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The PTI government has presented its first federal budget of Rs 7.04 trillion in the absence of a full-time finance minister. The budget announcement also came amidst a flurry of political arrests and a recent staff-level agreement to a USD 6 billion IMF program. These developments were preceded by an overhaul of the government’s key economic decision-makers.

A day earlier, the latest Economic Survey released a bleak economic outlook for Pakistan. The country’s forecasted GDP growth at 3.3% – against a target of 6.2% – is set to hit a record 9-year low. Pakistan also faces the highest inflation in five years nearing double digits. Even the budget speech yesterday, was quick to acknowledge slow growth and static exports since the past five years.

Source: Dawn, June 11, 2019, Budget brief, 2009-2020

GDP growth rate for fiscal year 2018-2019 has been 3.3 percent, which is forecasted to further reduce to 2.4 percent in fiscal year 2019-2020.

 Facing a looming balance of payments crisis just two years after the completion of a USD 6.6 billion IMF program, and well into another one, the government was expected to take some tough economic decisions leading up to and included in the 2020 budget. In fact, the goals unveiled for FY20 underline the scale of the economic challenges the country faces.

 The budget for FY20 includes a strong commitment to narrow the primary deficit – the difference between current government spending and total current revenue (net of debt reservicing) – down to 0.6% of GDP from an anticipated 2.0% for this year.

 Much of the adjustment burden falls on revenues. Not surprisingly, therefore, the budget sets ambitious targets for revenue collection combined with aggressive expenditure control. The budget is loaded with new taxes and austerity measures/spending cuts.

 

Is PTI on its way to fixing what ails the economy? 

 Pakistan’s economy can only be fixed if we address its most fundamental structural flaws. This requires an understanding of what ails the economy –  a disparity between public sector spending and income, and an underdeveloped export base.

 Unless policymakers take concrete measures to address the underlying causes of macroeconomic crises, this fiscal situation will repeat itself every few years.

 What do we need to do to fix this?

 On the one end, we need sustainable and reliable flow of income – hence an increase in revenue generation. We need tax reforms to focus on progressive taxation and reduce reliance on indirect taxation and thus protect the interests of the low-income.

 On the other end, we need to rationalize expenditures, reduce losses of state-owned enterprises and streamline government machinery. At the end we need a strong export base and a strengthened business environment with a strong private sector engagement.

 Does the budget reflect this commitment and offer a stabilization of the macroeconomy and its fundamentals?

 The budget focuses on some aspects of the critical interventions needed to boost the economy, but there are glaring contradictions as well.

 Attending to IMF conditionality, a one-time sacrifice of defence budget’s increment, more income tax slabs and higher sales taxes are temporary measures to provide breathing space to help avert a current fiscal crisis. 

Source: Dawn, June 11, 2019

Pakistan’s armed forces have voluntarily agreed to a reduction in their budget, mainly comprising salary cuts of officer corps. In a country that continues to remain embroiled in multiple external and internal conflicts, requiring military operations against terrorist groups,  this shows the resolve of military authorities to support the government. 

 The government is still committing to a high fiscal deficit at 7.1% compared to 7.2% of GDP in last year, owing primarily due to the large size of the debt repayments not leaving much for the private sector and businesses.

 In addition, the government has announced, in a low-growth period, highly challenging revenue targets relying mostly on taxes to be collected from the masses. A plethora of new taxes have been levied and income tax slabs revised. The burden has fallen onto the salaried classes – as is typical – and is bound to hit the consumption of middle-and-low income segments to further slow down economic activity and reduce aggregate demand.

 This is despite a recent World Bank report confirming that Pakistan is capturing only half of its revenue potential and needs to raise revenues by enhancing tax compliance not levying new taxes or increasing rates.

 A new structure of indirect taxes is bound to increase the prices of essential items such as electricity, gas, edible oil and sugar, and will impact the overall cost of doing business and cause further inflation.

 This is expected to worsen with a falling rupee which has already depreciated by more than 30% against the dollar since December 2017.

 Moreover, how are exports expected to grow with a withdrawal of zero-rating facility accorded to the five leading export sectors namely: textile, carpets, leather, surgical and sports goods? Almost 65% of the exporting sector will now be liable to pay 17% duties.

 In the short run, these budget commitments may become unsustainable, necessitating interim finance bills to provide quick fixes.

 The PTI government has already passed two mini-budgets in the past fiscal year. Another one will only confirm the fears of the government’s worse critics.

 How different is this budget from the previous ones?

 Unlike the previous budgets this budget comes at the backdrop of an imminent sign off to a three-year extended fund facility with the IMF. What this means is that this budget is front loaded with prior actions to meet the IMF conditionality grounded in market-led reforms.

 Imran Khan came to power promising to create 10 million jobs and build 5 million low-cost housing units over a five-year period, as part of his vision for an ‘Islamic welfare state’.

 In the backdrop of a stabilization package, constraints of the IMF conditionality are expected to cut across Imran Khan’s attempts to establish a welfare state. And the new budget is underpinned by this underlying economic reality.

 The total budget outlay is 30% higher than previous year. However, the focus is on two critical two critical aspects – raising revenue and cutting down expenditures. Both actions are geared towards reducing the primary deficit in the immediate future.

 What stands out in this budget is the excessive focus on revenue generation, setting seemingly unrealistic, through probable, targets and austerity measures across all sectors. Tax collection targets of Federal Board of Revenue (FBR) alone are estimated at Rs 5.555 trillion to bring tax-to-GDP ratio to 12.6%. Overall federal revenues are estimated at Rs6.717 trillion – 19% higher than the previous year’s revenue.

