Abstract
This Selected Issues paper reviews Pakistan's tax regime, evaluates the level and composition of tax revenues, and estimates tax buoyancy and efficiency. Despite recent progress under the program, Pakistan's tax revenue remains very low relative to comparator developing countries and the tax effort expected for the country's level of development. This reflects narrow tax bases, overgenerous tax concessions and exemptions, weak and fragmented revenue administrations, and structural features of the economy. The findings suggest that unlocking tax revenue potential requires broadening tax bases, strengthening revenue administration and taxpayer compliance, eliminating distortionary tax expenditures, and rationalizing tax policy for greater efficiency and equity through a comprehensive and front-loaded reform agenda.
Improving Pakistan’s Competitiveness and Business Climate1
Despite the recent increase in economic growth, the longer-term trend for growth rates has been declining, stressing the need for reforms that would enhance productivity and foster accumulation of physical capital. Structural policies that lead to a closing of the gap of Pakistan’s competitiveness indicators with MENAP peers could help boost growth in the medium term significantly. These improvements, combined with increases in the variety and the quality of produced export goods and a real exchange rate at a level consistent with fundamentals would also help provide a much needed boost to exports.
A. Increasing Growth through Higher Competitiveness
1. Pakistan experienced solid growth rates with intermittent periods of high growth in the past but trend growth has been declining. Average growth has decreased from about 6 percent in the 1980s, to 4.5 percent in the 1990s and 2000s, and 4 percent in more recent years. This decline is accompanied by a decrease in manufacturing growth, particularly worrisome because of the higher productivity and growth potential of this sector. Trend growth, calculated by two approaches—application of a Hodrick-Prescott (HP) filter and by means of a production function approach—indicates that potential GDP growth has gradually declined over the past decades.2 Subject to considerable uncertainty under these approaches, both methods indicate that the output gap is nearly closed, being 0.4 percentage points in 2014 (production function approach) and 0.03 percentage points in 2015 (HP filter).
Actual and Trend Growth
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.Actual and Trend Growth
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.Actual and Trend Growth
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.
Average Sectoral Growth Rates, 1960–2015
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.Average Sectoral Growth Rates, 1960–2015
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.Average Sectoral Growth Rates, 1960–2015
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.2. The recent growth deceleration is mainly driven by a decrease in total factor productivity. A growth accounting exercise in the spirit of Solow (1957)—which decomposes growth into its supply-side drivers labor, physical capital, and total factor productivity (TFP)—shows that labor has overshadowed TFP and capital accumulation in the recent past. While productivity contributed about 40 percent on average to the growth spurts of the mid-1960s to mid-1980s, its contribution in the past 10 years slowed to about 25 percent. In addition, capital accumulation’s contribution to growth has also slowed markedly.
Decomposition of GDP Growth
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.Decomposition of GDP Growth
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.Decomposition of GDP Growth
(In percent)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: Pakistani authorities; and IMF staff calculations.3. Productivity is key to improve Pakistan’s potential growth in the future. Comparing the current contribution of productivity to real GDP growth rates to the past indicates that the contribution of TFP to overall growth can be substantial. Moreover, productivity does not face the same extent of diminishing returns as capital and labor accumulation and thus has the potential to boost growth for extended periods of time.
4. An improvement in productivity requires a business-friendly environment where the government delivers basic services efficiently, promotes the rule of law, reduces corruption and fraud, and streamlines business regulations. This is confirmed by an analysis by Mitra and others (2015), which identifies policies that eliminate gaps with emerging market and developing countries (EMDCs) in the business environment to be critical in promoting TFP and hence in unlocking long-term growth for Middle East, North Africa, Afghanistan, and Pakistan (MENAP) oil importers.3 Pakistan currently ranks 138 out of 189 economies in the World Bank’s Doing Business Report 2016 and 126 out of 140 in the World Economic Forum’s Global Competitiveness Report (GCR) 2015-16. The latter, which uses a scale from one to seven, further indicates that Pakistan ranks below the MENAP comparator group in every subcategory but market size and worsened its score over the past 10 years—from 3.8 in 2006-07 to 3.4 in 2015-16—though some components of the index such as institutions, infrastructure and market size have improved in the recent past. The results of Mitra and others (2015) suggest that implementation of structural policies that lead to an improvement in the overall Global Competitiveness Index (GCI) score by one point can raise productivity growth by 1.4 percentage points. Overall, this indicates the great potential that growth-boosting policies may have in Pakistan as recognized by the action plan to improve the business climate, which was finalized in October 2014.
