The China Pakistan Economic Corridor (CPEC) has done well for the overall economic confidence in the country. We do see this most notably foreign direct investment in Pakistan. Three foreign auto sector companies have recently received a go-ahead to set up car assembly plants in Pakistan.

The Ministry of Petroleum and Natural Resources has set up shale gas and oil centres, which is a positive signal for exploration and production companies. The on-track performance in at least nineteen CPEC projects is a good signal for cement, steel and electricity sectors. Some new sectors that have just started to bear fruits including: e-commerce, m-wallet, domestic tourism, and social enterprises. We also see that the confidence of bilateral lenders has also increased. The recent lending commitments by France and US are an example.

A key challenge still remains: how can the government demonstrate that this is not entirely debt-backed or borrowed-growth?

This is a key question as many economists have argued that one-off and debt-driven investment in public infrastructure cannot sustain growth over longer periods. This will also not result in sustained poverty reduction and related progress towards sustainable development goals.

This view is attested by the recent data on Pakistan’s economic performance and subsequent analytical opinion pieces which suggest that lack of structural reforms have prevented Pakistan’s economy to achieve higher levels of savings and private investment. While the savings ratio declined to 13.1 per cent in FY17 compared to 14.3 per cent in FY16, the private investment as percentage of gross domestic product was below 10 per cent. Just as a regional comparison, we may like to note that the savings ratio in India stands above 25 per cent.

There are also signs of populist economic expansion which the incumbent government may resort to, given that they are entering into an election cycle. As one could observe that while the government is unable to process refunds of exporters and pay for the circular debt in electricity and gas sectors, the volume of agriculture credit is being enhanced by PKR 1,001 billion. This is a 43 per cent increase over the previous year. In fact, the size of agriculture credit is same as the overall public sector development programme (PSDP).

The government intends to roll out two million small loans of up to PKR 50,000 per farmer through the Zarai Taraqiati Bank and National Bank of Pakistan. Past evaluations of agriculture credit do reveal that such expansion in lending may not be sufficient for sustained growth unless agriculture markets are made competitive, fair and transparent. We do, however, realise that expanding agriculture credit wins votes!

Lack of structural reforms have prevented Pakistan’s economy to achieve higher levels of savings and private investment. While the savings ratio declined to 13.1 per cent in FY17 compared to 14.3 per cent in FY16, the private investment as percentage of gross domestic product was below 10 per cent.

On the PSDP, the government is clearly aiming to create more debt if it has to fund PKR 1 trillion projects in 2017-18, besides also funding the throw-forward i.e. projects already approved in the past and awaiting cash flow. The budget documents are certainly silent on what would be the term structure of this borrowing to fund the PSDP, grants, subsidies and losses of public sector enterprises.

While all this is happening, changes are also being made to the definition of public debt and accounting for fiscal deficit. Of course, this is being done with the aim to suppress the true value of variance between low government revenues and large government expenditures.

The taxation structure also remains complex and compliance is difficult, in turn hurting competitiveness of Pakistani businesses. The total number of taxes, levies and surcharges faced by individuals, small and medium enterprises (SMEs), and large corporations has increased after the devolution. On average, a SME annually faces over four dozen different levies at federal, provincial and local level. There are different filing and payment arrangements for each of these taxes and taxpayers end up receiving notices and audit calls from multiple federal and provincial tax authorities across the country.

Perhaps a good exercise could have been to learn if not follow, from our neighbour, the recent example of moving towards ‘one India one tax’ goods and services tax (GST). GST in India now is a single tax on the supply of goods and services across the country, and across the supply chain of manufacturer to the consumer. The credits of input taxes which are paid at each stage remain available in the next (value addition) stage, making GST a levy only on value addition at each stage. The end-consumer pays only the GST charged by the last seller.

Having a single tax framework throughout the country implies easy compliance, uniformity of tax rates and structures, removal of hidden costs of doing business and overall improvement in competitiveness. We do, however, know that multiplicity of taxes actually lead to lower revenues with the FBR missing its annual target in the previous year.

A key element in the cost of doing business is electricity and gas. What we know from the preliminary data available on newly added generation capacity and LNG supplies, that additional supply does not mean lower prices for Pakistani consumers. The guaranteed tariffs for almost all new power generation plants are bound to keep Pakistan’s energy prices one of the highest in the region. While energy generation side is being addressed to some extent, very little progress has been seen to address the transmission and distribution issues. The problems related to technical losses and energy theft still continue to exist.

As debt servicing expenses increase and foreign exchange reserves remain under pressure, a key failure of the incumbent government was its inability to turnaround the export performance. While exports were not helped by the current structure of exchange rate, distortions in taxation, high cost of utilities including energy, lack of availability of timely and affordable credit, weak trade facilitation reforms (among other issues), some very basic mistakes were made by the state which did not help the already falling export receipts.

Most notably, the reduction in transit and bilateral trade with neighbours i.e. Afghanistan, India and Iran made Pakistan an unreliable trading partner in the region. We now know that Afghanistan -- once Pakistan’s key market for exports -- has started imports from other economies in the region. This year Pakistan could see its exports to Afghanistan fall below USD 1 billion. Another grave mistake was also not to consciously tap the potential of services sector growth (and resulting potential services exports). Most under-negotiation and past free trade agreements of Pakistan have ignored the trade in services.

Finally, it remains a matter of concern that Pakistan’s growth is still not seen as pro-poor. Ideally it is the SMEs that should grow and absorb the unemployed and new workforce entering the labour market. However, we have observed during the past year that despite record low interest rates borrowing by SMEs is still not at a level seen during 2005-07. The government has also not done any evaluation of why are Pakistani SMEs not able to sustain and graduate into larger entities over the longer run.

Similarly, in order to address the woes of those unfortunate amongst us, the delivery of social safety nets in Pakistan is still fragmented across federal and provincial institutions. A key question will be how the existing institutions can better provide healthcare and employment insurance to those below the poverty line.