Economy of Pakistan has remained under turmoil most of the period under different rulers either from political parties or establishment. Hence it is the time; we should refrain from defending or opposing any institution in Pakistan on allocation of funds. This is a country for everyone and nobody is innocent in absolute manner. We should only care for the betterment of country’s economy in spite of different odds.
Last monetary policy for the next two months has been announced. Monetary policy announced by SBP is meant to lower inflation, create growth prospects and employment. For the next two months SBP has decided to increase the policy rate by 25bps to 7.25 percent.
Why! Because, Pakistan’s economic growth was provisionally estimated to achieve level of 5 percent for FY21-22 but after remaining negative it stands now at 3.9% to 4% in 2021. Concurrently, headline inflation was expected to stay well below the annual target of 9.0 percent but it had crossed 11%-14%. However, the balance-of-risks to the sustainability of the healthy-growth-low-inflation nexus have been shifted due to the various reasons. First, the balance of-payments picture, despite an increase in exports the imports increased moredue to sharp increase in international oil prices and limited financial inflows to date. Second, the revised estimate for fiscal deficit stands at 7-8% percent of GDP as compared to initial target of 5% percent for FY21, reflecting a significantly higher level of fiscal expansion than previously anticipated. These twin deficits- depicting the elevated aggregate demand in the country are adversely affecting the near-term macroeconomic stability. On the external front, the current account deficit widened to -288 USD Million in the first quarter of FY 2022 though in the last quarter of FY 2021 it remained positive for a shorter period.
Pakistan Federal Budget 2021-2022 current expenditure includes Rs1,363 billion in interest payments, Rs248 billion in pensions, Rs920 billion for defense affairs and services, Rs430 billion for grants and transfers, Rs138 billion in subsidies, and Rs378.8 billion for the running of the government.
The performance of the agricultural sector this year was 2.7 per cent as against its budget target of 2.8 per cent. However, with the 3.3% growth in the agricultural sector last year, its performance this year is at a very low level. The government has pointed out in the Economic Survey that foreign investment in Pakistan has declined due to global conditions caused by the corona virus.
The Economic Survey shows foreign investment figures for the first nine months of the current fiscal year, valued at about 1.4 billion in the July-March period, up from the previous fiscal year More than 2 billion in those nine months.
Most of the foreign investment came from China which was for CPEC projects in Pakistan which is about 47% of the total investment. The volume of investment in Pakistan from other parts of the World has been very low this year.
The economic survey for the current financial year also mentions Pakistan’s growing trade deficit. The survey provides foreign trade data for the first ten months of this financial year, July-April, which shows that the country’s trade deficit has increased by more than 21% in those ten months. The country’s total imports in these months stood at 42 42.3 billion, up 13.5 percent from $37.3 billion dollars in the same period last fiscal year.
During the period under review, the country’s exports increased by 6.5 per cent, but the sharp rise in imports wiped out the benefits of the increase in exports. It may be recalled that Pakistan had set a total import target of 42 billion this year, but in ten months, the country’s imports exceeded this target, leading to a widening trade deficit. One of the main reasons for the high imports is the import of food items in the country when the government allowed these two commodities to curb the rising prices of sugar and wheat, which had a negative impact on the balance of trade abroad.
The Finance Minister has blamed imports of wheat and sugar for the widening trade deficit. Although remittances to the country helped to balance the external payments, however the widening trade deficit is a sign of a negative trend for the country’s foreign trade.
The challenges and their resolutions are as follows.
• The most significant challenge is the energy/power crisis. According to some estimates the growth in Pakistan is 1/3rd off to the on-going power shortage.
• Opening up of markets and encouraging trade: The region that is Pakistan can become a connector of markets like it has historically been. The country is surrounded by resource rich countries and it should take advantage of the complementarities that can arise in through the labor market, or through trade.
• Investment in human capital. First is to improve general education outcomes across all levels. Second is to improve the skillset of the Pakistani labor force.
