Ladies and Gentlemen, thank you for joining us today. I am happy to be back in Pakistan to launch the World Bank policy notes that have been the object, over the past months, of many consultations across the country as part of our Reforms for a Brighter Future initiative. I would like to thank the Pakistan Institute for Development Economics (PIDE) for partnering with us on this initiative. The engagement of so many around the country has been great. I want to thank everyone who contributed very much.
This is a critical moment for Pakistan as you are facing one of the worst economic crises of the country’s history. It follows the catastrophic floods that hit last year, which were a sad reminder of how exposed Pakistan is to climate change. In the background, a silent human capital crisis is weighing heavily on Pakistan’s development.
We are convinced there is a feasible path to get out of this crisis. This possible path is what I am here to talk about. My team has subtitled the Brighter Future initiative “Time to decide”. With elections coming at the Federal and Provincial levels, it is indeed time to decide on the country’s path forward. Many countries have used crises as an opportunity to embark on fundamental reforms. Will Pakistan use or loose this opportunity?
I would like to make the case in favor. Many people our team talked to over the past two months are tired of the stop and go cycles of half-hearted reforms that are just enough for the country to muddle through, but that offer no long-term perspective of improvement. There seems to be a growing recognition that deep changes are needed.
The stakes are high. Indeed, it is striking to see how far Pakistan has fallen behind. In my first development class at the LSE in 1988, Pakistan was still held up as an example for strong human development in the region, with the second highest cumulative increase in per capita incomes since independence after Sri Lanka. Now it is second to the bottom in per capita incomes and has education and health outcomes comparable to much poorer countries in sub-Saharan Africa. Agricultural productivity growth over the past two decades has been less than 1% per year, at a time when India's was close to 4%, and China's close to 5%. Pakistan’s water productivity is one third that of India’s, six times lower than China’s and 12 times lower than that of the US. For a country with 40% of the labor force still in agriculture, these are alarming statistics.
Will the sense of crisis galvanize a sustained reform effort this time? The reform agenda is not new. Indeed, five years ago in the Pakistan@100 report, we advocated for similar measures to the ones I am presenting today. But after an initial drive, the reform effort petered out.
When I ask people why this is, I am told because there are strong vested interests resisting reforms. Large landowners who capture the bulk of subsidies, benefit from price distortions and pay little taxes on agricultural income; well-connected industrialists who thrive in the complex thicket of regulations, protections and exemptions; real estate investors who enjoy low taxation; and many others who ride on corruption and lack of accountability. During the consultations for this report, we heard about elite capture and political opportunism as major impediments. But we also heard many, including the growing young population in the cities, who ask for real change. There may be political dividends to those who understand their aspirations. And of course we know that when there is political will, Pakistan’s authorities can act decisively, as they did during COVID for example.
So much about politics. I now want to turn to the reforms we believe are needed to lift Pakistan out of the cycle of boom and bust and on a path towards sustained, inclusive growth. This will require major policy shifts in five areas.
First and foremost, Pakistan must address its acute human capital crisis.
This “silent” crisis—which rarely makes the headlines—affects a large proportion of the population today, and undermines the potential of Pakistan tomorrow.
Forty percent of children under five suffer from stunted growth. This is a shocking statistic. It means that a large part of Pakistan’s population is not reaching their physical and cognitive potential. The root causes lie in the lack of access to clean water and sanitation, lack of birth spacing, poor nutrition, and insufficient access to health services. We know that the unhygienic living conditions many mothers and children are exposed to in the first 1000 days from conception are a major cause. The impact of stunting continues through a person’s life, limiting cognitive abilities and increasing susceptibility to disease. And the disadvantage is intergenerational. Mothers who are stunted are at much higher risk of giving birth to children who are stunted.
This is not an easy problem to solve. It takes significant coordinated investments in water and sanitation infrastructure, health and nutrition facilities, and behavioral change. It requires political mobilization across all levels of governments, and across sectors that rarely work together. Nonetheless, with a shift towards water, sanitation and behavioral change in addition to nutrition, with much better coordination at the local level, and with additional investments of maybe 1 percent of GDP per year, stunting rates could fall by half until the end of the decade. The returns would be multiples higher.
The second aspect of Pakistan’s human development crisis is schooling and learning. Close to 28 million Pakistani children remain out of school—the majority of whom are girls. For many, schools are just too far from home. But the children who can go to school often learn in poorly equipped buildings, with insufficient teachers, classrooms or sanitation facilities. Most students receive a low-quality learning experience, including in private schools. As a result, four out of five Pakistani children cannot read or understand an age-appropriate text by the age of 10.
The combined effect of Pakistan’s learning and health crises means that the productivity of Pakistan’s large and growing workforce is only 41% of what it could be, were Pakistan’s youth, and especially girls, to reach their full potential. If Pakistan just caught up in human capital with its peers, it’s GDP per capita could be one third higher by 2047.
