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The Centre of Economic Research in Pakistan (CERP) with support of the International Growth Centre (IGC) is conducting a series of projects aimed to understand the impact of women’s mobility on their labour market integration. 

Despite more women entering Pakistan’s labor force, its workplaces remain highly male dominated. According to the latest labor force survey, between 2008 and 2010, female labor force participation rate has increased from 19% to 22.5%. However, this is still much lower compared to the world average (39.2% in 2018 as per the World Bank Data).

Some of the reasons that prevent women from entering the labor market include unfavourable social norms, restrictions on mobility, gender-based discrimination and sexual harassment, safety concerns, and all-consuming household duties. However, there is little in-depth scientific research to understand why there are so few women entering the labor force.

A team of researchers based at the Center for Economic Research Pakistan (CERP) and with the support of the International Growth Center (IGC) set up an employment facilitation platform – Job Talash (search) (earlier called Job Asaan (easy)) to understand the dynamics of the female labor market in one of Pakistan’s major metropolitan centers, Lahore. Survey data gathered from female subscribers of the employment facilitation service operating only in Lahore at the moment as well as from firms, suggests that there is both a willingness on the part of firms to hire more women and a desire expressed by women to enter the labor force if they find a suitable job. Yet the labor market does not reflect these desires.

A geographically representative survey of households provided two key pieces of information – how many people are looking to enter the labor force and, relatedly, how many of them were willing to sign up for our employment facilitation service.

The team called all individuals who had expressed an interest in the household survey to sign them up for Job Talash and assisted them in creating a resume for each person based on the details requested from them (educational qualifications, details of work experience) and matched them to jobs (job interests). This information has allowed the researchers to match the subscribers to jobs posted by firms, who were enrolled through a similar exercise covering all areas of Lahore. Apart from listing job advertisements, the firms also participated in a detailed survey about their hiring patterns which helped the team study the demand side of the labor market.

With an active platform of jobseekers and firms, the team was able to capture real-time application behavior, giving them a unique insight into how the subscribers operate in the labor market and their revealed preferences about job seeking activity through application behavior rather than self-reported information. The researchers were able to record their response, or non-response, to each job match they received through the portal.

One might think women simply do not want to consider working due to conservative social norms that constrain them from taking any job and/ or exclusively assigned responsibilities of dependent care work and household duties. Yet almost 20% of the women part of the household survey, currently not working, expressed an interest in working (Figure 1). Female labor force participation rate can more than double if these women take up jobs. Around 36% of this group have high school education or higher (12+ years of education) and 64% have a lower than high school education level. Of these, 18% went on to take the time to complete the in-depth sign up process for the job search service (Figure 2).

Despite willingness to work, supply of female labour has remained largely untapped – why?   

Figure 1: Interest in working by gender

Figure 2: Interest in working by gender and current employment status

Perhaps the constraint is on the firm side, in that employers might not want to hire women due to concerns about their competing family pressures, or simply due to discriminatory preferences.  Most firms in the representative sample of Lahore do not currently employ any women, although women are much better represented in larger firms (Figure 3).

Figure 3: Share of female employees by firm size

However, firms’ job postings with the service show that many companies are willing to hire more women. Figure 4 shows that firms with at least one female employee ask to receive applications from female candidates for at least 65% of their job openings. Even many firms that currently employ no women are willing to consider them – around 30% of the jobs posted by firms with zero female employees ask to see resumes from female candidates.

Figure 4: Job advertisements posted for women and current firm gender composition

If firms are willing to consider female candidates, and women are willing to work, why does the proportion of women in these firms remain so low? One potential reason for this is referrals that play a significant role in recruitment – it is by far the most common hiring method, even for high-end jobs (Figure 5 & 6).

Figure 5: Recruitment methods for female high-end filled vacancies

Figure 6: Recruitment methods for male high-end filled vacancies

Women lose out in referral-based employment because of societal barriers and a lack of access to the kind of referrals men might benefit from. Beaman et al (2015), in their experiment designed around a recruitment drive of real jobs, found that qualified women tend not to be referred by networks. The study’s data shows that women are hired through referrals less frequently than men and are hired because they submitted unsolicited applications more frequently than men. Firms with no female employees hire through referrals at a greater rate than firms with at least one female employee (Figure 7).