 What remains unchanged, despite the high revenue targets, is that the salaried class as always bears the brunt of the tax reforms. At the same time a rise in indirect taxes will make everyday use commodities more expensive.

 However, some of the suggested tax measures are seen as positive steps towards documenting the economy. These include the condition that property cannot be registered in the name of non-filers and much higher tax rates for unregistered companies.

 This budget is also focused on austerity measures and spending cuts.

 The army has also decided in an unprecedented move to voluntarily skip this year’s increment. The budget outlay for defence remains unchanged at Rs 1.1 trillion. This reveals clearly government’s keenness to ensure IMF has everything it needs for a sign off.

 Government’s running expenses have also been slashed down. Cabinet members will take a 10% cut in their salaries while grade 20 and 21 officers will also forgo any increment in their salaries.

 The government has however taken some measures to safeguard the unprotected and low-income strata.

 Some projections suggest that, over a three-year adjustment period, almost 1 million jobs could be lost and some 1 million people could fall below the poverty line. Mindful of this, the IMF insisted the new budget maintains social spending at the level of previous year.

 The government has formed a new ministry to eliminate poverty to launch programs for social safety and become the umbrella organization to manage the Ehsaas program.

 At the same time, stipend through BISP scheme has increased from Rs5,000 to Rs5,500, with a 10% rise for pensioners while a ration card scheme is being introduced where 80,000 people will benefit via interest-free loans.

 This year’s budget also sees an increase in the minimum wage from Rs 15,000 in the last two budgets to Rs 17,500.

Where can we expect the economy to be at the time of the next budget?

 Any successful IMF program requires government’s commitment to policies (some painful) that are outlined in the program. Associated with a new loan will be extensive pressure to reduce aggregate demand of which the largest burden will be on the fiscal side. A limited fiscal space can hamper Khan’s efforts to substantially enhance public spending and also hit economic growth.

 The last time Pakistan entered the IMF program, growth rate stood at under four percent. Projections already reveal that growth rate will fall further to 2.4% while inflation will enter double digit figures at 13%.

 This poses a challenge to the new government, voted in with high expectations to set up an Islamic welfare state. Its electorate will expect initiatives for social uplift and job creation and at the same time, high growth.

 What we can expect before the next budget, in the face of an economic slow-down, is higher inflation and a tighter job market as economic activity takes a hit.

 Some of this inflation could be offset if income taxes were lowered, but that is not the case as Pakistan targets to grow tax revenues at the fastest pace in recent years. With less than 1% of the 208 million people filing their returns, it may be difficult to meet the ambitious revenue targets.

 While a slow-down in the demand for imports will help to prevent the dollar drain and reduce the trade gap and higher taxes along with spending cuts can help reduce budget deficit, the government may save enough to spend on development projects.

But this process will take time.

It may take two years may before economic growth can bounce back and government is able to fix the larger macroeconomic problem. If not, then we could be looking at another bailout.

A shorter version of this article was first published in Dawn. It appeared in Prism here.

Hina Shaikh is the Country Economist at the International Growth Centre (IGC).

Citizens of a country face different life choices. These choices are based on labels assigned to various groups determined by a combination of socio-economic, ethnic and religious factors. Such labels have historically determined the kind of access citizens are provided to public goods and economic opportunities.

By definition, public goods are meant to be non-excludable – that is individuals cannot be effectively excluded from using them as price doesn’t restrict access to the good. The state is obligated to ensure inclusive growth which includes providing all citizens access to public goods without any form of discrimination.

However, growth in Pakistan is not inclusive. The State has been unable to ensure such access to all, particularly for the marginalized –  people socially excluded due to multiple reasons such as age, disabilities, gender, ethnic and religious affiliations. These people also include minorities.

Attainment of inclusive growth becomes even more uncertain as Pakistan enters into another IMF agreement. Adjustment efforts under such reform packages usually demand state retrenchment and a focus on market-led, profit-generating interventions led by the private sector. The fiscal space and political inclination to focus on such issues diminishes drastically.

A recent Lahore Policy Exchange organised by the Consortium for Development Policy Research (CDPR) highlighted in detail the relationship between access to economic opportunities and the marginalization of communities with a focus on minorities. A panel of experts discussed the key reasons for state’s failure in safeguarding minority rights and put forth possible solutions.

Mr. Suneel Malik, Manager Programs at the Centre for Social Justice, a Lahore-based civil society organization working for social justice for the marginalized, highlighted how the state caters to service delivery needs of minorities that now form 3.5% of the country’s population. The state recognizes minority groups, aggregated along religion and ethnicity. However, other factors such as disability, gender, and geographical proximity to government’s priority development zones worsen a citizens’ chance of getting attention from state institutions.

Discrimination against minorities woven into the social fabric

A history of conflict surrounds access to public goods and services along socio-economic dimensions. The structure of the Pakistani state operates on patron-client linkages the beneficiaries of which usually belong to the mainstream with links to influential intermediaries to help gain access to state services. Dr. Hadia Majid, Assistant Professor at LUMS, discussed her work on how religion, ethnicity and income level impact citizen’s chances of accessing public goods such as gas, sewage and sanitation infrastructure, and common water pools like canals and how this results in reduced chances for their upward social mobility. Thus, they are often stuck with low paying, generationally passed down occupations. Minority groups, therefore, not only experience more poverty but are also more prone to getting into poverty traps.

