GROWTH will remain tepid during the current fiscal due to deep structural imbalances, says the State Bank in its annual report for FY23-24. Projecting the national economy to grow by 2.5pc to 3.5pc, the new report argues that structural impediments — such as falling investments, an unfavourable business clime, lack of research and development, low productivity, and energy sector inefficiencies leading to growing circular debt alongside climate change risks — continue to challenge macroeconomic stability. This is in spite of the recent improvements in macroeconomic indicators and resumption of IMF funding. These imbalances “constrain the economy’s growth potential”, says the SBP, explaining the reasons behind the low growth estimates for the ongoing year despite a relatively stable economic environment. It emphasises the need for addressing energy sector challenges through sectoral policy and regulatory reforms rather than simply “substantial price adjustments”. Likewise, it highlights the necessity of reforms to tackle the challenge of inefficient SOEs “that continue to burden fiscal resources already restrained by a low tax-to-GDP ratio”.

Despite some indication of macroeconomic stabilisation in recent months, both multilateral lenders and global credit rating agencies are convinced that the risks remain high, and faster sustained growth will require substantial reforms. Hence, the medium-term growth is broadly projected to stand at around 3.5pc. Any attempt to grow at a faster pace without structural reforms, these agencies have repeatedly warned, would lead Pakistan back to a balance-of-payments crisis — as our experience from the last two decades shows. Sadly, the government has displayed little commitment to implementing hard, politically unpopular reforms to improve investment confidence, its claims to the contrary notwithstanding. Its reluctance to tax the retail and real estate sectors to protect its core political support is one example. The proposal to squeeze existing taxpayers in the name of strengthening tax enforcement and compliance is not helping either. The recent termination of contracts with some power producers, without tackling the issues driving up electricity prices, has raised questions regarding policy consistency. While these steps may win the authorities some short-term gains, they cannot be a substitute for tax and power sector reforms. That is the point the SBP tries to drive home in its report.

Published in Dawn, October 21st, 2024