PILLAR II:: ACHIEVING SUSTAINED, INDIGENOUS AND INCLUSIVE GROWTH
1.Become one of the largest 25 economies in the World, leading to Upper
Middle Income country status.
2.Reduce poverty level by half.
3.Increase annual Foreign Direct Investment from USD 600 million to over USD 15 billion.
4.Increase tax to GDP ratio from 9.8% to 18%
The objective of Pakistan Vision 2025 is to offer opportunities for achieving better living standards to all Pakistanis irrespective of faith, creed, ethnicity, political affiliation or region i.e. inclusive growth. Studies have shown that high GDP growth does not always mean high social development unless there is a dedicated strategy to distribute the benefits of growth in the society and people are made capable of being part of the growth process. Inclusive growth on the principle of social justice and equity would ensure that people are effective contributors to and beneficiaries of the growth process. Pakistan Vision 2025 also aims this growth to be driven primarily by mobilizing indigenous resources.
Pakistan's volatile development experience has been a result of our over reliance on external assistance and exogenous factors. To ensure a stable and sustained trajectory of higher growth rates, we will focus on endogenous factors of growth such as domestic resource mobilization, tax reforms, science, technology and innovation, driving export led growth and attracting foreign direct investment. Remittances have provided crucial support to our financing needs but their true potential has not been realized. We will introduce reforms to enhance remittances by offering incentives. Nevertheless, with a view to attaining this longer-term target, we will need to build a solid and self-sustaining platform leveraging external funding sources in the medium term. Pakistan is marked by socio-economic imbalances. There are horizontal and vertical, intra and inter-provincial, as well as rural and urban inequalities. We envision a strategy for developing a united and equitable society through a balanced development approach, social uplift and rapid broad based growth. This will ensure provision of opportunities and fruits of economic development to all segments of society.
The focus will be on maintaining macroeconomic stability which is fundamental for sustained and inclusive growth. The purpose of the macroeconomic framework will be to support inclusive growth based upon harnessing the full potential of economic factors, adequate resource availability, private sector as engine of growth, sustainable fiscal and current account deficits, modern infrastructure to support the growth process, provision of affordable energy, knowledge driven economic value addition, modernizing agriculture and SME sector as well as an effective system of social protection.
To achieve sustained and inclusive growth, we will further cut down the fiscal deficit to reduce inflation by reducing borrowing, adopting self-reliance, implementing tax reforms, increasing investments, promoting exports to overcome the persistent problem of the balance of payment deficit. Low inflation will increase investment, promote sustained and inclusive growth, reduce poverty and improve income distribution among different segments of the population.
Pakistan Vision 2025 seeks to elevate Pakistan's position from a lower middle income to an upper middle income country. The economy is targeted to grow by over 8% between 2018 and 2025 with single digit inflation. This will result in GDP per capita increasing from $1,300 to $4,200. An export led growth strategy will be pursued to help achieve these ambitious targets. The Vision aims for an increase in exports from the current US $ 25 billion to US $ 150 billion by 2025. This will enable us to enhance expenditure on the social sector which is critical for reducing poverty. Consequently, poverty will be reduced by half. To accomplish these targets, we need a tax-to-GDP ratio of 16-18%, and an investment rate in the range of 22-25 % of GDP financed through domestic savings of 18-21% of GDP.
The international community is now showing increased confidence in Pakistan's economy. A robust inflow of foreign savings is estimated at 3-4% of GDP in the medium-term to long term which would enable us to finance additional investment of up to 2.7% of GDP until 2025. The projects in the proposed Pak-China Economic Corridor and energy sector will be financed through substantial inflow of foreign investment and disbursements.
To release resources for the private sector, we will bring down the fiscal deficit below 4% of GDP in the long run and attain the domestic savings rate of 18-21% of GDP in order to finance investment from domestic resources. Financial deepening as measured by M2-to-GDP ratio will increase over 50% which will enhance liquidity in the banking and financial system.
Foreign private investment both from the Middle East and export oriented economies of East Asia including China, which now face the pressure of rising real wages, is a strong potential source of financing development, improving technology, upgrading labor skills, and finding export markets. Pakistan offers great prospects for foreign investment in energy including oil and gas exploration, infrastructure development, and water management. Pakistani Diaspora abroad will be harnessed by providing incentives for investment.
