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The fourth transition

With Tassaduq Hussain Jillani’s elevation to chief justice of Pakistan, the country has completed a third transition in the outgoing year. A historic political transition saw power transferred from one elected government to another, with Prime Minister Nawaz Sharif assuming office for a record third time. The next transition was also smooth, with the change of command in the army.

But it is the fourth transition that will be the most consequential for the country’s future. This is the economic transition — from a crisis economy, perpetually on the brink, to an economy of growth and investment, powered by the mobilisation of national resources rather than a reliance on unsustainable domestic and foreign borrowing or assistance.

Having made economic revival his top priority, Sharif has much to draw on from his party’s election manifesto to give strategic direction to this critical transition. The manifesto promised to accord central importance to raising tax revenue and reduce dependence on foreign loans. It pledged to address the budget and balance of payments deficits, resolve the energy crisis and boost the investment climate.

Having identified these priorities the government acted quickly in its first few months to strike a balance between economic stabilisation and stimulating growth. They included fiscal consolidation measures, raising electricity tariffs as part of a larger energy strategy and signaling the resolve to rapidly pursue privatisation.

From the outset the government recognised it had difficult choices and trade offs to make — deal with a precarious balance of payments position on the one hand, and undertake structural reforms and build business confidence on the other. Both had to be pursued simultaneously and with urgency.

Recent official pronouncements make it apparent that the government’s immediate focus is on mobilising external financing to deal with the fragile balance of payments. Managing the low level of foreign exchange reserves to avert a foreign exchange crisis is likely to preoccupy Pakistan’s economic managers as outflows will continue to exceed inflows for some time. But the government has to go beyond fire-fighting to pursue a strategy to revive growth and fix the structural problems that have driven the country into a vicious circle of chronic financial imbalances and repeated bailouts from outside.

Such a strategy has to place Pakistan on a higher growth and investment trajectory, without which the government cannot finance its development priorities and create jobs to match the country’s youth bulge. The current two to three per cent annual GDP growth — half of what it was a decade ago — is much below the seven per cent needed to absorb two million new entrants into the labour market every year and provide them access to public services.

The government acknowledged by its early steps that creating fiscal space and encouraging investment was necessary to foster economic growth. Having set this policy direction it now has to sustain the momentum and translate intentions into action. It also means that, as promised, the government has to move decisively to implement comprehensive tax reforms. This is not politically easy and will require difficult decisions in a complex environment.

This involves dismantling the regime of concessions and privileges, which were granted over the years to special interests and individuals by statutory regulatory orders (SRO). The SRO culture has cost the economy billions in lost revenue, created an uneven playing field for business and undercut any notion of tax equity.

Private investment in the country has plunged from 13 to nine per cent of GDP between 2007-12. In 2012, 84 per cent of bank credit was preempted by government borrowing. Only 16 per cent went to the private sector. In 2013 the private sector had access to just two to three per cent of total credit. Reducing government borrowing is important to build a positive investment climate. But other, more comprehensive measures are also needed, especially solving the power crisis and moving on privatisation.

The prime minister has often urged the opposition to keep politics out of efforts to fix the economy. He should consider beginning the new year calling for a national consensus around a set of measures that can help to secure the goal of an economically resilient Pakistan.

Dr Maleeha Lodhi served as Pakistan’s ambassador to the US and UK