Doing Business Ranking 2016 1/
(Out of 189 countries)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: World Bank Doing Business 2016.1/ Pakistan ranks 138 out of 189 countries for overall eas of doing business.Doing Business Ranking 2016 1/
(Out of 189 countries)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: World Bank Doing Business 2016.1/ Pakistan ranks 138 out of 189 countries for overall eas of doing business.Doing Business Ranking 2016 1/
(Out of 189 countries)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: World Bank Doing Business 2016.1/ Pakistan ranks 138 out of 189 countries for overall eas of doing business.
Competitiveness Index, 2015-2016
(1-7 (best))
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: WEF Competitiveness Database.Competitiveness Index, 2015-2016
(1-7 (best))
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: WEF Competitiveness Database.Competitiveness Index, 2015-2016
(1-7 (best))
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: WEF Competitiveness Database.
Global Competitiveness Index
(1-7 (best))
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: WEF Competitiveness Database; and IMF staff calculations.Global Competitiveness Index
(1-7 (best))
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: WEF Competitiveness Database; and IMF staff calculations.Global Competitiveness Index
(1-7 (best))
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Sources: WEF Competitiveness Database; and IMF staff calculations.5. A number of areas are lagging behind when compared with peer countries. Based on the Doing Business Ranking, the areas which perform relatively well are protecting investors and resolving insolvencies. Getting credit and electricity, contract enforcement, paying taxes, and trading across borders on the other hand constitute the largest limitations. Overall, the country ranks below the emerging market average. According to the GCI, the country fares especially well in the overall sample in terms of market size, and comparably to other MENAP countries in the areas of financial market development, innovation, and business sophistication. The largest shortcomings are the overall macroeconomic environment, infrastructure, and health and education. Consequently, it is vital to improve security and power sector performance. Power sector reforms are currently being undertaken at high priority and improving education and health will require long-term engagement.
6. The findings of Mitra and others (2015) indicate that improvements in structural factors—reflected in a higher GCI—could increase productivity and hence overall growth. Technology transfer through FDI has been shown to diffuse new technologies and management methods to local firms, raising their competitiveness (OECD 2002; UN Conference on Trade and Development 2010). Accordingly, the results of Mitra and others show that an improvement in FDI technology transfer, reflected by an increase in the corresponding GCI score by one point, improves productivity growth by 0.6 percentage points. Similarly, an improvement in worker talent, especially the quality of education by one point, raises productivity growth by 0.7 percentage points.
7. Identifying the drivers behind physical capital accumulation provides additional opportunities to improve Pakistan’s growth. Well-developed financial markets, public infrastructure, and trade openness—especially with large emerging markets—represent the largest drivers in the sample covered by Mitra and others (2015). An increase in public investment by one percentage point of GDP raises physical capital accumulation rates significantly.4 Financial Market Development fosters greater investment activity by facilitating access to funds and protecting investors. An improvement in the corresponding GCR score is associated with an increase in physical capital accumulation rates by 1.7 percentage points. Trade openness, especially trade that promotes increased connectedness with large emerging and advanced economies, is also influential. Its improvement, when reflected by a one point increase in the corresponding GCR score, increases physical capital accumulation rates by 3.5 percentage points.
