ISLAMABAD
Pakistan’s inflation rate has dropped to 9.6%, which is a noteworthy accomplishment as it is the lowest it has been in three years. This is a reduction of 65% from August 2023. It is anticipated that this will lead to several economic advantages, including increased purchasing power for consumers, stabilised company expenses, and better government finances.

Given the very large discrepancy of more than 100% between inflation and interest rates, it is appropriate for the State Bank to contemplate a significant interest rate cut. Despite inflation remaining close to 5% for the past few months, India’s 6.5% interest rate has remained stable. Significant rate reductions would boost the economy and lower the cost of debt servicing.

Recently, Pakistan’s ratings have been raised by foreign rating agencies such as Moody’s and Fitch, contributing to the upward trend. Additionally, Moody’s changed the outlook from stable to positive. Pakistan can now raise additional foreign debt at a reduced cost by offering Panda, Green, and Eurobonds as well as Sukuk. The market’s strong belief that economic conditions have significantly improved is indicated by the remarkable performance of the Pakistan Stock Exchange (PSX), which turned into the best-performing equity market globally during FY 2023-24, delivering an impressive annual return of 89% in PKR and 94% in USD.

There’s never been a better moment to build on these encouraging trends. Thankfully, the administration appears to be more ready and committed than ever to implementing significant changes.

A well-crafted “home-grown economic growth agenda,” spearheaded by eminent political economist Professor Stefan Dercon of Oxford University, has garnered input from both domestic and foreign sources and is prepared for immediate execution. Credible reform programs have also been established by domestic think tanks and academia, which can be added to other areas like exports and taxes.

Reforms are seldom without difficulty, but history demonstrates that those who take big chances frequently succeed in the long run. We have created a complete package that tackles several aspects of the economy for the first time. Because of their interdependence, implementing these reforms all at once may have a positive feedback loop that promotes sustained growth. The move towards export-led growth is one significant reform under consideration.

Our policies have always promoted import substitution historically, and since 2008, we have strengthened this stance and undone all the progress made during the preceding ten years of reforms.

Regretfully, we started to fall behind our neighbours in the region in all important economic metrics after that, and our exports have remained flat ever since.

A deliberate shift in focus from import substitution to export-led growth has the potential to improve efficiency, innovate, and make a company more competitive.

This change may also put us in a position to benefit from industries moving away from China. A more dynamic economy can be achieved by expanding import sources and removing subsidies from unproductive businesses.

No industry should be able to acquire more than 20% tariff protection in order to guarantee a more equitable market environment. By putting this policy into effect, Pakistan’s limited export portfolio would be more diversified and the playing field would become more level. While some rent-seekers may oppose this change, more progressive industrialists should applaud it because it will allow them to use better quality inputs and more efficient capital products.Finding competitively priced sources for intermediate goods and raw materials would also be extremely beneficial to small and medium-sized businesses.

Most likely, worries about possible revenue losses are exaggerated. Both international experience and Pakistan’s own brief history of reforms (from 1997 to 2002) show that these kinds of improvements frequently result in sizable increases in income and a decrease in smuggling. According to a recent study conducted by the Pakistan Institute of Development Economics (PIDE) and supported by the UK Department of Trade, removing all regulatory and additional duties and lowering tariffs should result in net gains in customs duty of Rs17 billion in the first year of reforms, with that amount rising sharply to Rs188 billion within three years.

There are also worries that if imports are liberalised, the trade gap would get worse. But historical data shows that attempts to reduce the trade deficit by raising import tariffs have always backfired, creating an even greater gap. This is due to the fact that import tariffs impede efforts to improve the trade balance by acting as indirect export taxes. Fortunately, there is a window of opportunity right now. Given that 30% of import bills are made up of oil, the recent sharp drop in Brent crude prices—from $87 per barrel in July to $72 in September—offers significant respite. This cut could lessen the negative effects on the trade imbalance.

Being a part of the IMF program would help guarantee that the administration doesn’t start appeasing influential groups that might be against reforms. In order to carry out the reform agenda, the government shouldn’t think twice about employing skilled individuals from the private sector. It will move closer to faster growth if it can carry out its domestic economic growth program over the course of the next three to four years. In fact, there is no other option for lowering poverty, which has been rising for years as a result of protectionism and poorly thought out economic policies.

The author is a participant of the PM Committee on Tariff Rationalisation.

Growth driven by exports. He has previously represented FAO at the UN and represented Pakistan as an ambassador to the WTO.