Encouragingly, her research finds that when political incumbents/officeholders at the local level are elected into power with a miniscule vote difference with the runner up, they tend to opt for more inclusive policies in an effort to retain their vote bank. This leads to instances of breaking the cycle of clientelism and interest politics – i.e the tendency for collusionary activities between the state and powerful societal groups –  that distort the democratic objective of equitability.

How distance impacts the status of a citizen

A citizen is relegated to a minority status when governance channels do not provide public delivery in areas considered far-flung. Therefore, lack of proximity to state institutions leads to the marginalization of citizens left to fend for themselves. In circumstances when citizens are already isolated, minority religions, ethnicities, disability and gender can further aggravate poverty levels.

Dr. Faisal Bari, senior research fellow at IDEAS and moderator of the session, highlighted the high variation in public delivery/provision of power to residents within any city across Pakistan. This is because distribution companies increase load-shedding hours based on cost recoveries from particular neighbourhoods. If there is massive electricity theft in certain low-income neighborhoods, households that regularly pay their electric bills will be penalized with black-outs for the criminal actions of others. In a citizen-based state, these kind of government measures to prioritize recoveries over public delivery to its rightful citizens, is a breach of the social contract between the state and its people.

Dr. Hadia also underscored from her study that power, gas and water load-shedding occurs more frequently in localities farther away from commercial and industrial zones. However, ‘katchi abadis’ or slums located nearer to influential zones experience markedly less breakdown in public delivery. She further stressed that lack of basic amenities affects the productivity of men and women alike. It affects the revenues of home-based women workers who are unable to deliver orders on time as well as of men, who due to affected sleep and eating patterns, lose productivity at work.

Addressing inequity in Pakistan: the case of Akhuwat

Dr Amjad Saqib, founder of Akhuwat and a development practitioner, believes that public-sector institutions have not shown a strong will to reach out to citizens in areas with difficult terrain or those that are conflict-affected.

Akhuwat is a successful non-profit interest-free microfinance organization but its approach towards poverty alleviation is centered around inter-faith harmony as it recognises that financial inclusion is not possible in a divided society. Therefore, it sets up its various offices on a rotation basis across mosques, churches, and temples to bring together individuals from different faiths that are experiencing similar financial and political exclusion woes.

Mr. Amjad Saqib stated how establishing centers for social and financial intermediation in Gilgit Baltistan helped in reducing conflict among Shia, Sunni and Ismaili sectarian groups. At the end he urged researchers to conduct a more detailed analysis of this observation. To fill public delivery gaps, Akhuwat also established offices in terrorism-inflicted FATA five years ago amidst high security risks. It has disbursed 52,000 loans since then.

Helping the Marginalised: Looking for Solutions

The state has failed to address the various ways in which people are discriminated against in Pakistan.

A holistic measure to counter all types of discrimination are needed. To overcome the concerns of the marginalized, especially minorities, the state must first redefine what entails a minority. The state defines minorities solely on the basis of religion, ethnicity and sectarian groups, instead of also encompassing income levels, gender, and distance.

The parliament has reserved seats for minority groups. However, individuals are not assigned any constituencies and are hand-picked by political parties. This wields nominal political influence for societal improvement. Systems for preferential treatment of minority groups at the political level needs to be improved.

There is also lack of legislation to ensure that the 5% public service job quota reserved for minorities is in fact allocated to them. Currently, only 2.5% of civil servants employed in the federal government are from minority groups.

There is a commission for the protection of minority rights, but it has several shortcomings that prevents it from playing a meaningful role in improving access to inclusive opportunities.

The state is stripping people of their right to citizenship and it must reach a heightened sensitivity to address the needs of its entire pluralistic society as promised to them in the constitution.

Relevant studies by Dr. Hadia Majid:

https://www.theigc.org/project/public-goods-provision-and-socio-economic-hierarchies-in-lahore-slums/

https://link.springer.com/article/10.1007%2Fs11205-017-1707-0

https://www.researchgate.net/publication/292983134_Women_in_Pakistan’s_Urban_Informal_Economy

Sharmin Arif is the Communications Associate at the Consortium for Development Policy Research (CDPR).

 

With a rapidly growing urban population, Pakistanis are flocking to cities faster than any other country in South Asia. Resultantly, a fifth of all Pakistanis now live in just 10 cities.

By 2017, nearly 40 percent-up from 17 percent in 1951- of the country’s population was urban. As rural residents continue to move to cities in search of better prospects, Pakistan is projected to become an urban-majority country by 2030 with more than half of its forecasted 250 million living in cities.

If done right, urbanization can be transformative for Pakistan. International experience has shown that effective cities can become economic hubs and globally competitive drivers of growth. However, if misgoverned, unplanned cities can propel countries into discontent and further economic and political instability.

Urban growth without a shift in economic patterns can become non-inclusive (in service delivery) and unsustainable (if it does not create enough productive jobs). It can also lead to rising urban poverty. Hence, the country needs to formulate and pursue a strategy that guides urbanization away from its adverse consequences. The challenges here are as great as the failures of policy.

This piece looks at what lies ahead for urban Pakistan, its impact on the economy and a suggested way forward.