8. Implementation of structural policies that lead to an improvement in the aforementioned key indicators could lead to substantial gains in potential growth. Based on the above results and Pakistan’s current score in the GCR, we estimate the potential growth effect if Pakistan closed some of the gaps with peer countries over the coming five years.5 In particular, average growth could increase to 6.5 percent on average in 2017–21 if Pakistan improved structural factors to reach average MENAP levels of the global competitiveness and FDI technology transfer indices, and increased the share of exports to fast-growing economies in total exports, and public investment as a share of GDP by one percentage point over the same period. Growth could improve further if the speed of reforms picks up or additional reform areas are improved.
B. Policies to Unlock Potential Growth through Productivity and Capital Accumulation
9. Several constraints on productivity and physical capital accumulation are especially binding and policies should concentrate on the tackling these. For example, the ailing power sector negatively affects several of the aforementioned competitiveness sub-indices. Improving its performance could therefore yield substantial gains. Similarly, the overall security situation limits progress in several important areas. Implementation of the required policies will be difficult in the context of Pakistan’s political situation, and most likely face judicial challenges. The following policies could be applied in the respective areas (Mitra and others, 2015):
10. Fostering a competitive business environment which benefits physical capital accumulation and long-term productivity growth requires:
Privatization of large state-owned enterprises involved in sectors critical for businesses. In the case of Pakistan, the power sector constitutes the largest structural impediment and requires a far-reaching overhaul as do SOEs in other sectors. Against this backdrop, an SOE reform strategy has been formulated and begun to be implemented. In particular, financial advisors have been appointed for three better performing power distribution companies (DISCOS), and the governance of DISCOs, three generation companies, and the National Transmission and Despatch Company (NTDC) has been transferred to new boards of directors and management.
Streamlining business regulations, tax codes, and bureaucratic red tape to reduce the cost of doing business, level the playing field, and raise efficiency of government services. Some progress such as the introduction of a Virtual One Stop Shop for new business registrations has been made, and further efforts to simplify business registrations and processes for paying taxes are necessary. Efforts are underway, including at the sub-national level, to strengthen these areas.
Promoting the rule of law through concerted efforts to discourage corruption and fraud. Improving governance in tax administration and legislation preventing “benami” transactions are steps in the right direction.
Improving the quality and quantity of public infrastructure investment requires efficient investment management and more financing. A broader tax base will be key in that regard. Moreover, power sector subsidies have been reduced from 0.8 percent of GDP to 0.4 percent of GDP over the last year, and a further reduction of subsidies in the energy sector could mobilize additional financing resources. CPEC projects will provide a boost for urgently-needed infrastructure.
Financial market development is vital for physical capital accumulation. Promoting access to finance and ensuring adequate protection of legal rights are imperative to advancing its development. Increased public borrowing from banks risks crowding out productive private investment. These issues are being gradually addressed through continued reduction of the fiscal deficit and efforts to strengthen financial development, including through the National Financial Inclusion Strategy (NFIS).
Increased non-commodity trade that promotes increased connectedness with large emerging markets, has strong ties to physical capital accumulation in MENAP (Mitra and others, 2015). The recent appreciation of the real effective exchange rate may thus have negative repercussions on this channel.
C. Export Competitiveness
11. Pakistan’s exports of goods and services are low when measured in percent of GDP and compared to those of regional peers, such as India, Sri Lanka, Bangladesh, China, or Turkey. Over the last decade, they have declined from 16 percent of GDP in 2005 to 12 percent in 2014, while the lowest level observed in the group of five peers is 18 percent and the average level in the Emerging Market countries is 38 percent. Although China and Sri Lanka have seen sizeable declines in these ratios, they remain above 20 percent. In the other three countries, the exports-to-GDP ratios have been rising.
12. A similar picture is observed when examining the growth rates. The growth rates of Pakistan’s real exports have mostly been among the three lowest over the last decade, on average constituting just above 4 percent, compared to 12 percent in Bangladesh and 10 percent in India. In terms of dollar values, Pakistan’s exports fall behind the growth rate of global exports on average by one percentage point a year.
