail, and consumer goods. Several large exporters have invested in shopping malls and retail, none in IT or IT-enabled sectors, but a few in agriculture. Family-controlled businesses struggle to separate ownership from management and, due to limited professional resources, have poor risk management and value-addition capabilities.

Partly because of this but also due to exchange control, there are no Pakistani multinational corporations. Banks and companies are risk-averse, preferring to stay within their comfort zones. Other countries manage to sell to EU a larger volume of textiles at a higher price than Pakistan due to their superior value. The most significant investments in the last decade have been in guaranteed-return IPPs and energy terminals.

Pakistan’s high population growth rate, stunting, and inadequate education result in weak hu­­man capital. Low productivity ne­­ga­tes the benefits of low wages. A bloa­ted, colonial-era bu­­reaucracy’s high cost and inefficie­ncy impede businesses and deprive investment in socioeconomic development. Government rig­htsizing has yet to lead to cost reduction. Fra­­­gmentation exists between ministries. Security conditions discourage business visitors and tourists. Pakistan ranks poorly in logistics. The judicial system is slow, and extrajudicial interventions deter investment.

There is a need to remodel businesses and government to make Pakistan fit for growth. Economic stability is fragile. Commodity tailwinds can reverse. Exports have increased but so have imports from which these are made. The wheat crop is short of the target. Access to the US market is uncertain due to potential tariffs. SOEs continue to bleed the fiscal account. The tax base remains narrow. Energy costs are high. Forex reserve build-up has slowed. External financing awaits improved credit rating. It would be unfortunate not to put our house in order and risk another boost-and-bust cycle by prematurely triggering growth. The status quo is a recipe for repeated IMF programmes.