As part of the dividends from the Economic Corridor and regional connectivity, our trade linkages with neighbouring countries will expand especially. Completion of key infrastructure and energy sector projects will contribute to national economy and provide a stimulus to attain sustained and indigenous growth.
Capital markets will play a crucial role in mobilizing domestic and foreign resources and channelling them to the most productive medium and long-term uses. They will act as a major catalyst in transforming the economy into a more efficient, innovative and competitive marketplace within the global arena. The capital market will be monitored through prudent financial regulations to protect investors from fraud and deception.
Various structural, legal and fiscal reforms will be undertaken to strengthen risk management, increase transparency, improve governance of the capital market institutions, and enhance investor protection, as described in Pillars III and V. We envision that market capitalization will increase from currently 27% of GDP ($54.28 billion) to over 60% of GDP by 2025.
We need a radical improvement in productivity since the share of total factor productivity in 2013 is one-fourth of its level in the 1980s. Our target is to double its current level by 2025. The productivity will get ample support from skills development, quality institutions, responsive governance, supportive regulatory environments, accountability and transparency at all levels, effective civil service reforms to enhance service delivery, informed decision making, land use reforms, elimination of SRO culture, documentation, effective skills imparting mechanism, positive contribution of Diaspora and above all a credible growth strategy. This will discourage rent seeking, promote competition and enhance productivity in the economy.
Our commitment to provide equal opportunities to all segments of the society by increasing social sector spending (education, training, health and social protection) to 7-8% of GDP will enhance quality of the labour force and increase productivity in the Industry. It is envisaged that Industry and Manufacturing will upgrade from low to high value added output. Business clusters will be developed to promote competitiveness across small, medium and large enterprises. In the Agriculture sector, bridging 40% yield gap in major crops through enhancing technological intensity and 50% decrease in crop losses by 2025 by streamlining input supplies will also increase sector productivity. A nation-wide Quality and Productivity awareness campaign will be launched.
Growth per se will not alleviate poverty but its inclusiveness, through the provision of opportunities for all, will ensure benefits of growth accrue to every stratum especially to the poorest. Inclusive growth will improve distribution of income across society by improvements in workforce education, skills and health. This will ultimately lead to sustained economic growth, which will strengthen macroeconomic fundamentals and the shock absorbing capacity of the economy.
Structural reforms will underpin macroeconomic policies and remove microeconomic distortions affecting key sectors of the economy. Improved governance will allow higher returns on investment and will be conducive to poverty reduction through better delivery of social services. In order to achieve inclusive, indigenous and sustained growth, the following strategic initiatives are planned:
a. Formalizing the Parallel Economy
The share of Pakistan's informal economy is estimated to be more than 50% and employment trends also show that the informal sector is the largest employer of the workforce. The informal sector provided employment to 73.5% of the non-agricultural workforce in 2010-11 and trending upward.
The reason for the growing informal sector includes: tax evasion, cumbersome procedures and pervasive, corrupt practices. Accordingly, we will provide strong incentives and simplify the regulatory environment to help formalize undocumented sectors, which will pay huge dividends to the economy in the form of revenue and ensure a level playing field among entrepreneurs. We target that by 2025; at least half of the businesses in the informal economy will have entered the formal economy.
b. Resource Mobilization
Economic growth and resource mobilization re-enforce each other. The Tax, Investment and Exports (T.I.E) nexus is essential for guaranteeing the desired level of growth in an economy. T.I.E. as a percentage of GDP has declined substantially in recent years and has thus negatively impacted growth. Tax-to-GDP ratio at 9.7% is lowest in the region, private investment has fallen by nearly half between 2006-07 and in 201213 from 15.4% to 8.7% accompanied by sharp drops in both foreign and domestic investment, and exports have fallen from 12.5% of GDP in 2007-08 to 10.7% in 2012-13. This is how substantial erosion of the growth momentum in the recent past could be explained from the financing side. Tax, Investment and Export (TIE) are crucial for enhancing the growth potential and thus enhancing the job creating ability of the economy in the medium to long-term. Critical steps to enhance Tax, Investment and Exports are priority areas in Vision 2025.