Urbanization Underpinned by Pakistan’s Demographic Reality

Pakistan is set to remain one of the world’s youngest countries for the foreseeable future. Almost 64 percent of Pakistanis are under the age of 30. Even by 2050, the median age is projected to reach just 31 compared with the current median of 22.5.⁴

This ‘youth dividend’ is a major growth opportunity, as well as a monumental policy challenge, for Pakistan. In a sense, some of the economic benefits of this demographic transition have already started accruing to the domestic economy. Over the past decade, growth in communications, consumer electronics, automobiles, education and retail sectors is evidence of market expansion driven by the youth.

However, youth unemployment is higher in urban than in rural areas. Of the 50 million people in the 18-29 year age bracket, 55 percent live in urban areas, with 30 million in Lahore and Karachi alone. Exploiting this dividend requires job-rich growth and increased productivity.

Urban Economy Landscape

When urbanization works, the economy expands faster as more people inhabit cities. To a certain extent, this holds true for Pakistan as it collects 95 percent of the federal tax revenue from ten of its major cities, with Karachi contributing 55 percent, followed by Islamabad at 16 and Lahore at 15.⁵ In fact, Karachi alone contributes around 25 percent to Pakistan’s GDP.

The share of the urban service economy is also larger than the national average. Since FY08, Pakistan’s urban economy has demonstrated an annual growth rate of almost 4.5 percent, compared to less than 2.5 percent for rural.⁶

Urban Pakistan generates almost 55 percent of the country’s GDP, even though only 38 percent of Pakistanis live in cities. This, however, falls short compared to other countries. India’s urban population is almost 10 percent smaller than Pakistan’s, but the country generates 58 percent of its GDP from urban areas.⁷ Similarly, for Indonesia, with 44 percent of its population in cities, 60 percent of its GDP is urban.

Pakistani cities vary in size in terms of their economy and potential to generate employment. The average urban per capita income among the top ten cities ranges from PKR 37,000 to PKR 70,000. Urban poverty has now also become a “major and visible phenomenon” .⁸ Six out of the top ten major cities have double-digit poverty figures: Quetta, (at 46 percent) has the highest poverty rate while Islamabad (at 3 percent) has the lowest .⁹

The continuous movement of people from rural to urban is linked to a shift in the economy. Services and industry remain major employment sectors in urban Pakistan while the share of agriculture in overall employment falls. The share of agriculture was down to 41.3 percent in FY18 from half in 1994.⁰ By FY16, the urban economy consisted mainly of services and industry with a share of 73 percent and 24 percent respectively. At the same time, the share of the national value added by sector in urban areas was 6 percent in agriculture (compared to 94 percent in rural), 58 percent in industry (compared to 42 percent in rural) and 63 percent in services (compared to 37 percent in rural). The widening urban-rural divide coupled with a decline in agriculture is expected to intensify rural to urban migration.

Cities create Economies of Scale

A higher concentration of people in cities grows the economy and boosts innovation. Denser economic activities create economies of scale. Larger market size increases productivity and creates knowledge spill overs.

Economists use a term called ‘agglomeration’ to describe this phenomenon. As economic activity takes place in close proximity to each other, businesses begin to specialize and offer services other rms lack. This specialization lowers production costs, attracts a diverse pool of labour, facilitates exchange of knowledge and skills, and spurs entrepreneurship. When clusters of such activity begin to form, they enable higher productivity and attract investment and innovation. In 2015, 22 percent of Pakistanis were residing in urban agglomerations of more than a million inhabitants.

Agglomeration, along with fast paced rural to urban migration, can provide increased manufacturing potential.⁴ Pakistan, however, has not yet benefited from this spatial transformation. This is evident in the poor performance of the industry that has failed to create well-paying jobs for those moving to urban centres.

Moreover, ill planned cities can also reverse economic gains. Pakistan’s urbanization has been termed as ‘messy and hidden⁵’Messy from the low-density sprawl and hidden as cities grow beyond administrative boundaries to include ‘ruralopilises’, – densely populated rural areas and outskirts not officially designated as cities. Today, ruralopilises are estimated to make upto 60 percent of urban Pakistan.⁶

Such urbanization without an accompanying shift in economic patterns does not bode well and as cities expand without planning, challenges of providing effective infrastructure and transportation and of delivering services continue to mount.

Creating Jobs

The State Bank has estimated that Pakistan needs at least a 6.6 percent growth rate to create 1.3 million jobs to cater to the new entrants into the market. By FY15 Pakistan had four million unemployed youth (aged 15-24 years), expected to rise to 8.6 million by 2020.⁷

The challenge is not just about creating more jobs. Cities have to produce employment opportunities that would make migrants relatively more productive. When available, jobs are usually of low quality, especially in manufacturing and services. Around 25 percent of young workers are in unstable, low-paid jobs without any benefits, while 35 percent work as unpaid family workers, majority of them women.⁸

Pakistan also has among the lowest levels of labour productivity in the developing world. According to World Bank, labour productivity in the 1980s grew by 4.2 percent every year, but the rate fell to 1.8 percent by the 1990s and to an average of 1.3 percent during 2000-2015. Since 2007, it has been growing at just 1 percent. A key factor inhibiting labour productivity remains the low accumulation of human capital. Of the 1.7 million entering the job market each year, only 1.3 percent have vocational training. The ability of individuals to participate in the labour force is further constrained by poor health. Close to 44 percent of children under five have stunted growth.⁹

Sectoral Focus

Encourage Manufacturing

The movement of people is determined largely by the type of jobs and where they are created. Transforming the quality and quantity of jobs will require an expansion of manufacturing, especially in the value-added segment, since every job in manufacturing creates 2.2 jobs in other sectors.⁰ Hence, manufacturing remains key to reviving the economy. However, Pakistan’s value-added manufacturing as a proportion of GDP decreased by 2016 to 12.8 percent, from 18.6 percent in 2005. Manufacturing can be encouraged by pushing industries and businesses that are export-oriented, or have considerable export potential, require little capital and are labour intensive, use relatively less energy and are densely populated by Small Medium Enterprises (SMEs).