By providing free hiring services through Job Talash and gathering survey data on all hiring, the team allows firms to hire women or men from outside their social networks, and observe whether they choose to do so or not. This provides a chance to test whether a range of interventions change that decision, and whether it expands opportunities for women.

When asked how firms’ employees commute to work, there is a significant differences in responses for female and male employees. Firms were asked whether females and males use a number of different transport modes. Figure 8 (a) and (b) indicate that women are more likely to walk or take public transportation compared to men, of which 71% commute using their own car or motorbike.

Figure 8 (a): Firms response on their employees’ transport mode for commute

Figure 8 (b): Firms response on their employees’ transport mode for commute

Approximately 90% of women surveyed who were willing to enter the labor force said they would be more likely to work if safe and reliable transportation, like employer pick-and-drop, was provided (Figure 9).

Figure 9: Impact of safe transport on decision to work among women

Interestingly, firms of various sizes consider where job applicants live in the city and the mode of transport they will use to commute to work when evaluating the applicants (Figure 10). Despite the indication that transport mode used for work is an important consideration in hiring decisions, only 4% of the employers surveyed provided any kind of transport to their employees (Figure 11).

Figure 10: Do employers consider applicant residence and mode of transportation, by job education level

c)

Figure 11: Availability of transport service provided by employers

Women’s labor force participation is limited by many factors.  But some may be more responsive to policy changes that could expand women’s choices.  The high frequency and high quality job seeker and employer data we collect on our job platform enables us to perform various experiments to investigate these constraints further and test out interventions that can help reduce them, so that women who choose to work have the opportunity to do so.

Information frictions

The fact that people want to work but cannot find suitable positions and firms want to hire but cannot find suitable candidates suggests information frictions – jobseekers do not know where the jobs are, and what skills they need for them, while firms cannot distinguish skilled and committed jobseekers from the competition. Skills mismatch may be part of a larger reason firms rely on networks to hire; they are unable to find a qualified pool of applicants without using references to screen them. Apart from providing a free job matching service by sharing CVs of suitable job seekers with employers, we have studied information frictions by providing jobseekers better information about the skills firms demand so that they can invest in them, while also providing better information to firms about jobseekers’ qualifications. Results of this experiment can help policy-makers better understand the nature of these information asymmetries and how best to tackle them through information campaigns, education interventions, technical training initiatives or employment facilitation.

Physical mobility

While there are many barriers to women entering the labor force, the provision of safe and reliable transport is one of the more policy responsive impediments. To assess the importance of safe and reliable transport in women’s decision to enter the labor force, we offer randomly allocated groups of subscribers a transport service to and from work. Some women are offered women-only transport and some mixed-gender transport; men are offered mixed gender transport. We also experimentally vary the percentage subsidy subscribers receive on their transport offer. The aim is to determine whether transport offers impact application rates and, by extension, whether transport is a major consideration in the decision to work. The different types of transport we offer, as well as the rate of discount on the transport offered, can inform policy decisions about what modes of public transportation are most effective and at what prices.

 This post is the second in a series discussing findings from the Punjab Education Sector Programme (PESP) II evaluation, a performance evaluation funded by the UK’s Department for International Development (DFID). In the first interim phase, survey and administrative datasets were reviewed to understand changes in Punjab’s education landscape since 2012. The first post in this series discussed participation and access. This post will focus on educational attainment.

School-level averages of learning outcomes for Punjab show marginal improvement in educational attainment in the province. The analysis of raw data from different data sets reveals that there have been marginal gains in learning outcomes in the province in all basic literacy and numeracy competencies assessed i.e. English, Math and Urdu[1]. For the purpose of this post, we have used DFID data which has been collected through a school base survey, using learning outcomes data for grade 3 pupils.

The average overall student score has increased from 70.2% in 2015 to 78.4% in 2018, resulting in an increase of 8.2 % in the three-year assessment period. In terms of average student scores in subjects, mathematics has shown the largest increase in this period, going up by 9.8%, followed by Urdu at 8.9% percent, and finally English at 5.5%.