13. These patterns may be reflective of quality and diversity of Pakistan’s exports. Pakistan mainly exports goods that fall into three groups of products by SITC, revision 1 classification: Food and live animals (group 0, 17 percent), Manufactured goods (group 6, 41 percent, dominated by exports of textile yarn and fabrics at more than 30 percent), and Miscellaneous manufactured articles (group 8, 28 percent, dominated by exports of clothing items at more than 20 percent). Main destinations for Pakistan’s exports are the United States (15 percent in 2010–14), China and Afghanistan (9 percent each), UAE (8 percent), and UK (6 percent). The euro area countries altogether account for some 18 percent. Most of the relevant market shares are either stagnant or declining. Longer-term trends show that while Pakistan’s export diversity is average relative to regional comparators with a gradual decline since the 1990s and export quality has been stagnant and gradually fallen behind comparators.6 Lack of diversification is driven by a limited number of exported products and by their heavy concentration. Looking at quality indicators, one observes that in groups of products that constitute bulk of Pakistan’s exports, regional peers have over time improved quality of their exports surpassing Pakistan.
14. These factors alone, however, cannot fully explain the lagging performance of Pakistan’s exports. Indeed, they have not prevented Bangladesh, a country with similar diversification and quality difficulties, from increasing its export capacity, while Sri Lanka, a country with low diversification as well, even though not having achieved high export growth rates in the last decade, was able to sustain a relatively high export-to-GDP ratio. An important consideration for Pakistan is that it has been operating under distressed conditions, with security concerns leading to higher capital costs and making it less attractive for foreign investors. Other obstacles include high trade costs and an overly complex tariff regime, which creates an anti-export bias (Reis and Taglioni, 2013b).
15. The constant market share analysis (CSMA) allows isolating different factors affecting growth in exports. The idea behind the CSMA is as follows: if a country is more (less) specialized in exporting products to markets, where demand is strong (weak) in comparison to other products and markets, than its aggregate export share will increase. Algebraic manipulation allows decomposing the growth differential into two factors:
Pakistan: Distribution of Exports
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: UN COMTRADE database.Pakistan: Distribution of Exports
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: UN COMTRADE database.Pakistan: Distribution of Exports
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: UN COMTRADE database.
Pakistan's Exports: Market Shares
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: UN COMTRADE database. Breakdown of exports in accordance with SITC, Rev 1.Pakistan's Exports: Market Shares
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: UN COMTRADE database. Breakdown of exports in accordance with SITC, Rev 1.Pakistan's Exports: Market Shares
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: UN COMTRADE database. Breakdown of exports in accordance with SITC, Rev 1.
Pakistan and Selected Peers, Export Diversification
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: IMF's Diversification Toolkit: Export Diversification and Quality Databases (Spring 2014) https://www.imf.org/external/np/res/dfidimf/diversification.htmNB: Higher values for the all three indices indicate lower diversification.Pakistan and Selected Peers, Export Diversification
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: IMF's Diversification Toolkit: Export Diversification and Quality Databases (Spring 2014) https://www.imf.org/external/np/res/dfidimf/diversification.htmNB: Higher values for the all three indices indicate lower diversification.Pakistan and Selected Peers, Export Diversification
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: IMF's Diversification Toolkit: Export Diversification and Quality Databases (Spring 2014) https://www.imf.org/external/np/res/dfidimf/diversification.htmNB: Higher values for the all three indices indicate lower diversification.
Pakistan and Selected Peers: Export Quality by Products (SITC, Rev. 1)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: IMF's Diversification Toolkit: Export Diversification and Quality Databases (Spring 2014)https://www.imf.org/external/np/res/dfidimf/diversification.htmNB: Higher values for the quality indices indicate higher quality levels.Pakistan and Selected Peers: Export Quality by Products (SITC, Rev. 1)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: IMF's Diversification Toolkit: Export Diversification and Quality Databases (Spring 2014)https://www.imf.org/external/np/res/dfidimf/diversification.htmNB: Higher values for the quality indices indicate higher quality levels.Pakistan and Selected Peers: Export Quality by Products (SITC, Rev. 1)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
Source: IMF's Diversification Toolkit: Export Diversification and Quality Databases (Spring 2014)https://www.imf.org/external/np/res/dfidimf/diversification.htmNB: Higher values for the quality indices indicate higher quality levels.where g is the growth rate of total Pakistan’s exports (in value terms), gj,k is the growth rate of exports of a product j to country k, and θj,k is a share segment in Pakistan’s exports in the same product/country segment. Variables with asterisks refer to global exports.
