Pakistan—Reviving Growth Through Competitiveness
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PAKISTAN REVIVING GROWTH THROUGH COMPETITIVENESS DECEMBER 2020 PAKISTAN REVIVING GROWTH THROUGH COMPETITIVENESS DECEMBER 2020 Co-publication of the Asian Development Bank and the Islamic Development Bank. Creative Commons Attribution Non-Commercial 3.0 IGO license (CC BY-NC 3.0 IGO) © 2020 Asian Development Bank (ADB) and the islamic Development Bank group (isDB) 6 ADB Avenue, mandaluyong City, 1550 metro manila, philippines tel +63 2 8632 4444; Fax +63 2 8636 2444 www.adb.org some rights reserved. published in 2020. isBn 978-92-9262-613-6 (print); 978-92-9262-614-3 (electronic); 978-92-9262-615-0 (ebook) publication stock no. sgp200406-2 Doi: http://dx.doi.org/10.22617/sgp200406-2 the views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of ADB, its Board of governors or the governments they represent, or those of the isDB, its Board of governors, or its member countries. 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ADB recognizes “China” as the people’s Republic of China and “Kyrgyzstan” as the Kyrgyz Republic. pictures on the cover are from ADB photo library and from ADB pakistan Resident mission. iii Contents Tables, Figures, and Boxes v Foreword xi Acknowledgments xiii Abbreviations xv Weights and Measures xvi Glossary xvii Pakistan Country Diagnostic Study: Highlights xviii 1. Understanding the Episodic Growth Performance 1 1.1 Economic and Social Impacts of COVID-19 2 1.2 Macroeconomic Trends 5 1.3 Persistent Slow Growth, Reversal of Tariff Liberalization: 13 2008 to Present 13 1.4 The 2018–2019 Balance-of-Payments Crisis 22 1.5 Causes of the Episodic Growth Performance 23 1.6 The Way Forward 37 References 39 2. Identifying Critical Constraints 41 2.1 Low Investment 43 2.2 Is the High Cost of Finance a Binding Constraint? 44 2.3 Is Poor Financial Intermediation a Binding Constraint? 50 2.4 Is Low Physical Capital a Binding Constraint? 52 2.5 Is Low Human Capital a Binding Constraint? 57 2.6 Are Weak Institutions a Binding Constraint? 63 2.7 Are Macroeconomic Risks a Binding Constraint? 66 2.8 Are Coordination and Information Failures a Binding Constraint? 70 2.9 Conclusion 74 References 75 iv Contents 3. Trade Performance: Challenges and Opportunities 79 3.1 Export Trend since the Early 2000s 80 3.2 Cotton, Textile, and Apparel Industry 86 3.3 Basmati Rice 102 3.4 Automotive Industry 112 3.5 Investing in Export Development 121 3.6 Conclusions 126 References 127 4. Foreign Direct Investment and Mobilizing Domestic Savings: 131 Financing Sustainable Development 4.1 Foreign Direct Investment Trends 132 4.2 Impediments to Foreign Direct Investment 139 4.3 Mobilizing Domestic Savings 140 4.4 Theoretical Framework and Analysis 143 4.5 The Way Forward 151 References 152 5. Reforming the Power Sector 155 5.1 Power Sector Overview 156 5.2 Power Sector Challenges 163 5.3 Understanding the Circular Debt 175 5.4 Ongoing Power Sector Reforms 190 5.5 International Experiences with Electricity Subsidy Reform 194 5.6 Policy Recommendations 197 References 205 6. Nurturing Human Capital Development in the Education 211 and Health Systems 6.1 Role of Human Capital on Economic Development 212 6.2 Constraints to Primary and Secondary Education 215 6.3 The Way Forward 226 6.4 Constraints to the Health Sector 230 6.5 The Way Forward 246 References 250 7. Harnessing the Economic Potential of Urbanization 256 7.1 Urbanization Trends 257 7.2 Constraints to Effective Urbanization 264 7.3 Socioeconomic Impacts of Urban Constraints 272 7.4 Recommendations 276 References 280 8. Concluding Remarks 283 v Tables, Figures, and Boxes Tables 1.1 Exports in Selected Asian Countries 24 2.1 Credit Ratings 49 2.2 Global Ranking of Infrastructure Development 53 in Selected Countries, 2019 2.3 Road Length of National Highways by Province 54 2.4 Population Statistics of the World’s Most Populous Countries 58 2.5 Health Indicators 59 