• Land reform: Land is very central to industry and to urbanization (which has been uneven). Land issues remain central to what happens to the urban space. Property rights also need to be established while agglomerations are to be thought over. Most importantly the writ of the state to introduce a new system is essential. However land reform without financial market is useless
• Currently only 14 percent of Pakistanis have bank accounts; hence access to finance is very limited. The financial sector needs to be reformed with a keen focus on who it lends to, on what conditions, to what end and how it can be made more accessible across a wide array of stakeholders including individuals, the private sector and the public sector. System of creating/providing credit to these people engaged in small medium enterprises is very important. They require access loans bigger than what microfinance banks offer.
• Legislation on government borrowings should be brought forward from current Act framed in 1944. SBP has worked on it when I was Director there. The draft can be made available as and when desired.
• Improving Health and Education sectors.
• To carry on the War against Terror, Sectarian attacks and general law and order situation.
• State owned enterprises are also in a crisis like PIA, Steel Mill, and Railway etc. They need to be put on workable state.
• The regulatory framework needs to be improved. Legislative and empowerment measures must be taken to strengthen existing institutions such as the Federal Board of Revenue and the Competition Commission of Pakistan.
• As unemployment among the youth is rising, direct intervention is warranted. Employment guarantee schemes like in other countries can be implemented in Pakistan.
• The state has to play a role to incentivize private sector to grow as private sector savings need to be mobilized to bring the economy back on track. At the moment private sector confidence is zero due to the circular debt issue. Conditions don’t exist in Pakistan to allow the private sector to lead infrastructure led-growth.
• Employment as a percentage of population has declined. Industry and formal sector Jobs are not being created and should be a deep area of focus. Several things are important under this. First female rates of participation are essential as they form 50 percent of the demographic dividend. Secondly employment creation through small scale manufacturing can be critical. Thirdly need to look at success stories such as lady health workers program that has created over 10,000 jobs and has had the greatest impact in terms of women’s empowerment, fertility rates, malnutrition etc.
• Restoring the tax base is essential to any effort at tax reform. It is also important to ensure mechanisms to tax the very rich in the country. If you can demonstrate states’ credibility, willingness to pay taxes will increase. Hence service delivery needs to be improved.
• Develop a tax directory. All tax-payers return and assets should be put on a tax directory as a first step towards transparency.
• Clear Tax laws should be prepared and passed through parliament for Services, Agriculture, Wholesale and Retail sectors.
• Revamp the Board of Revenue: Set up a new autonomous revenue authority with no link with the government and hire employees at market wages. The board of revenue is one of the most important organizations for Pakistan’s economy. Practical lessons can be learnt from Latin America.
• Bring the informal economy into the tax bracket: Small scale informal sector is engaged in unrecorded or undocumented economic activity and hence remains unregulated and untaxed. This sector ends up using resources from other sectors and not paying back. They need to be taxed.
• Asset transfer from the rich to the poor can occur through taxation so taxation should be made mainly through direct taxation.
• Governance Reform should be made through well-functioning civil service that monitors, evaluates and calibrates and knows when to exit when an intervention fails. They need to work with industrial units just like in Malaysia and Korea. Hence any industrial policy without attaching it to the core element of reform will make it difficult to implement.
• Industry interventions need to be context specific and detailed. There are certain clusters, industry or geographical clusters that have a lot potential. This can be addressing bottlenecks of each industry. Such as the soccer ball industry in Sialkot. China and Thailand has new technology. Sialkot needs time to get these resources by becoming efficient and reducing costs. The Gujarat fan industry for instance has issues with labor contracts. So productivity can be enhanced by improving labor contracts. Such interventions have pay offs in the short run.
• Across the board policy framework for manufacturing is also needed.
• Review the tariff structure.
It seems as if Pakistan’s economy is stuck in a state of multiple equilibrium and in order to get out of this exceptional adjustment needs to be made. Political coalitions must be strengthened, as they are required to push reform. Any reform that is passed must be accompanied by legislative reforms by provincial governments. There must also be a clear political calculus on how to change and bring reform. All of this needs to be strategically thought out by the parliament.