Analysis of this data raises several important issues. Firstly, the overall limitations of all collected data are in themselves an important finding. They indicate the need for nuance, perspective and context while analyzing the raw data. They also highlight crucial gaps in data collection which need to be addressed in order to gain an accurate assessment of changes in learning outcomes. The second point is especially crucial in terms of developing and implementing appropriate and targeted policy interventions.

Secondly – and more specifically – the available data shows us marginal progress only for the limited set of literacy and numeracy skills that have been assessed. This means that when interpreting the results, it is necessary to remember that we lack evidence about other aspects of children’s learning and development. For example, a supportive and literate home environment, access to home tuitions, and even basic nutrition and health, among others. Thirdly, it is also helpful to remember that learning progresses, and learning outcomes change, in a complex and non-linear manner. Data snapshots for a specific period in time are therefore not helpful in conducting accurate analysis. It is much more helpful and informative to collect data and observe potential gains over a longer time period. The current time period for which data is available is only able to give us a surface level look into improvements in educational attainment in the province.

Lastly, and most critically, the current data reveals the need for a great deal of context about who is being assessed. Simply put, this means that we need much more information about children under assessment in order to have a deeper understanding of improvements in learning outcomes. Variations such as location, gender, socio-economic status, disability, school-type, and other potential marginalization, are integral in order to accurately understand learning outcomes. Understanding whose learning is being assessed is especially more important when it comes to the enrolment and consequent progress of disadvantaged children. Disadvantaged children – be it wealth, location, gender, disability, or an intersectionality of all of these – tend to have poorer learning outcomes than their counterparts. Increased enrolment of disadvantaged children therefore has a negative effect on measured learning outcomes, particularly if school quality remains unchanged. The inability of current data sets to categorize socioeconomic profiles of students being assessed is therefore a significant drawback, and greatly impacts the ability of researchers and policy makers to gain a meaningful understanding of success in educational attainment.

Despite the data limitations, it is important to note that in this case, limited improvement does not necessarily signify failure. This is because improvements in learning tend to be cumulative. Not observing large improvements in learning outcomes over a relatively short period is by itself not indicative of a system-wide failure in educational attainment. There is significant literature that suggests that being in school matters for learning for children  One potential path to success is through increased enrolment, and then retaining students in the educational system long enough to identify meaningful improvements in learning beyond their particular socio-economic context.

[1] The PESP II evaluation studied educational attainment across three different data sets i.e. Learning and Numeracy Drive data 2015-2017 (LND), DFID’s Six-Monthly Assessment data (2014-2017), and ASER data. For both LND and DFID, data are mainly collected on basic literacy and numeracy (English, Urdu and Maths).

[2] See work done by the Institute of Development and Economic Alternatives on this under the Teaching Effectively All Children (TEACh) project: http://ideaspak.org/human-development/teaching-effectively-all-children-teach/

Maheen Saleem Khosa is the Assistant Manager Communications at the Institute of Development and Economic Alternatives (IDEAS).

This post discusses findings from the Punjab Education Sector Programme (PESP) II evaluation, a performance evaluation funded by the UK’s Department for International Development (DFID). In the first interim phase, survey and administrative datasets were reviewed to understand changes in Punjab’s education landscape since 2012.

Article 25A of Pakistan’s Constitution states that ‘The state shall provide free and compulsory education to all children’. Despite this constitutional imperative, however, Pakistan is a long way away from the provision of universal access to basic education for all. In Punjab, in particular, while some gains have been made in improving access and quality of education, many challenges still remain. This post looks at patterns in educational participation and access in Punjab, during the 2011-2016 period 1 . Access in Punjab is seen to have improved during the evaluation period, with the overall participation rate rising by by 8%. Despite this, there are significant challenges remaining particularly for some groups and regions. Additionally, taken alone, the participation rate lacks nuance, and does not given an accurate picture of prevailing educational disparities in the province.

A deeper look into improvements in educational access and participation in Punjab reveals that while there has been some success at getting more children into school, significant inequalities remain by region, socio-economic status and gender. Additionally, while more children between the ages of 5-16 are attending school, they are not always in the appropriate grade.