16. The first factor reflects competitiveness gains. It is defined as a sum of the growth differentials in various product/geographical market segments times share of the market/product segment in Pakistan’s exports. It is positive if Pakistan’s exports are concentrated in products and geographical market segments, where growth of Pakistan’s exports exceeds growth of the world exports, which can be happening because of improvements in Pakistan’s competitiveness broadly speaking (e.g., via exchange rate and labor costs) or because of improvements in the quality of exported goods, better marketing strategies, as well as conclusion of trade deals that expand or deepen access to geographical markets (such as granting a Generalized System of Preferences Plus status to Pakistan by the European Union).
17. The second factor reflects the existing export structure. It is a hypothetical change that would have occurred in the aggregate exports if individual shares were to remain constant and is defined as a sum of the share differentials times growth rate of the global exports across all the market/product market segments. It is positive if Pakistan’s exports are concentrated in segments with higher global export growth and is more reflective of external, pull factors, such as strength of foreign demand and its composition.
18. Applying the CSMA methodology to the case of Pakistan does not provide a very clear picture. On average Pakistan’s export grew in the last 20 years by about a percentage point slower than the world exports (6½ percent against 7½ percent). Decomposition of this differential using four product groups described earlier7 suggests that on average competitiveness factor plays an important though somewhat limited (about a quarter) role in explaining the growth differential. Moreover, a closer look shows periods with rather large competitiveness losses that are subsequently offset by years with large competitiveness gains.8
19. Two sets of factors can explain export performance. One of them is a set of structural factors (such as business environment, energy supply, quality of inputs, etc)9 that affects supply of exportable goods and which were discussed in the first part of the paper. The other is a set of macroeconomic variables (such as real exchange rate and demand in trading partners) that affects demand for a country’s exports. Of course, both sets of factors can simultaneously be at play.
20. Pakistan’s real exchange rate has proved to be somewhat rigid downwards. Since 2011, it has appreciated by more than 17 percent, more than currencies in most of its regional peers. Specifying the level of any currency misalignment is subject to model specifications and significant general uncertainty, with existing models used within the Fund estimating overvaluation of the rupee of between 5 and 20 percent (Box 1).
Real Effective Exchange Rate 1/
(Indices, Jan-ll=100)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
1/ An increase in the index implies appreciation.Real Effective Exchange Rate 1/
(Indices, Jan-ll=100)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
1/ An increase in the index implies appreciation.Real Effective Exchange Rate 1/
(Indices, Jan-ll=100)
Citation: IMF Staff Country Reports 2016, 002; 10.5089/9781513582412.002.A002
1/ An increase in the index implies appreciation.21. Several empirical studies have looked into estimating responsiveness of Pakistan’s exports to changes in demand and relative prices. Most of them find that changes in the REER impact exports, though there is a significant range in the estimates.
Siddiqi et al., (2012) and Khan et al., (2013) estimate the long-run relationship between the variables using cointegration analysis. The first paper, using annual 1971–2009 data for exports of textile and clothing, finds that price elasticity of these exports is low (around 0.3) and that the world demand is the main determinant. The second paper, making use of 1981–2010 annual aggregate data, also finds insignificant price elasticity and foreign demand being a dominating factor.
In contrast, Hussain (2010) using disaggregated annual 1988–2009 data shows that most of the categories of exported goods are responsive to world demand and relative prices, with the degree of responsiveness dependent on share of value added, lower for primary and low value added products (e.g., relative price elasticity of 0.5 for rice exports) and higher for high value added products (e.g., relative price elasticity of 1.6 for textile articles).
Likewise, Zada et al., (2011) using aggregate annual 1975–2008 data demonstrate exports to have elasticity close to unity and argue that for devising a viable strategy towards exports growth, more attention should be paid to demand side determinants instead of focusing only on the removal of supply-side constraints.