Promote SMEs

Evidence shows that economies with strong SMEs are progressive and experience robust economic growth. According to the Small and Medium Enterprises Development Authority (SMEDA), 90 percent of all enterprises in Pakistan are currently SMEs, employing around 80 percent of all non-agriculture workforce. The share of SMEs in GDP is approximately 40 percent and they contribute almost 25 percent to total export earnings. The SME sector, thus, has the potential to absorb a large and growing workforce. Yet, SMEDA’s budget spending amounts to just 1 cent per capita compared to 9 cents per capita in India, 53 cents in Turkey and USD 1.92 in Thailand.

Pakistan must invest in modern skills for its workforce in areas like start-ups, innovation and digitalisation that are now a major focus for sustainable economic development elsewhere in the world such as Sweden. Plans to strengthen SMEs should also include easing access to credit, improving access to market, simplifying business registration and adopting a national SME policy.

Boosting the Housing Sector

The State Bank of Pakistan has estimated that across all major cities, urban housing was approximately 4.4 million units short of demand in 2015. Construction of an additional 100,000 houses each year can lead to both growth and employment opportunities.⁴ Housing and real estate sectors are directly linked to about 42 construction materials’ industries, creating jobs at much higher rates.⁵ While easing housing pressure on cities, investing in lowcost housing may also boost SME business in Pakistan.⁶

Making Pakistan an Urban Industrial Country

Provinces have not yet designed industrial policies that look at land usage and development of new cities, even though industrial investments under the China Pakistan Economic Corridor (CPEC) have already begun. The Planning Commission has confirmed that nine industrial parks that will act as primary hubs of industrial activity in the country, are included in the CPEC framework to be built across four provinces.

Special economic zones can provide enormous opportunity for boosting employment and job creation. If these projects are launched in the vicinity of densely populated areas and urban centres, they can make a win-win scenario for the community and the industry. In such a case, these projects can also develop close integration with the local industry. These projects can further result in urban knowledge spill-overs to help develop a knowledge-based economy.

Punjab is currently identifying areas with the best potential to develop into cities and industrial estates, other provinces need to follow suit to economically align to CPEC. However, outdated land use regulation and building codes, the absence of a unified land record system and patchy data on land use continues to lead to poor urban land management.

Investing in Urban Transport for Integrating Labour Markets

A well-integrated urban public transport network contributes to economic growth by reducing transport costs and travel time, facilitating specialization of rms and workers, and decreasing the cost of economic transactions. However, Pakistan’s rapid urbanization is challenging the flimsy infrastructure of its cities, constraining economic activities and reducing potential of growth. Several transportation projects are being rolled out across cities without much understanding of their economic benefits or the local job market.

Researchers⁷ have worked on a series of three projects funded by the International Growth Center (IGC) to analyse the impact of urban transport on the labour market. These projects look at the effect of the Lahore Metrobus on employment by quantifying the causal impact of a reduction in transit cost and time due to investment in public transport infrastructure while measuring impact of mass transit on aspects of labour market integration. These projects found, a) introduction of the Metrobus in Lahore reduced time and cost of commuting for those already relying on public transport, b) substantial proportion of commuters switched to public transport, c) many commuters indicated they would use transport even if fare was increased substantially, d) commuters had higher average earning power than the population riding public buses in the past, and lastly, e) introduction of women’s-specic transport eases their integration into the labour market.

Some of the key policy messages emerging from this work suggest continued investment in, and expansion of high-quality public transport including mass transit, reduction in ticket subsidies and use of peak pricing to make mass transit financially sustainable. Pakistan’s transport sector must prepare for the rise in economic activity expected in urban centres following investments under CPEC. Introducing the right land-use policies and investing in low-cost public transport can help meet the likely increase in demand.

What can Governments do?

There are a few steps that the government can take to ensure cities are able to generate-instead of hamper-growth. Foremost is empowerment of city government in public service delivery and nancial matters and boosting local revenue generation. And last, but certainly not the least, providing a framework to guide urban planning and land-use.

A. Empowering Local Governments

The changing role of the government following devolution is impacting its ability to address urban challenges. The 18th amendment transferred scal and administrative powers for most federal subjects including urban planning, to the provinces, with further delegation to local governments. In fact, international experience shows urban development is best placed within the mandate of local governments.

However provincial authorities undermine the power of city governments to serve their residents. Provinces remain reluctant to empower local governments and have made exceptions in retaining large entities⁸ under their own control. Thus, local governments have a limited role in resolving issues such as the urban housing crisis and provinces continue to assume many responsibilities related to municipal controls, regulations and management. City governments also lack resources to fund schemes and are unable to borrow independently from international donors.

B. Empower Cities to Tax

Most urban taxes are implemented by each of Pakistan’s four provincial governments. These provincial governments have large jurisdictions, with populations ranging from 12 million to over 110 million. As managing cities is not the central function of these governments, most of them have not developed effective urban administration mechanisms.