Regional disparities are heavily skewed towards urban areas, with children in rural areas far less likely to be able to access education than their urban counterparts. It is promising to note that the percentage increase in participation in rural areas has increased by 9%, as opposed to a 4.4% increase in urban areas. However, the overall participation rate remains higher for urban areas by 6.5%.

Socio-economic disparities are also heavily prevalent in participation and access. Wealth is a significant factor in access to education, with the rich far more likely to be accessing schooling than the poorest. As with regional disparities, it should be noted that while there have been improvements in educational access for the poorest – a 29.5% increase in participation rate between 2013 to 2016 – cost is still a significant barrier for many in sending their kids to school. This is especially problematic given the presence of free primary education. This is because the cost of education does not simply include the direct cost of attending school, but also includes a number of indirect costs such as uniforms, textbooks, examination fees, travel costs and other expenses. More importantly, for a lot of households it also includes the opportunity cost of lost earnings from a child going to school as opposed to earning a living. For households subsisting on the poverty line, all these costs often become insurmountable, even in the face of free primary education.

In terms of gender, girls continue to be less likely to participate in schooling than boys. There has been some progress in increasing girls’ participation in the province – participation rates rose by 9.9% for girls during the evaluation period, as compared to 6.3% for males. But progress has been persistently slow and has not been able to address the basic disparity between genders, with overall male participation rate continuing to be higher. This gender disparity is often exacerbated by low household socio-economic status. Low income households often likely to prioritize boys’ education over that of girls, particularly in the face of limited finances to educate both [1].

Another issue is age-appropriate enrolment. It seems that although participation in schooling has improved, the pattern of enrolment rates indicates that there are still many children who are not attending schooling in the appropriate grade for their age. This is calculated using Gross Enrolment Ratios (GERs) and Net Enrolment Ratios (NERs), which provide alternative means of evaluating access to education at various education levels. What do these ratios mean? Simply put, the GER measures enrolment in a certain grade regardless of age, while the NER calculates the percentage of children in the age-group who are in school at an age-appropriate grade level [2].  While assessing participation data, it is useful to see the GER and NER in conjunction with each other, rather than individually. Discrepancies between the two ratios indicates that children enrolled in school are either entering late to first grade or not progressing regularly through the grades. The persistent discrepancies between the GER and NER for Punjab during the evaluation period are indicative of underlying systemic inefficiencies relating to issues such as overage school entry, grade repetition and drop-outs, among others.

[1] The PESP II evaluation used the the PSLM, Nielsen and ASER data sets during this period. All data and analysis used in this post and the accompanying infographic is also based on data from these sources.

[2] Because of the way GER is calculated, it is possible for the ratio to exceed 100, as both overage and underage children are included in the calculation.

Maheen Saleem Khosa is the Assistant Manager Communications at the Institute of Development and Economic Alternatives (IDEAS)

This blog post is based on a session of the Lahore Policy Exchange held at the Consortium for Development Policy Research on 5^th July, 2019 with Dr. Reza Baqir, Dr. Ijaz Nabi, Dr. Salman Shah, and Tariq Saigol.

On July 3^rd 2019, the International Monetary Fund (IMF) approved a $6 billion 39-month Extended Fund Facility (EFF) arrangement for Pakistan. The EFF was conditioned on a set of macroeconomic stabilization measures designed to allow the government to implement an economic reform program. In order to understand the contours of this reform agenda, it is important to understand the implications of such a stabilization program.

Responding to the demands of the IMF, and the needs of the economy, the State Bank of Pakistan (SBP) allowed the rupee to depreciate against the dollar to bring it at par with the market rate. Since the start of 2018, the rupee depreciated by almost 45 percent against the dollar. This exchange rate adjustment combined with higher fuel prices and demand side pressures resulted in inflationary pressures and an erosion of purchasing power. Consequently, to curb inflationary pressures, SBP raised the policy rate (i.e. lending rate of the central bank) at the start of 2018 to 13.25 percent from 5.75 percent. At the same time, the government also initiated an austerity drive and tightened its fiscal policies while cutting down expenditures.

The immediate effect of these policies was a slowdown of the economy and weakening of growth prospects over the next two to three years.

Ironically however, this is not unfamiliar territory. Pakistan has sought IMF support 13 times in the past three decades and this is the country’s third IMF package since 2008. While the political context in which each of these crises occurred differed, the underlying structural deficiencies have remained the same.

