Excellencies, Honorable Secretaries, Ladies and Gentlemen, thank you for joining us today. I am delighted to be back in Karachi. I am in Pakistan this week is to launch the World Bank policy notes that have been the object, over the past months, of many consultations across the country, including here, 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 amazing. Many thanks to everyone who contributed.
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, and some of the poorest districts in rural Sindh are the worst affected.
We are convinced there is a feasible path 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. Many countries have used crises as an opportunity to embark on fundamental reforms. Will Pakistan use or lose 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 and economic 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. It also lags in many other dimensions behind regional peers.
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, some say this is a problem of capacity to implement. I would like to challenge that. When there is political will, Pakistan’s authorities can act decisively, as they did during COVID for example. We have also seen it in the aftermath of the floods in Sindh, where the authorities have moved very fast to start rehabilitation and reconstruction activities, including with World Bank support. Lots remain to be done but, already, the Emergency Housing Reconstruction project that I will visit later today has so far provided funding to more than 320,000 beneficiaries who are reconstructing their destroyed houses in a resilient manner. The Sindh Flood Emergency Rehabilitation project restored irrigation structures benefitted some 3 million people, primarily farmers.
So why don’t we see such political will mobilize when it comes to implementing no less urgent economic reforms to address challenges that are equally critical for the country?
I am told this is 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 these policy notes, we heard about elite capture and political opportunism as major impediments. But we also heard many who ask for real change, including the growing young population in cities like Karachi, and businesspeople who see the opportunities they are missing because of the lack of a level playing field. There may be political dividends to those who understand these aspirations.
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.
I would like to focus mostly on child stunting. This is particularly severe in the poorest districts of Sindh, where more than sixty percent of children under five suffer from stunted growth, compared to an average of 40 percent in the whole country. These are shocking statistics. 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. And I should note, here, that stunting affects urban, and middle-class areas as well. The low quality of water and sanitation services is a key reason – with big economic implications.
The learning crisis is equally acute in Pakistan. Schools are dilapidated, teachers absent or poorly trained, and students – if they go to school at all – receive a low quality education. Once again, rural Sindh is among the worst performers in learning. The economic impact of this crisis is huge: Pakistan is losing 60 percent of its potential income because the poor health and education of its workforce.
The solution to this human capital 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, plus perhaps 1% for water and sanitation. 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 revenue and spending side. These reforms are long overdue. Pakistan’s tax base is small, leading to a heavy burden on the few who do pay taxes, and motivating requests for exemptions and special treatment. Regressive tax exemptions cost Pakistan up to a third of its total revenue. Most retailers remain out of the tax net. Increased taxation of land and property– where the rich invest their wealth – could bring additional revenues and incentivize more productive investments. Low taxation of agricultural income is particularly regressive in Sindh where land concentration is highest. Same for real estate taxation. Karachi has the highest concentration of property wealth in the country. We estimate the city could raise at least ten times what it collects today in land taxes, which could finance the infrastructure the city needs.
But it’s also clear that no one will want to pay higher taxes if there is not simultaneously an effort to cut wasteful spending – on poorly targeted subsidies, to plug the hole in loss making SOEs, or to pay for generous civil servant perks and benefits.
The third theme I wish to emphasize today is particularly important for Karachi, Pakistan’s undisputed economic hub: Pakistan needs to shift towards a more competitive open economy.
Today, policy distortions and the lack of competition mean Pakistan’s private sector punches well below its potential weight. 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. Let me dwell a moment on this point: I have heard many say that pressures in the foreign exchange market results from smuggling and illegal imports of fuel and consumer goods from neighboring countries. And that the clamp down on this activity has helped stabilize the rupee. But these imports also reflect the high cost of goods and services in Pakistan, due to poor infrastructure, the high cost of finance, and the low competitiveness of businesses who have accommodated themselves behind high protective barriers. The recent devaluation of the currency is forcing these businesses to look for export markets for the first time in many years. It is this, and parallel reforms to lower Pakistan’s domestic production costs that will bring in the foreign change, keep the currency stable, and allow interest rates to fall.
I should mention that efforts to boost competitiveness and export orientation would not just be good for macro stability but also create many more jobs. This in turn would address another long-term challenge for Pakistan’s development which it shares with the rest of South Asia: the very low participation rate of women in the workforce. While educational gaps, concerns over safety during the commute and at work, lack of childcare and social norms keep many women at home, the example of Bangladesh demonstrates that women do work, when jobs are available. Pakistan’s young population could be a huge economic boon or turn into socially explosive problem. The solution lies in the entrepreneurial energies of Karachi and other leading cities.
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.
The fifth policy shift we recommend is in the energy sector.
I won’t say much on this today, since the issues are well known. Suffice to say that any sustainable solution needs to go beyond tariff increases and address the reasons for high costs: import dependence, losses and theft, and the high cost of finance.
Before I end, let me say a word about implementation. At the center of this are the relations between the federal, the provincial and local governments. We have a policy note on this as well. It argues that to improve the quality of services, local governments need to be given more responsibility and autonomy. That would encourage them to raise revenues for the purpose of public investments. Sindh, the only province where local governments are elected, could be at the forefront of such reforms.
Let me come to a close. I have argued that Pakistan needs fundamental reform – muddling through with partial measures would only delay the needed adjustments and deepen the disillusionment of Pakistan’s youth, sapping the energy the country needs for its future growth and development.
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!