Land and physical properties are a major source of untapped revenue for most developing countries cities’ .⁹ Punjab, for example, despite being home to nine cities with over a million people, collects about 6 percent of its total tax revenue, from property taxes.⁰ Other parts of Pakistan have not fared better. Sindh, which is home to Karachi, Pakistan’s largest city, has not had a revaluation of land and property since 2001. Yet, there is large potential to increase this. For example, an estimate from 2011 shows that Punjab could raise PKR 25 billion in property taxes if it undertook comprehensive reforms.

Taking the case of the urban property tax collection in Pakistan, researchers tested performance-based systems that consider both effort (i.e., incentivise the bureaucrat to exert the desired level of effort) and information revelation (i.e., creating the right incentives for the civil servant to truthfully disclose information to the state) dimensions. The objective of these studies was to increase tax collection. The completed studies found that performance incentives worked-tax revenues in circles where tax collectors were assigned to performance pay schemes had a 46 percent higher rate of growth. Moreover, easy to understand, transparent, ex ante, and objective incentive schemes were most effective-where tax collectors were paid a bonus directly tied to the revenue they collected above predefined benchmarks, they had a 62 percent higher growth rate in total revenue.

C. Improve City Planning

Given Pakistan’s growing population, which exerts extreme pressure on land, and dearth of nancially attractive investment opportunities, land is the most prized asset in terms of returns. This is complemented by a weak legal and administrative governance structure, which has contributed to an acute housing shortage, and cardependent sprawl.

A policy mandate to manage urbanization has been slow to emerge at the federal and provincial levels. Master plans for urban centres are usually devised to translate the city’s vision and economic goals, amongst other aspects, into tangible development and infrastructure strategies and projects. Unfortunately, in Pakistan, no comprehensive urban planning framework exists. At present, out of 150 towns and cities in Punjab, ten have crossed the one million population benchmark and only a few have updated and practical plans.

To facilitate urban planning and land management, experts are collating new data and reformatting existing data to inform policy. The focus is on spatial mapping and understanding urban economies-both of which are key for effective urban planning. A recent example is the World Bank’s report⁴ on urban agglomeration and spatial mapping, in which for the rst time in 2015, night lights data was used to measure economic growth for South Asian cities over the last ten years. Punjab is also now about to launch its urban spatial strategy.

Hina Shaikh is a Development Expert and is currently working with the Pakistan Team, International Growth Centre 

This post originally appeared in UNDP’s Development Advocate Pakistan report focusing on Sustainable Urbanisation, Volume 5, Issue 4

References:

1. Pakistan’s urban population growth has been 3.2 percent whereas the regional average was 2.6 percent as per United Nations Population Division of the UN Department for Social and Economic Affairs’ comprehensive report titled “2018 Revision of World Urbanisation Prospects”

2. With Quetta, Lahore and Faisalabad showing the largest percentage increase in population.

3. United Nations Development Programme (2017), “Pakistan National Human Development Report 2017.” Available at http://www.pk.undp.org/content/dam/pakistan/docs/HDR/PK-NHDR.pdf

4. Ibid

5. Ministry of Climate Change and UNHabitat (2018), “The State of Pakistani Cities 2018.”Report on the State of Pakistani Cities (SPC) launched by the Ministry of Climate Change with technical assistance of the United Nations Human Settlements Program (UN Habitat)

6. Business Recorder, Dr. Haz A. Pasha, “The urban-rural divide.” Available at https://epaper.brecorder.com/2018/02/21/18-page/700950-news.html

7. World Bank (2014), “Pakistan Urban Sector Assessment: Leveraging the Growth Dividend from the Urbanization Process.”

8. Launching ceremony of the “State of Pakistani Cities” report launched by the Ministry of Climate Change with technical assistance of the United Nations Human Settlements Program (UN Habitat). Available at http://unhabitat.org.pk/?p=188

9. World Bank (2015), “Leveraging Urbanization in South Asia: Managing Spatial Transformation for Prosperity and Liveability.”

10. In 2018, 23.90 percent in industry and 34.82 percent in the service sector (world bank indicators)

11. Supra 6

12. Supra 6

13. United Nations, “2018 Revision of World Urbanization Prospects.” Available at https://www.un.org/development/desa/publications/2018-revision-of-world-urbanizationprospects.html

14. Ernesto Sánchez-Triana, Dan Biller, Ijaz Nabi, Leonard Ortolano, Ghazal Dezfuli, Javaid Afzal & Santiago Enriquez, “Revitalizing Industrial Growth in Pakistan: Trade, Infrastructure, and Environmental Performance.” Available at https://books.google.com.pk/books/about/Revitalizing_Industrial_Growth_in_Pakist.html?id=2EgtBAAAQBAJ&printsec=frontcover&source=kp_read_button&redir_esc=y#v=o nepage&q&f=false

15. Ishrat Hussain, “Messy and Hidden Urbanization.” Available at https://ishrathusain.iba.edu.pk/speeches/MessyandHiddenUrbanization.pdf

16. Ijaz Nabi and Hina Shaikh (2017), “The six biggest challenges facing Pakistan’s urban future.” Available at https://blogs.lse.ac.uk/southasia/2017/02/15/the-six-biggestchallenges-facing-pakistans-urban-future/

17. Hina Shaikh, “Young blood: Pakistan’s bulging youth population needs employment opportunities.” Available at https://blogs.lse.ac.uk/southasia/2018/02/09/young-bloodpakistans-bulging-youth-population-needs-employment-opportunities/