An important question that emerges is how will these stabilization measures, which have slowed down growth currently, ensure growth in the future? More importantly, how can we ensure that this is the last time we go to the IMF?  

To answer these questions, it is useful to think about three critical aspects of macroeconomic stabilization. Firstly, we must consider why macro instability is bad for the economy and what causes it? Once we understand why instability is bad, it becomes easier to come to terms with the short-term economic contraction caused by a stabilization program. Secondly, we must consider what short-term actions have been taken to date to counter this instability by the government and the SBP. Finally, if we accept that instability is bad for growth, does that mean that stabilization will automatically ensure growth in the future and reduce poverty?

The effects of instability and its causes

The multiple aspects of macroeconomic instability can be narrowed down into three broad categories: external, monetary, and fiscal.

A typical situation of external instability is represented by two concurrent trends: a rising current account deficit where imports exceed exports and, depending on the exchange rate regime, falling foreign reserves. In Pakistan, both these trends were driven by an overvalued exchange rate. Between 2013 and 2018, the PML-N government, maintained a USD to PKR exchange rate that hovered around a 100, far below the market rate. This resulted in an increase in imports (making them cheaper to purchase), eroding foreign exchange reserves, and at the same time made our exports uncompetitive in the global market. With an overvalued exchange rate, there is inevitable pressure on the external account, which can lead to a full-blown Balance of Payments crisis, all the while eroding foreign reserves. The net effect of such instability is to raise uncertainty about the future, dampen investment, job creation, and ultimately growth.

A good way to capture monetary instability is via rising inflation which erodes purchasing power and can reduce real living standards. While those in middle-to-high income brackets are able to smooth their consumption with savings, those in lower income brackets are hit the hardest. Inflation not only slows down economic activity, but also adversely impacts income distribution, disproportionately affecting the poorest segments of society.

Fiscal instability is caused by a situation where government debt rises due to recurring fiscal deficits i.e. the government spends more than it earns. To counter this, given a narrow tax base, Pakistan inevitably needs to borrow. However, the country has failed to pursue a borrowing policy that minimizes the risks of taking on debt. As a result, over the previous decade there has been a persistent and significant deterioration in Pakistan’s debt sustainability. The debt burden became so large that it squeezed other sectors of the economy and necessitated assistance from the IMF.

What has been done so far?

The State Bank has two primary instruments to counteract such instability: the exchange rate and the interest rate. By allowing the exchange rate to respond to market forces, the current account deficit over the first eleven months of FY19 contracted by 29 percent from $17.92 billion to $12.68 billion. The State Bank also confirmed that the current account deficit that had risen to almost $2 billion on a monthly basis has now been halved to $1 billion. Exchange rate adjustment led to a contraction in imports, a volumetric increase in exports, and a rise in remittances that helped reduce the current account deficit. The impact on current account deficit could be even larger had global oil prices not increased.

At the same time, to combat rising inflation, interest rates were also increased by 750 basis points since January 2018. Despite the associated increase in the cost of borrowing, the State Bank considers this to be a short-term measure and expects the increase in purchasing power to compensate for the decrease in investment in the short-run.

On the fiscal side, the government vastly decreased its expenditures while increasing its revenue targets. The Federal Board of Revenue (FBR) has initiated a comprehensive campaign to document the undocumented sectors of the economy and broaden the tax base.   

A primary objective of indicators such as the exchange rate and the interest rate is to provide a signal to the markets about the direction of the economy. Hence, the importance of sentiments in stabilization cannot be overstated.  Responding to corrective measures taken so far, non-resident purchases of stocks have been going up. Hence some of the actions that have been taken so far are having the intended effect.

The quantitative fiscal measures have also been accompanied by some qualitative measures. In the past several months, the SBP was one of the biggest sources of financing the government deficit leading to inflation (via printing more money). As part of the stabilization program, the IMF wants the government to reduce its reliance on the SBP and this is reflected in the new budget where financing from the central bank has been reduced to zero. Moreover, debt obligations have also been pushed forward.

The IMF has released its first tranche of $1 billion. This has the potential to unlock additional financing from other multilateral and bilateral sources. It will also give government the fiscal space to increase development and social protection spending.

