A few years ago on a flight from London to Karachi I sat next to one of Pakistan’s leading textile manufacturers who spent several hours discussing the sorry state of his business. The fact that his European clients will no longer visit the country because they view it as too dangerous was not even his biggest problem. His real issue is the constant blackouts his factories face due to a lack of reliable energy. “We can’t compete with the likes of Bangladesh and Vietnam,” he bemoaned. This is the tough economic reality that Nawaz Sharif, Pakistan’s newly elected prime minister, inherits.
Pakistan’s recent successful election should quiet talk of it as a failed state. For the first time in the country’s history, a civilian government will complete its term and hand power to another, fairly elected, civilian government. Although the Taliban vowed to disrupt the election through suicide bombings, voter turnout approached 60 percent, a significant increase from 44 percent in the last election. As many as 150 people died in political violence during the election, but even more devastating scenarios were possible.
While Pakistan’s fragile democracy has proven resilient in the face of deepening extremism, its economy faces severe and growing challenges. Growth over the past five years has averaged only 3 percent–not enough to keep pace with the country’s rapidly growing population which already exceeds 180 million. It also faces a serious balance of payments crisis. Foreign exchange reserves have declined precipitously over the past years and now cover only two months worth of imports. There is talk of Pakistan negotiating a bailout from the IMF to the tune of $9 billion.
Sharif, who served twice before as prime minister, is a steel magnate whose family has long dominated politics in Punjab, Pakistan’s largest and wealthiest province. He was elected in large part to fix the country’s staggering economy, and he is moving quickly to put in place a strong economic team, many recruited from the private sector. But to succeed, his government must not only resolve Pakistan’s immediate balance of payments problems, but also tackle the structural issues that are undermining competitiveness.
First up is getting the country’s fiscal house in order–its budget deficit for the year is pushing 8 percent. This requires privatizing many large, inefficient public sector companies–including airlines, power companies, and railroads–that together decrease the country’s GDP by as much as 2 to 3 percent each year. Unions will balk at mass layoffs, but the current bleeding is unsustainable and the IMF will no doubt require some restructuring of public sector companies in return for a loan. Increasing tax receipts is also an urgent part of fiscal reform. Just over half of one percent of Pakistanis even pay taxes, according to its own federal board of revenue, and Pakistan’s tax to GDP ratio has dipped below 10 percent in recent years–compared with an average of 15 percent for developing countries. Donor countries such as the UK and the US have warned Pakistan that it must mobilize greater domestic resources for their support to continue. The IMF too will demand a rise in tax receipts.
Addressing the country’s energy crisis is also urgent. As recently as 15 years ago, Pakistan had a surplus of energy and was even exporting electricity to India. But a total lack of investment over the years, combined with rising demand from a growing middle class, has led to the current crisis which by some estimates reduces the country’s GDP by as much as 3 to 4 percent. Creaky infrastructure that wastes as much as a third of energy in transit is part of the problem. Inefficient energy subsidies that skew to the rich are also to blame. The fact that Pakistani households and businesses simply do not pay their energy bills further undercuts the system. Numerous government ministers in Islamabad are themselves on the delinquent list and the national utility estimates it loses over a $1 billion a year in unpaid bills.
Pakistan’s failures in education must also be addressed. According to the 2013 Human Development Report, it ranks 146 out of 186 countries in education, with an adult literacy rate of just 55 percent. Karachi holds the notorious distinction of the largest number of school-aged children out of school–a quarter of its four million children–of any major city in the world. Those who do attend school are subjected to low-quality education, one of the reasons for the country’s high drop-out rate. Pakistan’s failure to get and keep girls in school is particularly shameful; high female illiteracy also impedes efforts to reduce the country’s high fertility rate.
Sharif clearly faces daunting challenges. But his large win gives him something of a mandate to deal with the country’s structural problems. The work his brother Shahbaz Sharif has been leading in recent years in reforming education in populous Punjab points the way on educational reform: a combination of merit-hiring, data-driven accountability, and vouchers has increased teacher and student attendance and led to an additional 1.5 million children now attending school who previously did not. Pakistan’s problems are great, but for the first time in many years, there is reason for some hope.