Development in Pakistan: Perspectives on the Financial Future

Harvard International Review, Fall 2011 | Go to article overview

Development in Pakistan: Perspectives on the Financial Future


AN INTERVIEW WITH ABDUL HAFEEZ SHAIKH

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ABDUL HAFEEZ SHAIKH is an economist of international repute with over 30 years of experience in policymaking, management, and implementation. He has served as Minister for Finance, Planning, and Development in the Sindh province, Federal Minister for Investment and Privatization in Pakistan, and a Member of the Senate of Pakistan.

What are the key developmental challenges Pakistan faces today, and what solutions has the Finance Ministry posed to address these challenges?

Our developmental challenges cover both the long term and short term. The long-term challenge is to develop the economy and bring prosperity to our citizens. We are a people-rich country and need to work harder to make our people realize their full potential, which can be achieved by greater investment, enhancement of skills, and access to opportunities. We know that it is not possible to be a developed country with underdeveloped people. This is the critical challenge if we want to get on a long-term sustainable path for economic growth. A related long-term challenge is to reorient the role of the state in the economy. We have to ensure that private businesses play a central role in the economy, and that they awn and manage all commercial enterprises while the state is confined to the performance of important tasks of policy, regulation, and design of incentives.

Our immediate challenge is to maintain stability-- achieved after considerable effort--and to navigate the economy safely through the current global turmoil. We need to build upon the record export performance of last year, continue with aggressive expenditure-management, and mobilize domestic taxes to keep fiscal discipline and check inflation. We also have to move faster in overcoming electricity and gas shortages to increase production and create jobs and growth, and ensure that the transitional burden does not fall disproportionately on the weaker groups. Therefore, while eliminating many general subsidies, we continue to provide social safety nets for the very poor and the vulnerable.

Indeed, these challenges are interlinked. For example, the fiscal deficit is to a large extent a reflection of low tax effort and untargeted subsidies on electricity and fuel consumption. This in turn has led to a circular debt that is threatening the viability of the otherwise highly profitable energy sector. The deficit also displaces private investment as government borrowing "crowds out" businesses by raising their cost of credit from the banks. The inefficiencies of the public sector corporations further aggravate the situation in the sector. The solutions are therefore complex, requiring a simultaneous attack--and success--on many fronts.

Currently we face an unprecedented security challenge, for which Pakistan is paying a heavy price in terms of lives, perception, and diminished economic activity in certain parts of the country. We will overcome this problem, but in the meantime it has slowed the pace of our economic progress.

What do you consider to be the main challenges the Finance Ministry will face over the next few years?

I think the stabilization we have achieved has to be protected. It will take some time for us to consolidate and move to a trajectory of higher economic growth. There are no quick fixes. We may be paying a price with a lag for our failure to take actions when those were warranted. In particular, when world oil prices peaked in 2008 at nearly US$150 per barrel, we did not rationalize prices due to political expediency and allowed a crisis-like situation to emerge.

During the stabilization phase, we hope to do away with regulated prices and untargeted subsidies. We have frozen all government expenditures in nominal terms, simplified the structure, and expanded the tax base. We are dealing with chronic problems of circular debt, injecting transparency in fiscal relations between states and the federation. …

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