Will growth automatically follow stabilization?

Simply put, no. While instability ensures that growth cannot take place, the converse is not true. The objective of macroeconomic stabilization is merely to create the conditions in which growth can potentially take place. This potential can only be unlocked by a supportive reform agenda of the government.

The start of any stabilization program is accompanied by hard economic decisions that require difficult adjustments by the people. In this phase, the government’s prime responsibility is to ensure that the effects of such adjustments are mitigated for lower-income segments of the population. At the same time, it has to ensure it addresses the key structural deficiencies that have resulted in recurring macroeconomic crises. 

This is by no means an easy challenge. The problems that Pakistan faces are numerous and varied. It must reform and strengthen institutions to ensure economic mismanagement ceases to be a recurrent feature. It must simplify and rationalize tax laws while at the same time widening the tax base and focus on increasing the value of its exports in the global market. It should take measures to increase productivity in manufacturing and services, improve the ease of doing business via deregulation, and restructure the energy sector. At the same time, it needs to enhance social protection, and reform public health and education. Pakistan must also reform the way its cities are managed to ensure they become the engines of growth a modern economy requires.

Lastly, but most importantly, any successful reform program needs a supportive bureaucracy. Political leadership relies on the civil service to understand government procedures and help formulate policy. This connection needs to be strengthened to ensure policy prescriptions reach their logical end.

Bakhtiar Iqbal is a Research Assistant at the Consortium for Development Policy Research.

As IMF steps in to stabilize Pakistan’s economy, ‘structural reforms’ have become the center of economic debate in the country.  Structural reforms are measures targeted to remove inefficiencies in the economic structure to optimize resource allocation and increase productivity and employment. Such reforms can include widening the tax net, reducing wasteful government expenditures on inefficient state owned enterprises or administrative set-ups, protecting domestic industries, devaluing currency to boost exports, etc. However, for these reforms to be successful, the political economy has to support and create an environment geared towards their success.

Some developments have eased the pressure. A drastic reduction in current account deficit (CAD), down to USD 14b from USD 20b in the past 11 months, has been a relief at a time when external financing requirements have sky rocketed due to substantial rise in imports.  At least this government will not need to finance its CAD through external debt, as done by previous governments. However, the country’s debt obligations – having risen due to commercial borrowings from international banks – have become the single largest liability requiring external financing. The total debt volume is significantly over USD12b after accounting for loans worth USD 7b received thus far from UAE, China and Saudi Arabia. Managing timely repayment of this piling debt alongside the hefty CAD will be a challenge for the incumbent political team.

As CAD soared, so did the fiscal deficit, closing at 7.6% of the GDP by June 2019. Fiscal deficit and current account deficit are two sides of the same coin. Fiscal deficit compounds the problem of trade deficit thereby worsening the overall current account deficit. In the past this led the government to take a series of steps, such as intervening in the exchange rate market and taxing imports, which helped generate increased revenue in the short-run, but worsened the country’s trade balance.

The Consortium for Development Policy Research (CDPR), a Lahore-based, policy research and dissemination organization, hosted a panel talk with eminent economists including Dr. Hafiz Pasha, Dr. Waqar Masood, and Dr. Naved Hamid, moderated by CDPR Chairperson and respected economist, Dr. Ijaz Nabi, to understand whether the government’s stabilization efforts are aligned to IMF directives.  Dr. Masood felt Pakistan should have approached the IMF as early as 2017 when it became apparent that foreign exchange reserves had begun falling. So while one may wonder about the necessity of an IMF loan, its timing may be a bigger concern.

Budget as a stabilization tool for structural reforms

Federal budget 2020 was the immediate first step of the incumbent government towards economic stabilization. The budget lays out the government’s plan to generate revenues to exceed its total expenditures. Since, as per State Bank of Pakistan, the government can no longer borrow from the central bank during the fiscal crunch, it has sought to rapidly increase revenues by undertaking efforts to widen the tax base as well as increasing total taxes.