18. Supra 3 19. Pakistan Today (2019), “Over 44 percent children in Pakistan suffering from chronic malnutrition.” Available at https://www.pakistantoday.com.pk/2019/03/08/over-44-childrenin-pakistan-suffering-from-chronic-malnutrition/

19. Pakistan Today (2019), “Over 44 percent children in Pakistan suffering from chronic malnutrition.” Available at https://www.pakistantoday.com.pk/2019/03/08/over-44-childrenin-pakistan-suffering-from-chronic-malnutrition/

20. United Nations, “Industry, Innovation and Infrastructure: Why it Matters.” Available at https://www.un.org/sustainabledevelopment/wp-content/uploads/2016/08/9_Why-itMatters_Goal-9_Industry_1p.pdf

21. Government of Pakistan, SMEDA, “State of SME’s in Pakistan.” Available at https://smeda.org/index.php?option=com_content&view=article&id=7:state-of-smes-inpakistan&catid=15

22. The ExpressTribune (2018), “Pakistan needs to become urban industrial society.” Available at https://tribune.com.pk/story/1858885/1-pakistan-needs-become-urban-industrialsociety/

23. Supra 15

24. Karandaaz Pakistan (2018), “Enhancing Builder Finance in Pakistan.” Available at https://karandaaz.com.pk/media-center/news-events/new-study-highlights-massive-economicbenets-low-income-housing/

25. Ibid

26. If current trends continue, Pakistan’s ve largest cities will account for 78 percent of the total housing shortage by 2035.

27. From Duke, Urban Institute and Lahore University of Management Sciences.

28. Such as the Karachi Water and Sewerage Board, Sindh Building Control Authority, Lahore Development Authority (LDA), and Lahore Waste Management Committee.

29. Research conducted by the IGC’s ‘Cities that Work’ initiative.

30. DAWN (2018), “Punjab property tax collection remains far behind.” Available at https://www.dawn.com/news/1397466 27. From Duke, Urban Institute and Lahore University of Management Sciences.

31. International Growth Centre (2011), “Policy Brief: Reforming the Urban Property Tax in Pakistan’s Punjab.” Available at https://www.theigc.org/wpcontent/uploads/2014/09/Nabi-2011-Policy-Brief.pdf

32. Ibid

33. From Harvard, London School of Economics and Massachusetts Institute of Technology.

34. World Bank, “Leveraging urbanization in South-Asia.” Available at http://www.worldbank.org/en/region/sar/publication/urbanization-south-asia-cities

There are approximately 144 million individuals in Pakistan who reside in either completely off-grid areas – areas that are too far away to connect to the grid – or in ‘bad’-grid areas where load shedding exceeds 12 hours per day (IFC, 2015). Households and businesses in off-grid and bad-grid areas spend an average of 14% of their monthly disposable income on kerosene oil, candles, and others alternative sources of energy.

Access to renewable energy

Recent evidence from Rwanda and Bangladesh has shown small, solar-powered kits can have significant positive effects on household welfare and energy expenditures. Pakistan is relatively well endowed with renewable energy sources; yet access to clean, renewable energy is rare. For instance, solar energy is consumed by approximately 3.8% of households nationwide and is nearly non-existent in Punjab, Sindh and Balochistan.
According to the IFC report, cost remains one of the biggest barriers in the take-up of alternative energy sources, such as solar electricity, in Pakistan. Consumers prefer to make small, incremental purchases to meet their energy needs and are reluctant to make large upfront investments, such as those typically required for solar systems.

Pay-as-you-go energy solutions

One energy provider in rural Sindh, EcoEnergy (EE), aims to meet these needs by providing Pay-As-You-Go (PAYG) solar solutions, allowing individuals to pay only for what they need and can afford. Monthly payments are typically comparable to what villagers spend on energy. The PAYG product has a strong enforcement feature: The solar kit is remotely disconnected when credit expires. Since there are no financial penalties for late payments, disconnections represent a pure loss for the provider.

The study: Behavioural innovations to improve the sustainability of PAYG solutions

We first test if increasing the flexibility afforded by PAYG leads to improved payment performance. We do this by varying whether payment is explained as a minimum monthly amount or as an equivalent total amount that can be paid more frequently: Weekly, bi-weekly, or at other frequencies for the solar kit to remain functional.
Second, we test the individual constraints to repayment such as inattention, forgetfulness, and lack of self-control. We use another soft-touch intervention similar to the ones that were effective in improving medical screening rates and voter turnout in the United States (US). Specifically, we ask customers to formulate a plan for the subsequent payments and to circle the payment dates on a calendar that can be displayed at the clients’ home or place of work. In formulating this plan, clients need to think about possible issues in repayment and the strategies to overcome them.

Our study involved randomly varying the terms of the product to 727 new EE clients in rural Sindh between March and December 2018. Nearly a quarter of the sample had no access to electric power. The remaining had access but experienced more than ten hours of load-shedding a day. An average customer experienced approximately five instances of inactivity (disconnection) in this period, with each instance lasting an average of five days a month.

Results: The benefits of flexibility and payment implementation plans

We find that providing information on flexible payment options to this sample improved repayment behaviour: Clients are likely to pay on time and experience one fewer instance of inactivity. On the other hand, implementation plans do not improve repayment behaviour on average (see figure 1).

