What is the Size of the Government Footprint on Pakistan’s Economy?

Pakistan’s economy has failed to achieve the target that it set for increasing investments. The investment rate currently stands at 15.4 percent of GDP which is about half the South Asian average. Factoring in the rate of depreciation shows that net investment in the economy is negligible, or, put in layperson’s terms, there is hardly any new investment in the economy. Successive governments have expressed their desire to increase investment levels in the economy to little or no avail. Private investment that represents a major chunk of total investment is also chronically low at about 10 percent of GDP.

Although a range of factors amalgamate together to cause low investment rates, one reason that hinders private investment is the heavy footprint of the government on the economy. This has crowded out private investment. According to our estimate, the total footprint is as high as 67 percent of the total economy, something which is not apparent by observing government expenditure figures alone. (PIDE Working Paper). A recent policy paper published on the size of the subject while confirming the pervasive presence of the government suggests actionable options for increasing the space for private investment.

General Government Expenditure in Pakistan is 22 percent of total GDP of the economy. However, the government is much more than what it spends, as it also controls about 200 State-Owned Entities (SOEs), many of which are large public companies also listed on the Stock Exchange. In addition, the government also influences the economy through arbitrary changes to tax regime in the shape of SROs and through regulations that affect growth of competitive markets in the economy or cause delays because of excessive time consumed in seeking permissions.

In 2011, the Planning Commission, while developing a new growth strategy for Pakistan, estimated that the government controls 44 percent of the economy through State-Owned Entities (SOEs). Come the year 2020, the situation has changed little. Taking sectoral percentage changes into account, the figure still stands at roughly the same, 43 percent. The government is involved substantially in agriculture, construction, finance and banking, electricity and gas, and even in wholesale and retail markets.

Table 2: Estimating the Government’s Share of the Economy
Source: PIDE (2020), Increasing Spacer for Investment & Entrepreneurship through Reducing the Footprint of Government on the Economy in Pakistan, Report.

Besides what the government directly influences, the regulatory frameworks in Pakistan add to the growing footprint of government on the economy. Businesses in Pakistan face high transaction costs, excessive paperwork, barriers to trade and lengthy delays in getting permits. The economy’s percentile ranking in the Worldwide Governance Indicators’ ‘Quality of Regulation’, which ranks Pakistan in the bottom 30th percentile worldwide, reflects this.

It takes an average of 9 procedures to gain a construction permit for a warehouse in Pakistan and the associated cost of these procedures is around 8.8 percent of the total warehouse value, which is the highest in South Asia. Another example of a cumbersome compliance system for businesses is the tax payment system, which involves excessive paperwork and a plethora of both paper and online procedures. It takes a business an average of 283 hours and 34 procedures per year to file all taxes in the country compared to the world average of 233 hours and 23 procedures per year.

The aim here is not to criticize all business regulations as some regulations are necessary to make markets function; however, there are a lot many that make transactions difficult and inhibit competition. The latter add to the regulatory burden and increase the government footprint in the economy while the former facilitate markets to create competition, jobs and growth.

Estimating the cost of regulatory burden is a more complex process than estimating direct footprint. We at PIDE estimate that unnecessary government regulations cost the Pakistan’s economy an average of 24 percent of GDP. We explain the methods behind this calculation, among others, in our PIDE working paper. Thus, with 43 percent as the government’s direct share in the economy and 24 percent as the cost of compliance with inhibiting regulations, the total footprint of the government on the economy stands at 67 percent.

A significant facet of government’s footprint, which we have not included in these estimates, is the share of the government in the economy through ownership of public land. One example is the government’s ownership of prime real estate in most Pakistani cities used for government offices and for providing housing to public officials. If we consider the opportunity cost of such land ownership, the footprint of the government increases even further.

Given the high government footprint on the economy, there is little space for private invests to operate. In such a scenario, there is an urgent need to reduce government footprint by doing away with unnecessary regulations that inhibit growth of competitive private market or curb efficiency in any manner and through privatization of loss making SOEs.

Editor’s Note: This blog is based on research carried out for a PIDE Working Paper Series – Working Paper No 26 in 2020, and a Policy Paper prepared in collaboration with the Ministry of Planning, Development and Special Initiatives in 2021.

About the Authors: Nadeem ul Haque is Vice Chancellor, PIDE, and Raja Rafiullah is Research Fellow, PIDE.