Several opportunities exist for enhancing the Tax-to-GDP ratio:
(i) the implementation of a full alue Added Tax (VAT) or wholesale reductions in exemptions and concessions (eliminate SRO power),
(ii) fully incorporating services into the tax net; and
(iii) considerable improvement on the tax administration front, developing and implementing a comprehensive strategy to strengthen tax administration with focus on significantly stepping-up the FBR's enforcement activities and strengthening its legal authority plus digitalization of tax records.
Investment promotion will be achieved through the simplification of regulations, better contract enforcement, liberalization of barriers to new business start-ups, simplification of legal and taxation requirements (such as a "one stop shop" for investors), strengthening anti-corruption efforts, enhancing access to credit for small and medium enterprises (SME) and focusing on financial inclusion and deepening. Efforts will be made to create proper incentive mechanisms for mobilizing savings and transmitting them into investment, harnessing the full potential of the Pakistani Diaspora abroad by offering them potential areas of investment on the patterns of best international practices and above all reaping benefits of investment in economic corridors. We will prioritize public sector investments in order to attract private sector investments in priority sub-sectors, identified as potential drivers of growth, through Public Private Partnerships.
Exports are a victim of protectionist tendencies which incentivize production for the domestic market rather than global markets. A paradigm shift to provide incentives to industries to move their production from low value to high value products will be part of reforms in Pakistan Vision 2025. This will improve export competitiveness and will enable the gaining of a higher share in global markets besides diversification of products and regions. Improvement in supply chains and integrating them into the world market will open many doors for Pakistani exporters. Trade diplomacy and regional trade enhancing initiatives could add substantially to Pakistan's export-to-GDP ratio. The improvement in business climate through reforms will also enhance export potential.
Tax-to-GDP ratio will be increased to 16-18% by 2025 in line with comparable countries (India 16.8%, Turkey 19.7% and Thailand 18.8% in 2012) by broadening the tax base and reforming the taxation system. Domestic savings to GDP ratio will be improved to around 18-21% of GDP through the development of financial markets (banking, insurance and capital markets) and by creating incentives to save (India, 30.9% of GDP, Thailand 29.8%). An export led growth strategy will help achieve $150 Billion exports by 2025.
c. Pakistani Diaspora
One of Pakistan's best resources in realizing these goals is the Pakistani Diaspora. In the case of all fast developing countries, the Diaspora played a critical role in bringing resources, experience, technology and providing access to markets. Pakistan is blessed with an extremely gifted Diaspora. Overseas Pakistanis shall be offered special incentives to become partners in the development of the motherland by not only investing in core development activities but also becoming actively engaged in their management and governance.
d. Urban Development and Smart Cities
The urban population was only 32% in the 1998 census and is expected to be over 50% by 2025 under the administrative definition. Today,Pakistan's cities contribute 78% to the country's GDP. In developing countries, including Pakistan, a 1% increase in urbanization leads to a 1.1% increase in the economic growth rate There is excess demand for office, apartment, retail, warehouse, education as well as community space in all major cities of Pakistan. This problem has been exacerbated by outdated zoning laws which fail to accommodate the growing demand for commercial space. For example, 55% of Islamabad's land was designated for residential purposes, whereas only 5% was designated for commercial activity. This has led to unplanned and haphazard urbanization. Businesses are forced to move to residential areas as they are faced with high commercialization fees and cumbersome procedures. In addition, large cities have witnessed an increase in slums or katchi abadis where sometimes even basic sewerage facilities are not available. Because of such urban sprawl, respective city administrations struggle in providing adequate public services to their citizens. Such a scenario is not sustainable and will hamper growth.
Pakistan Vision 2025 aims at transforming our urban areas into creative, eco-friendly sustainable cities through improved city governance, effective urban planning, efficient local mobility infrastructure (mass transit systems) and better security to make urbanization an important driver of growth. Zoning laws will be revised to cater to the growing demand for commercial and parking space in large urban centers. This will involve the use of 'mixed use' areas – residential and commercial.
Pakistan's cities have witnessed horizontal expansion, with the consequence that Pakistan only accommodates 6000 people in one square kilometer of area whereas Dubai, with its vertical expansion of residential buildings accommodates 200,000 people in the same area. Development of vertical expansion, high-rise buildings for residential and commercial purposes, will convert urban centers into commerce friendly cities while maximizing usage of space.
