What are the biggest challenges to Pakistan's economic managers?
There are three major imbalances in the economy. First, there is the existence of crony capitalism. For a long time a small group of businessmen, landlords, industrialists and civil servants have hijacked the beneWts of economic activity and growth. Tax breaks or customs rebates or unpaid loans were provided to these businessmen, creating distortions in resource allocation. This in turn has suppressed economic growth, so the amount of investment that could have given us 6% growth in GDP was giving us only 4%.
Two, the public sector has been living beyond its means. The quarterly Wscal deWcit of the public sector has been unsustainably high at 8% to 10% of GDP. This was Wnanced by domestic debt and external borrowing but such Wscal imbalances have produced a very high debt stock, equivalent in scale to our entire GDP. That is one of our heaviest burdens.
Third, foreign exchange earnings have lagged foreign exchange consumption. We continued to import goods freely while our exports were never adequate to Wnance the imports. This forced us to go to external borrowing.How can these imbalances be reversed?Our strategy involves deep-rooted structural changes and institutional reforms.