Zakaraia (2014) using aggregate 1981/82–2007/08 quarterly data shows that Pakistan’s exports show significant price and income elasticities (with the point estimates reaching in some specification 2.9). Moreover, he argues that both were stimulated by trade liberalization that has been happening since the 1980s.
22. Cross-country studies also confirm an empirical relationship between the REER and exports. For instance, cross-country empirical relationships estimated by Fund economists suggest that a 10 percent real appreciation has a negative effect on exports of about 7 percent and a positive effect on imports (i.e., displacing domestic production) of about 9 percent, which would accrue over time. For Pakistan, this would translate into a loss in the trade balance of $6½ billion and a negative impact on GDP of about 2¼ percent (accruing over time) from exports lost to competitors and from imports replacing domestic production.
23. In conclusion, the poor performance of Pakistan’s export seems to be reflective both of structural impediments and competitiveness losses stemming from the REER appreciation. Structural impediments—poor business environment, lagging quality and diversification of exportable products—will need to be tackled continuously and will take time to show results. In parallel, the marked appreciation of the real effective exchange rate over the last two years points to a need for continued structural reforms and supportive monetary, fiscal, and financial sector policies to maintain a competitive real effective exchange rate, supporting exports and import-competing industries and thereby growth.
Estimating Real Exchange Rate Misalignment
The Fund economists have been working on models that would allow evaluating the real exchange rate misalignments for several years. This work has led to development of the so-called External Balance Assessment (EBA) Methodology, summarized in Phillips and others, 2013.
The EBA methodology is based on three approaches, two of which are econometrical. These two methods are based on cross-country regressions where either current account balances or REER levels are linked to a set of fundamentals, allowing estimation of equilibrium levels and subsequently, deviations from them or misalignments (positive in the case of overvaluation). Trade elasticities, estimated in a cross-country setting are used to convert the CAB misalignments into the REER ones. The third method seeks a level of a current account that allows stabilizing a net foreign asset position in percent of GDP.
Two features of the EBA methodology are worth emphasizing. Firstly, the fundamentals used in these regressions are measured in relation to countries’ trading partners and during calculations adjustments are made to ensure global consistency of the estimates. The second feature is that EBA methodology allows decomposing misalignments into two parts, with one of them reflecting deviations of policies (such as fiscal stance, credit growth, reserve accumulation) and the other reflecting factors beyond the fundamentals.
For a selected group of countries (that includes Pakistan), the Fund conducts estimations on a regular basis. In addition, modified templates (so-called EBA-lite) are made available to economists working on low- to middle-income countries. These templates are based on modified sets of fundamentals, including variables such as remittances and foreign aid.
The latest estimates are as follows: 4.6 percent (EBA CAB), 4.9 percent (EBA REER), 10 percent (EBA-Lite CAB), and 20 percent (EBA-Lite REER). Decomposition of the residual indicates that despite recent progress, the still higher than desirable budget deficit and the still incomplete reserve accumulation are factors affecting the appreciation of the currency.
References
European Central Bank, 2005, “Competitiveness and the Export Performance of the Euro Area,” Occasional Paper, No. 30 (Frankfurt: European Central Bank).
Hussain, F., 2010, “Pakistan’s Exports Demand: A Disaggregated Analysis,” SBP Research Bulletin, Vol. 6, No. 2, pp. 1–13.
Khan, S., S. Ahmad Khan, and Khair-UZ-Zaman, 2013, “Pakistan’s Export Demand Income and Price Elasticity Estimates: Reconsidering the Evidence,” Research Journal of Recent Sciences, Vol. 2 No. 5, pp. 59–62.
Mitra, P. and others, 2015 (forthcoming), “Avoiding the New Mediocre: Policies to Strengthen Potential Growth in the Middle East and Central Asia,” Staff Discussion Note (Washington: International Monetary Fund).
