THE past year has seen the welcome return of economic stability to Pakistan. Growth has resumed, inflation has declined dramatically, the exchange rate has been stable, and foreign reserves have more than doubled. Given the extreme external pressure and uncertainty facing Pakistan in mid-2023, the pace of this turnaround is remarkable, reflecting the commitment of both caretaker and new governments as well as the State Bank of Pakistan to maintaining sound macroeconomic policies. The challenge confronting Pakistan now is to move beyond this renewed stability towards sustained stronger growth, with its benefits shared more broadly and evenly across society. Pakistan`s history suggests this transition is neither predestined nor straightforward. Past periods of stability have been followed by a loosening of economic policy in an effort to stimulate faster growth, but without tackling deep-seated structural weaknesses, growth quickly stalled.

Each of these boom-bust episodes left Pakistan weaker and more indebted than the one before.

The authorities recognise the need to break this pattern and for a new approach to development that enhances fundamental productivity and competitiveness, improving the living standards of all Pakistanis. Pakistan`s new home-grown programme, supported by the new Extended Fund Facility arrangement approved by the IMF`s Board on Sept 25, recognises that easy stimulus and giveaways are not the route to achieve higher and sustained growth. Instead, the authorities` programme presents a new approach to growth and development through reforms to promote productivity and competitiveness by fostering domestic and external competition, create space for private investment, right-size the role of the state, reform state-owned enterprises, and improve the quality of public services, spending, and infrastructure.

This structural reform effort will be coupled with the continuation of sound macroeconomic policies. The exchange rate will play its central role equilibrating market conditions as the economy adjusts, rather than being artificially determined. Monetary policy will be geared to bringing inflation down to within the SBP 5-7 per cent target range. And, resources required to support the development agenda will come from a sustained effort to strengthen tax administration and broaden the tax base, including into currently undertaxed sectors agriculture, retailers, and property making the tax system both fairer and more efficient. The FY25 budget already removedthe special tax regimes for exporters and developers, moving them into the standard corporate tax regime. The provinces have also agreed to share this effort and support the programme, given their control over key revenue sources (agriculture and property) and their constitutional responsibility for critical development spending (health and education), including through improved intergovernmental collaboration under a new National FiscalPact.

Why is a new approach needed? Successive past governments have sought to generate faster growth through heavy state intervention, subsidies, incentives, and concessions (including through Special Economic Zones) to support businesses, even as they and Pakistan were losing competitiveness. This was coupled with protection through regulation and exceptionally high tariff and nontariff barriers. Not only did these attemptsfail to attract investment, significantly spur exports, generate sustainable growth, or create jobs, they also undermined the development of a dynamic and outward-oriented economy. Critical resources became trapped in low-productivity and chronically inefficient activities and sectors, some of which only survived on the back of state intervention. Export performance was weak, lagging well behind peers and reflecting a history of limited innovation. Living standards declined relative to regional peers, with the gap increasing with each passing year.

A fragmented, complex, and narrow tax system has proved unable to generate the resources critically needed for social and economic development. Despite some improvement in recent years, Pakistan`s health and education indicators lag regional and lower-middle incomepeers, and quality spending in these areas has steadily declined relative to GDP, as evidenced by poor literacy and school participation rates, and high rates of stunting and infant mortality. Under-investment in Pakistan`s vast potential human capital undercuts efforts to reduce poverty and inequality andleaves a significant share of the population in lowproductivity activities (including agriculture) and unable to integrate into the labour force of amodern economy. Equally important, domestic and external borrowing to compensate for the lack of fiscal resources has given rise to a heavy debt burden, with large borrowing needs just to repay maturing debt.

Reforms should now focus on liberalising the economy and enhancing domestic competition, improving the quality of public services, and reforming loss-making SOEs. After years of misallocating resources, Pakistan needs to build a business environment free from state interference and preferences, conducive to innovation, and encouraging of greater (domestic and foreign direct) investment. Fiscal reforms need to generate the resources for social spending to improve livelihoods and build human capital and upgrading infrastructure, making it more resilient to natural disasters. Public borrowing needs to be limited to gradually reduce public debt to safer levels that do not expose Pakistan to recurrent shocks and absorb critical public resources on debt service, while also creating space for banks to finance private investment. Electricity sector reforms need to tackle deep-seated weaknesses to reduce cost pressures in this sector, paving the way to make energy more affordable for all electricity consumers. The authorities` new programme makes efforts across all these fronts.

The starting position for this effort is favourable. Unlike some past IMF-supported programme, macroeconomic stability has been secured before this programme begins. However, making the programme a success will require important policy decisions that have been elusive in the past. The authorities, including provincial governments, recognise that this environment presents a unique opportunity to pursue a lasting economic transformation. Doing so can pave the way to a more prosperous and inclusive Pakistan with higher living standards shared by a broader spectrum of its people. Continuing with the status quo would only see Pakistan continue its decline in living standards and face rising external pressure and growing tensions over the distribution of shrinking rents.

Pakistan`s international partners are committed to supporting Pakistan`s new effort, with financing and technical assistance. In a changing world, Pakistan needs to chart a new course that will define its future. • The wnter is IMF Paldstan mission chief.