Figure 1 – The number of inactive periods experienced by intervention type

These overall results mask interesting variation. Consistent with the fact that almost 40% of the sample believes forgetfulness is the main challenge to timely payments, we find that the implementation plans significantly reduce the number of inactive periods in the sub-sample of clients who reported difficulty in remembering to make payments on time. It is entirely likely that intention plans increase saliency of payments by enabling clients, who typically face difficulty in remembering to pay, to operationalise their intentions to make top-up payments on time (see Figure 2).

Figure 2 – The number of inactive periods experienced by individual characteristics (with intention plans)

In line with this reasoning, clients with a history of missing other payments experience a higher number of inactive cycles under the flexible payment treatment than under the discipline of a fixed contract treatment (see Figure 3).

Figure 3 – The number of inactive periods experienced by individual characteristics (with payment type)

Implications: Innovating for improved energy access

These results speak to an important, broader question in the literature on optimal contract design in developing countries and the need to pay attention to the characteristics of people when designing them. The interventions tested in this study are soft-touch and non-intrusive in that they make a desired payment schedule salient but non-binding. However, our findings point towards the promising role that these easily scalable behavioural interventions can play in improving the repayment performance of clients with particular characteristics.

The authors are IGC Researchers.

The government of Pakistan continues to negotiate a new program with the International Monetary Fund. While all signs indicate a program is likely, Professor Ali Hasanain of the Lahore University of Management Sciences explains why the IMF can’t fix Pakistan.

Pakistan is hoping to soon conclude negotiations with the International Monetary Fund (IMF) to receive a loan of approximately $10 to $12 Billion in what will be its thirteenth IMF bailout. Of the past twelve programs, only one was completed satisfactorily. This loan will add to approximately $10 Billion in bilateral loans that Pakistan raised recently from China, the UAE, and Saudi Arabia.

Much has been written about why Pakistan needs the IMF’s help, including foreign exchange reserves in sharp decline, substantial debt servicing obligations coming due this year, and difficulties in raising money due to deteriorating credit ratings. Most commentators have however ignored Von Clausewitz’s caution to ‘beware the vividness of transient events’ and focused on tactical points, such as the merits of taking loans from friendly countries before seeking the Fund’s help. With a handful of notable exceptions, few have asked why Pakistan remains in perpetual need of the IMF’s support.

Pakistan’s Economic Problems Aren’t New

The basic contours of Pakistan’s fiscal problems are not new nor do they come as a surprise to the government. First, budget deficits have become perpetual: Pakistan has an extremely low tax net, with only 1.7 Million tax filers in a country of 210 Million. Yet despite this, expenditures are substantial: the government substantially subsidizes a large number of public sector enterprises, including the railways, the national airline, and the Pakistan Steel Mills. It also subsidizes electricity, gas, water, major agricultural products, and many other sectors. In some years an overvalued currency has added to these woes, and in others significant external aid has masked them, but the underlying fundamentals have not changed substantially in more than half a century.

Second, beyond financial worries, the barriers to economic growth are also not new. Two decades ago, Pakistani Prime Minister Nawaz Sharif met with Singaporean Prime Minister Lee Kuan Yew and asked him to assess Pakistan’s economic troubles. Prime Minister Lee identified obvious problems such as poor land title documentation; extremely high defense and debt servicing costs; rampant corruption; crime and violence that frightened away foreign investments; and resource allocations done not through commercial imperatives but connections. Nothing is strikingly different today.

Government Must Better Articulate Reform Strategies

One pattern that has emerged since then is that political regimes typically inherit a crisis, seek an IMF bailout, and use the financial space created to claim victory without embarking on the sort of painful, fundamental reforms that the economy needs. Some commentators have argued that the Fund is complicit in entrenching the country’s woes because it has continued to lend, repeatedly and over decades, in the knowledge that true reform is unlikely. There may be a kernel of truth in this argument, but Pakistan is ultimately responsible for charting its own path.

Greater leadership and an articulation of a long-term plan beyond the IMF is required for any genuine economic reform to take place. For example, while the government took the brave step of removing the Hajj subsidy earlier this year, it failed to clearly articulate why this was economically necessary. Similarly, it has drawn down subsidies on electricity and gas, but failed to describe to the public why this will benefit the economy in the longer-term. Instead, Prime Minister Imran Khan has spent hours in his speeches talking about the austerity of his immediate office operations, even though the Prime Minister and President Houses combined only spend 0.03 percent of the Federal Budget. The government must focus on sensitizing the public to the need to undertake painful cuts in public sector enterprises and educating people on the fundamentals of economic reform.

Reform Depends on Political Change

The IMF can help Pakistan avoid insolvency, but a new program will do little to spur the comprehensive set of economic reforms that the country needs. Reform depends on internal voices questioning why each loan taken is not accompanied by a well-monitored plan for repayment. It also depends on political change. It is no great insight that Pakistan’s economic woes emanate primarily from its political problems. Political contests seldom compete on public service delivery and instead thrive on entrenched special interests and the prioritization of private local benefits over public development.

What then will drive political change? Two key changes in recent years emerge: one, Pakistan’s demographics make it among the youngest populations in the world, and the relative voice of the youth is getting louder; two, Pakistan is urbanizing, and a decrease in the importance of rural politics may over time reduce the role of patronage politics in society. An IMF program will resuscitate the economy in the short term, but it will ultimately be changes in Pakistan’s politics that create lasting reform.

Ali Hasanain is an Assistant Professor of Economics at LUMS and a CDPR Fellow.

This article was originally published by John Hopkins School of Advanced International Studies here.