The solution to this crisis will require more investment. We estimate that public spending on education and health may need to double to around 5% of GDP to close existing gaps. That would be around the same level India spends today.
This brings me to the second area where urgent reform is needed – Fiscal Sustainability.
Pakistan's chronic fiscal deficits have led to high debt, and interest payments that leave few resources for public investment. Next fiscal year more than 70 percent of revenues will be used simply to service Pakistan’s existing debt. Moreover, fiscal policy has been pro-cyclical, exacerbating Pakistan’s stop-and-go cycles.
To overcome these challenges, comprehensive fiscal reforms are required on both the spending and revenue side.
On the spending side, fiscal space for more public investment could be found by cuts in three areas:
- Reducing losses of ailing public enterprises, especially via privatization.
- Cutting regressive and distortionary subsidies in agricultural subsidies and energy, and poorly targeted export support schemes.
- Reducing the current duplication between the federal and provincial governments.
On the revenue side, efforts should focus on expanding the tax base, rather than further raising rates. Regressive tax exemptions cost Pakistan up to a third of its total revenue every year. The GST system needs to be harmonized across all provinces to bring more firms into the tax net, including in the under-taxed retail sector. Increased taxation of land and property– where the rich invest their wealth – could bring additional revenues and incentivize more productive investments. And new taxes on environmentally damaging products and activities could benefit both the economy and the climate.
Some measures could yield impact quickly. Just reducing tax expenditures and implementing the Treasury Single Account to optimize cash management could easily yield up to 2% of GDP. Systems to increase property taxation are in place and GST harmonization is advancing. Future governments could benefit from efforts made over the past five years.
Thirdly, we must strive for a more dynamic and open economy.
Pakistan’s economy is hampered by distortions and the lack of competition. Exports are undermined by the frequent overvaluation of the exchange rate and high trade barriers. Investment is discouraged by a challenging business environment, and the lack of a level playing field. Current policy settings encourage the allocation of savings to non-productive sectors such as real-estate, while banks lend almost exclusively to the government. Drastic reforms are needed to cut red tape and policy distortions, privatize SOEs, and open the economy to international investment and competition.
Pakistan’s growth potential is further thwarted by the low participation of women in the labor force. Only around 25 percent of women are currently working or seeking work—one of the lowest rates in the world. The solution will have to be multifaceted. Improving the educational attainment of girls is a key first step. Increasing access to safe public transportation for women can open new opportunities, as can expanding internet connectivity and access to the growing digital economy sector. Efforts to increase competitiveness would also support female labor force participation, with international evidence showing that exporting firms are more likely to employ women.
Fourth, Pakistan’s agriculture sector needs to wake up from its doldrums.
Agriculture is a critical sector for the economy, for employment, and for poverty reduction. But productivity has been stagnant. Input subsidies, inequitable land tenure and price restrictions are locking farmers into low-value farming systems. They discourage innovation and diversification and promote resource-intensive and environmentally damaging production practices. With climate change and rapidly increasing water scarcity, this could become an existential crisis.
Solutions are obvious, albeit politically challenging. Government spending should be reallocated to basic public goods, research on seeds, and innovation, and subsidies targeted to smallholders for income support. The economic benefits would be huge: reduced poverty, lower imports, and declining food prices.
Lastly, the energy sector has hampered Pakistan’s development potential for a number of decades.
Low tariffs, unpaid bills, power theft, and costly long-term generation contracts have weakened the financial sustainability of the sector and deter much needed investment. Instead of fueling development, the energy sector has been fueling fiscal deficits and macro instability.
Some progress has been made in recent years, but the cost has been born mostly by consumers. Accelerating the transition to cleaner energy through open, international competition could substantially reduce generation costs. Private participation could also reduce distribution losses – current work on a model concession should be urgently completed. Fiscal gains from reduced losses and subsidies could be invested in transmission to improve the quality of access and serve increased demand.
Let me come to an end.
I have touched on a few of the reforms covered in the Policy Notes – I encourage you to read through them for more detail. In each, you will find reforms that can be done quickly and some that will take more time. We also have some suggestions on how to improve the governance of the reform process. Pakistan’s rapid digital development could facilitate reform implementation through efficiency gains in service delivery and improved accountability. The role of local governments will be key and the federal government should step back where mandates have been decentralized.
Is this Pakistan’s moment? Will this time be different? I don’t know. All I can say is that “muddling through” this crisis and maintaining the economic status quo is a risky proposition. A failure to achieve growth would aggravate distributional conflicts and lead the brightest to leave the country. Pakistan’s elites should not be complacent about these risks. Nor should Pakistan’s international partners.
Our consultations over the past three months suggest that there is a groundswell of support for a different economic model. We hope to have offered some ideas on how to get there. If our advice was honest and maybe undiplomatic, it is because we care. I can assure you, the World Bank will continue to support the people of Pakistan on their journey towards prosperity.
Thank you very much!