2.6 Literacy Rate (Ages 15+) by Province and Gender, 2019 60 2.7 Emigrated Registered Workers by Skills Level, 2013–2020 62 2.8 Tax Revenue, 2010–2020 68 2.9 External Indicators, 2010–2020 69 3.1 Growth Rate of Major Exports, 2016–2020 82 3.2 Composition of Exports, 2004–2020 84 3.3 Cotton Value Chain Exports by Standard International 87 Trade Classification, 2005 and 2018 3.4 Distribution of Cotton Farms by Size 88 3.5 World Long-Staple Cotton Consumption 90 3.6 Production, Consumption, and Exports of Yarn, 1981–2019 92 3.7 Top Apparel Exports by Standard International Trade 95 Classification Code, 2005 and 2018 3.8 Upgrading in Global Value Chains 99 3.9 Rice Production, 2015 and 2018 103 3.10 Rice Yield Gap 110 3.11 Planned Automotive Industry Investments 116 5.1 Average Daily Load Shedding, 2016–2019 162 5.2 Operational China-Pakistan Economic Corridor Energy Projects 165 as of May 2020 5.3 Domestic and Imported Coal Supply, 2018 and 2019 166 5.4 Installed Capacity and Capacity Factor, 2019 168 5.5 Power Plants by Age, 2019 168 5.6 Transmission and Distribution Losses, 2018 170 5.7 Number and Duration of Forced Outages, 2017–2019 170 5.8 Power Tariff Rates 171 vi Tables, Figures, and Boxes 5.9 Electricity Connection Time, Number of Procedures, and Cost for 174 Commercial Users in Selected South Asian Countries, 2019 5.10 Reported and Allowed Distribution Losses 180 for Distribution Companies, 2018 5.11 Receivables of Distribution Companies, 2018 and 2019 185 5.12 Composition of New Circular Debt, 2019 186 5.13 Budget for Expenditure, 2019 and 2020 190 6.1 Human Capital Indicators in South Asian Countries, 2019 216 6.2 Federal and Provincial Division of Health Sector Roles 240 6.3 Provincial Government Health Initiatives since 243 the 18th Constitutional Amendment 6.4 People Ages 15–49 and Never Married Covered 245 by Sehat Sahulat, 2018 7.1 Rural–Urban Population Distribution by Province, 260 Census Years 1951–2017 7.2 Urban and Rural Growth by Province, 261 Census Years 1951–2017 7.3 Urban and Rural Population Distribution 262 in the 10 Largest Districts, Census Years 1998–2017 7.4 Local Government Structure by Province 265 7.5 Population Living in Urban Slums 275 Tables, Figures, and Boxes vii Figures 1.1 Gross Domestic Product Growth, 1971–2020 5 1.2 Fiscal and Current Account Balance, 1976–2020 6 1.3 Money Market Rate, 1971–2019 9 1.4 Gross Domestic Product Growth, Foreign Exchange Reserves, 15 and International Monetary Fund Programs, 2003–2019 1.5 Real Effective Exchange Rate, 2000–2019 21 1.6 Exports of Goods and Services, 1970–2020 25 1.7 Tree Map of Export Products, 1985 and 2018 27 1.8 Savings, Investment, and Foreign Direct Investment, 1980–2019 29 1.9 Lending Rate, Deposit Rate, and Interest Rate Spread, 2004–2019 30 2.1 Growth Diagnostics Decision Tree 42 2.2 Investment Rate in Select Asian Countries 43 2.3 Foreign Direct Investment, 1998–2020 44 2.4 Lending Interest Rates in Selected Countries, 2004–2019 45 2.5 Investment and Interest Rates, 2001–2020 45 2.6 Bank Lending as a Percentage of Total Lending, 2006–2020 46 2.7 Credit to the Private Sector by Type of Financing, 2016–2020 47 2.8 Loans to Small and Medium-Sized Enterprises 47 and Other Enterprises, 2016–2020 2.9 Gross Savings of Selected Countries, 2019 48 2.10 Gross Savings, 1990–2020 48 2.11 Interest Rate Spread in Selected Countries, 2019 51 2.12 Interest Rate Spread, 1999–2020 51 2.13 Share of Population Ages 15+ 52 with a Financial Institution Account, 2017 2.14 Value Lost Due to Electrical Outages in Central 56 and South Asian Countries, 2013 2.15 Human Development Index and Log of Gross Domestic Product 58 per Capita in Selected Countries 2.16 Out-of-School Children, Adolescents, and Youth of Primary 61 and Secondary School Age in Selected Countries 2.17 Governance Indicators of Selected Countries, 2019 64 2.18 Rankings on Ease of Doing Business, 2020 65 2.19 Fiscal Balance, Current Account Balance, and International 67 Monetary