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This 2015 Article IV Consultation highlights that starting from a difficult position in 2013, Pakistan has made substantial progress in reducing near-term economic vulnerabilities. Economic growth gradually increased from 3.7 percent in FY2012/13 to 4.2 percent in FY2014/15. During the same period, efforts to reduce power subsidies and raise tax revenue have lowered the budget deficit from 8.4 to 5.4 percent of GDP, although part of this adjustment reflected clearance of quasi-fiscal liabilities in the energy sector in 2013. In the medium term, growth is expected to reach about 5.5 percent, and inflation is expected to gradually rebound to the State Bank of Pakistan’s target of mid-single digits.

Economic development --- Development, Economic --- Economic growth --- Growth, Economic --- Economic policy --- Economics --- Statics and dynamics (Social sciences) --- Development economics --- Resource curse --- Banks and Banking --- Exports and Imports --- Macroeconomics --- Public Finance --- Industries: Energy --- Statistics --- Debt --- Debt Management --- Sovereign Debt --- Energy and the Macroeconomy --- Taxation, Subsidies, and Revenue: General --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- International Lending and Debt Problems --- Public Enterprises --- Public-Private Enterprises --- Public finance & taxation --- Petroleum, oil & gas industries --- Banking --- International economics --- Civil service & public sector --- Public debt --- Energy sector --- Revenue administration --- External debt --- Economic sectors --- Public sector --- Debts, Public --- Energy industries --- Revenue --- Banks and banking --- Debts, External --- Finance, Public --- Pakistan

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Most tax systems create a tax bias toward debt finance. Such debt bias increases leverage and may negatively affect financial stability. This paper models and estimates debt bias in the financial sector, and present novel estimates for investment banks and non-bank financial intermediaries such as finance and insurance companies. We find debt bias to be pervasive, explaining as much as 10 percent of total leverage for regular banks and 20 percent for investment banks, with the effects most pronounced before the global financial crisis. Going forward, debt bias is likely to once again gain prominence as a key driver of leverage decisions, underscoring the importance of policy reform at this juncture.

Banks and Banking --- Investments: Energy --- Investments: Stocks --- Macroeconomics --- Industries: Energy --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- State Space Models --- General Aggregative Models: Forecasting and Simulation --- Business Fluctuations --- Cycles --- International Business Cycles --- Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation --- Economywide Country Studies: U.S. --- Canada --- Energy and the Macroeconomy --- Energy: Demand and Supply --- Prices --- Energy: General --- Macroeconomics: Production --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Interest Rates: Determination, Term Structure, and Effects --- Investment & securities --- Petroleum, oil & gas industries --- Finance --- Oil prices --- Oil --- Oil production --- Stocks --- Long term interest rates --- Commodities --- Production --- Financial institutions --- Financial services --- Petroleum industry and trade --- Interest rates --- United States