While catering to commercial demands, the housing sector will also be developed keeping in mind increasing urbanization and growth in population. A 'Housing information system' to provide data on housing demand and supply will be established. The private sector will be encouraged to provide housing facilities. 'Katchi abadis' will be replaced by low income residential buildings with adequate provision of sewerage, clean water, and basic utilities such as gas and electricity. A move towards vertical expansion in city centres will provide residential facilities in addition to commercial space to city inhabitants. With increased urban expansion, there is an additional demand created for public services such as fire and rescue services, emergency medical services including ambulances as well as law enforcement. For there to be effective urban development, it is imperative that urban expansion is coupled with increased coverage of such services.
To cut down usage of private transport in urban centers, public transport including mass transit systems will be carefully devised and implemented. In addition, cities will be made pedestrian friendly. These measures will not only reduce demand for oil and fuels, but will also lead to cleaner more eco-friendly cities.
Other policy interventions to address urban development include: expansion of inner markets; city cluster development; digitization of the land registration system and establishing a regulatory body to register all property dealers. It is also important to not lose one's past while moving forwards towards progress. Therefore it is important to ensure adequate protection and maintenance of heritage sites and buildings in urban centers.
Community based participation will be promoted to transform our cities into 'creative' cities where local and innovative solutions are found to local problems through community organization in collaboration with city governments. The aim is to allow for the free exchange of ideas and organize citizens and city officials so that they can work together in formulating and implementing strategies to combat local issues and problems.
An Urban Planning Unit is already in the works at the Ministry of Planning, Development & Reform. It is envisaged that this unit will initiate reform and innovation in urban development in partnership with the provinces – a major tool with which to jump start Pakistan's economic revival.
These improvements will be the first step in developing 'smart cities' – cities that are capable of adapting to increasing complexity and demand for knowledge communication given urban expansion. To be able to cope adequately to increasing populations and city size with respect to providing public services, real-time updates on city traffic patterns, pollution, crime, parking spaces, water and power will be required. Therefore, for our cities to become 'smart', they must be equipped to transfer such vast amounts of data instantaneously. Vision 2025 seeks to ensure that Pakistan's cities are digitally connected, equipped with wireless network sensors and there is e-connectivity in all parts where the free flow of information is possible, thereby laying the foundations for the cities of Pakistan to be smart and creative.
e. Social Protection Framework
Pakistan Vision 2025 is people centric and aimed at reducing poverty and enhancing the people's wellbeing. Poverty is a multidimensional phenomenon and is described as a lack of income or consumption and access to education, health and other amenities of life. Changes in economic conditions and other shocks increase the vulnerability of households to poverty. We will strengthen the data collection process and increase the coverage of household data to the district level. This will enable us to monitor the poverty and vulnerability of the population in all dimensions.
Social protection offers a means of strengthening marginalized people's capabilities to mitigate and manage their risk and vulnerability. Social protection will be mainstreamed into all government policies to ensure social equity and inclusion. The effectiveness and range of available social protection instruments will be enhanced by following the 'rights-based' approach. Besides targeted schemes, the scope will be extended to employment creation or employment related forms of social protection, such as social assistance, social insurance, social equity, social development and economic empowerment. For this purpose, the Government's income support program will be expanded in size and scope. As a pilot project for example, Benazir Income Support Program has extended services by providing additional financial support for each child in school.
Establishment of a national social protection framework will harmonize federal and provincial level policies and programs to remove regional disparities as well as clarify the roles and responsibilities of respective governments. It will develop a range of strategies including prevention, mitigation, and coping mechanisms for managing risk and vulnerability. The agreed framework will take a multidimensional approach to social protection. The included areas are:
i) The development of a broad, shared conceptual understanding of social protection;
ii) Strengthened strategic thinking and measures to promote social security; and
iii) The assessment and strengthening of existing formal and informal mechanisms used by poor households to manage risk.
The government will focus on the strengthening of administration and building monitoring capabilities for social protection programs, moving from across the board subsidies to targeted subsidies and improving post-disaster early recovery support mechanisms.