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EAG: Pakistan needs to switch from ‘borrowed growth’ to ‘earned growth’

As per the Economic Advisory Group, Pakistan needs a new framework for sustainable economic growth which can be achieved through government facilitation. The government should introduce necessary adjustment measures for economic growth instead of intervening with targeted policies.

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The Economic Advisory Group (Prime Institute), an independent policy network, recognizes the need for achieving a high growth rate, as stated by the new FM. However, the EAG emphasizes that for any such growth to be sustainable it must involve addressing the distortions in the prevailing incentive structure which have continued to undermine efficient allocation of resources in the economy.

In this respect, the group has urged the government to remain committed to structural reforms and fiscal discipline.

The group has cautioned that the economy will keep undergoing the boom-bust cycles that entail a repeated balance of payment crises if governments continue to rely on expansionary macroeconomic policies to generate high growth.

Read more: Opinion: Overhauling Macroeconomic Policy of Pakistan: Prospects and Challenges

With elections only two years away, there is an increased likelihood that the government will be tempted to pursue this path.

Pakistan needs sustainable growth

EAG believes that as Pakistan moves from stabilization to growth, it needs a new framework for sustainable growth, which must accompany a rise in the productivity levels across the board.

This can be achieved, according to the group, by discontinuing the support of existing inefficient businesses and sectors and instead promoting continuous reallocation of resources from less to more productive areas.

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Read more: Pakistan Economy: History and Required Reforms 

Inefficient and poor performing businesses must be allowed to exit their industries and replaced with businesses that are not only more globally competitive but can also perform favorably in a challenging environment without the need to extract government support.

Tax and trade policies shield dominant and sclerotic incumbent players from the competition by innovative new entrants.

The group views that our export basket is concentrated in products that enjoy high effective protection, in addition to receiving other forms of disproportionate state largesse. This has prevented the economy from undergoing any transformation, contrary to the objectives of the policymakers.

This static incentive structure must come to an end if we want Pakistan to change.

Read more: Why Pakistan’s Economy is fragile after 72 years?

Measures government should take

A core point of the new vision is that Pakistan has followed a path of “borrowed growth” that leads to repeated runs on the foreign exchange reserves. It “earned growth” that supports a globally competitive business environment and generates higher exports.

The government must play the role of facilitators rather than intervene with targeted policies.

The Economic Advisory Group is also of the view that the government should continue to undertake necessary adjustments in the form of power tariff rationalization and improving the efficiency of the energy infrastructure, including recoveries, to prevent the circular debt from spiraling out of control.

Read more: Circular debt paralyzes Pakistan’s power sector

The group endorses the evolving competitive framework in the energy market and holds the view that all the energy distribution sectors should be open to competition to enhance consumer welfare and industrial progress.

The government should also withdraw tax exemptions, and reduce losses in the state-owned enterprises by improving their governance structure and giving necessary autonomy from line ministries.

Read more: Govt to withdraw corporate tax exemptions to comply with IMF’s conditions

The group also supports the cabinet approval of the central bank autonomy and considers it the right step towards improving fiscal discipline and monetary stability, while urging the need for further debate.

EAG is an independent group of individuals drawn from economics, policy, and the private sector which deliberate regularly on economic developments and shares their views with the government and public.

It has made presentations to the Planning Commission and National Security Directorate outlining its vision for economic transformation based on the restructuring of the productive structures.

Read more: EAG calls for ‘Fair and Just Taxation’

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