Organization for Economic Cooperation and Development (OECD), 2002, Foreign Direct Investmentfor Development: Maximizing Benefits, Minimizing Costs, (Paris: OECD).
Phillips, S., L. Catão, L. Ricci, R. Bems, M. Das, J. Di Giovanni, F. Unsal, M. Castillo, J. Lee, J. Rodriguez and M. Vargas, 2013, “The External Balance Assessment (EBA) Methodology,” IMF Working Paper, No. 13/272 (Washington: International Monetary Fund).
Ravn, M., and H. Uhlig, 2002, “On adjusting the Hodrick–Prescott filter for the frequency of observations,” Review of Economics and Statistics, Vol. 84, No. 2, pp. 371–76.
Reis, J.G. and D. Taglioni, 2013a, “Determinants of Export Growth at the extensive and Intensive Margins. Evidence from Product and Firm-Level Data for Pakistan,” World Bank Policy Research Working Paper, No. 6341 (Washington: World Bank).
Reis, J.G. and D. Taglioni, 2013b, “Pakistan: Reinvigorating the Trade Agenda,” World Bank Policy Paper Series on Pakistan, No. PK 15/12 (Washington: World Bank).
Siddiqi, W., N. Ahmad, A. Khan, and K. Yousef, 2012, “Determinants of Export Demand of Textile and Clothing Sector of Pakistan: An Empirical Analysis,” World Applied Sciences Journal, Vol. 16, No. 8, pp. 1171–75.
Solow, R. M., 1957, “Technical Change and the Aggregate Production Function,” Review of Economics and Statistics, Vol. 39, No. 3, pp. 312–20.
United Nations Conference on Trade and Development, 2010, Trade and Development Report 2010, Employment, Globalization and Development (New York: United Nations). http://unctad.org/en/docs/tdr2010_en.pdf.
Zada, N., M. Muhammad, and K. Bahadar, 2011, “Determinants of Exports of Pakistan: A Country-wise Disaggregated Analysis,” The Pakistan Development Review, Vol. 50, No. 4, pp. 715–32.
Zakaria, M., 2014, “Effects of Trade Liberalization on Exports, Imports and Trade Balance in Pakistan: A Time Series Analysis,” Prague Economic Papers, No. 1.
Prepared by Robert Tchaidze and Andreas Tudyka.
We set lambda, the weighting factor that determines the degree of smoothness of the trend, to 6.25 following the Ravn-Uhlig (2002) rule for annual data.
Building on cross-country regression analysis using a large sample of EMDCs, Mitra and others (2015) investigate the most effective policies to unlock higher long-term growth through its determinants productivity, physical capital accumulation, and employment.
This reflects both direct and indirect effects through the provision of more affordable and reliable inputs (especially for electricity) into production.
Based on the methodology proposed by Mitra and others (2015). The calculations are based on point estimates and are thus rather indicative. Nevertheless, all estimation results point to a significant improvement in potential growth.
Although the IMF dataset on quality and diversity of exports covers only the period until 2010 (https://www.imf.org/external/np/res/dfidimf/diversification.htm), consistency in trends observed since the early 1970s still allows for tentative conclusions. Diversification is measured using the Theil indices and is a sum of intensive and extensive margins, where the extensive margin measures the number of different export sectors and the intensive margin represents the diversification of export volumes across active sectors. Hence, diversification can occur through introducing new product lines (the extensive margin) or through exporting a more balanced mix of existing products (the intensive margin). The quality measure is based on unit values and a quality-augmented gravity equation, initially specified for each product with a subsequent aggregation.
Groups 0, 6, and 8 of the SITC, Rev 1 classification, and everything else.
The CMSA methodology is not very robust as a different breakdown of exports into product/country segments may lead to different results. At least one alternative breakdown has resulted in a very similar picture, although the average impact of the push factor was larger. Another notable weakness of the methodology is that it is based on evaluation of exports measured in the US dollars.
Reis and Taglioni (2013a) point to Pakistan’s internal problems with trade-related incentives, business environment, and governance that together with external constraints are important factors behind exports’ mediocre performance.