However, Dr. Pasha contended that the budget as a tool for achieving economic stability has a limited role to play in this scenario. IMF’s focus on the primary deficit – total revenue minus non-debt servicing related expenditure – aimed at 0.6% of the GDP from the current 2.2% of the GDP, will determine the path of the country’s debt accumulation. Achieving this target would require a significant adjustment from the government. However, a runaway growth in debt servicing – PKR 2000b for FY20, forecasted to rise to PKR 2900b by next year – will make reducing primary deficit more challenging. The rise in debt servicing can be attributed to burgeoning interest rates rather than an increase in the volume of debt, which in the next two years could increase debt servicing by 45%.

Dr. Ahmed and Dr. Hamid felt a primary deficit of 0.6% can be attained in the next 2 to 3 years and view the budget as a credible instrument for achieving this aspect of stabilisation under an IMF package. As interest rates escalate and currency weakens, debt servicing will definitely go up. In that case working to reduce the primary deficit will at least make it easier to honor interest payments.

In any case, primary deficit should not be considered as the ultimate lens through which to assess budgetary stability. It is just one indicator which determines the evolution of debt. A second critical indicator is the debt-to-GDP ratio determined by the real interest rate. If the real interest rate goes up to become positive, then the debt accumulation path can become very rapid even if primary deficit disappears.

How the budget is addressing structural imbalances

There are some elements of the budget that underlie structural change in the economy. Without voluntary cuts in military expenditure, total expenditure could become unsustainable, according to Dr. Pasha, reaching 45% of the GDP. This is a major structural reform that must be sustained.

Another crucial development is a renewed focus on detecting tax evasion. The Federal Board of Revenue (FBR) has developed a portal displaying all sources of income of Pakistani residents to encourage citizens to pay taxes against all declared and undeclared assets, properties and bank accounts. This effort by the government was intrinsic in pushing people to enter the tax base by availing the Amnesty Scheme that ended in June 2019.

The budget also underlines the importance of social protection and poverty alleviation by dedicating a separate line item outside of the development spending category for such expenditure. Under the banner of social protection and current expenditure, the government has allocated funds three times larger than under the previous government. This budget has increased to PKR 400b compared to PKR 130b in the past. This change will help cushion the poor against economic shocks during the ongoing IMF-backed adjustment.

Another major development towards sustainable growth is introduction of structural reforms to make the State Bank of Pakistan independent. This has led to currency adjustments that reflect the market value of the Pakistani Rupee rather than keeping it artificially overvalued. An exchange rate is only sustainable when it does not have to be financed through borrowed money and leading to distorted investment choices in inefficient sectors. An over-valued rupee has been hampering export growth and increasing imports. In the long-run, such currency adjustments will help generate higher earnings through exports even if there is an economic slowdown.

What the budget has not addressed

One of the largest sources of wasteful expenditure is that incurred by the Federal government that spans across 42 divisions and 200 plus autonomous bodies. The financial upkeep is extremely high. Yearly non-salary expenditure amounted to PKR 850b last year and is estimated to swell to PKR 1000b this year.

Through an overreliance on indirect taxes for revenue generation, the burden of adjustment has fallen disproportionately on the poor. Almost 70% of the revenue generated is expected via indirect taxes.

Hope for the future, but with reservations

Overall, the budget reflects sound policy choices to address structural imbalances in the economy focusing deeply on the problem beyond just symptoms. The current economic crisis is a government crisis whereby the situation is described by excessive government borrowing and not requiring bailing out of banks had it been due to excessive private sector borrowing. This is much easier to solve. However, while a country undergoes a difficult transition towards stability led by painful economic reforms, the sacrificing citizens must be offered a counter narrative to instill in them the confidence that the painful period will ultimately reap dividends. The best counter narrative would be if the government had managed to lay out an explicit macroeconomic and policy framework for the next three years to remove uncertainty amongst citizens.

The Economic Advisory Committee (EAC) has published a document called the Roadmap that is available on the Ministry of Finance website. This report details many areas where Pakistan requires structural reform and how to achieve it. The government could potentially pick up on a few of these structural reforms and create a counter-narrative based on how the strategies for reforming each sector – such as fairness and taxation, social protection, housing, governance or utilities – can benefit the people in the future.

In the end, maintaining the political momentum will be pivotal during this economic transition.

Sharmin Arif is the Communications Associate at the Consortium for Development Policy Research