Main Challenges to Pakistan Economy
Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

In 2020 GDP growth fell to -0.4% from 5.8% in 2018. Investments remained in 2020 at 15.4% against 17.3% in 2018. Inflation is at 10.7% in 2020 as compared to 4.7% in 2018. Current account balance hs improved to $-1,492 billion in 2020 as compared to $-19,195 in 2018

With these figures the economy should have recovered in the first quarter of this fiscal year—which began in July 2020—after GDP posted a slight contraction in FY 2020 (July 2019–June 2020) due to lockdown measures imposed at the tail-end of the year. In July–August, industrial production rebounded, predominately driven by upbeat manufacturing and construction activity, which was likely supported by the government’s fiscal stimulus package. Moreover, average remittances growth surged in the quarter, which, coupled with easing containment measures, should have supported private consumption—as suggested by a sharp pickup in auto sales. Furthermore, despite monsoon rains hampering supply chains, exports declined at a softer pace in the July–September period relative to April–June. Consequently, the trade deficit narrowed slightly over the quarter, boding well for the current account and much-needed FX reserves.

The economy should rebound in FY 2021 as uncertainty over the pandemic fades and domestic demand recovers. Furthermore, structural reforms implemented pre-Covid-19 should boost investment, while demand for Pakistani products is expected to pick up in tandem with the global economic recovery. Mounting debt and geopolitical tensions cloud the outlook. Economics panelists project growth of 1.6% in FY 2021, which is up 0.3 percentage points from last month’s estimate, and 4.1% in FY 2022.

First time country’s current account balance has recorded a surplus $424 million in July 2020. Pakistan has gone through this boom and bust cycles many times before: an import-driven boom, balance of payments crisis, International Monetary Fund (IMF) bailout, stabilization, a period of growth and then back to a crisis. This time is no different.

In their two years the government secured billions in financing from friendly countries hoping that it would help secure a “better deal” with the IMF. That was a huge and costly mistake. Developing countries don’t and cannot bargain with the mighty IMF.

Secondly, markets and investors hate uncertainty. Third, treating the current account deficit as just a financing issue was not the right response. Precious time was wasted turning a cyclical rise in energy and capital equipment imports into a full-blown sovereign debt crisis. The foreign direct investment plunged by 60pc to $1.4 billion, the rupee fell to above Rs 160 from Rs 108 within two years as the foreign exchange reserves continued to be under pressure. The aggressive drive to raise tax collections without any thoughtful tax reform program scared the local investors and damaged their confidence. However, they failed to help bring any meaningful change. Pakistan needs to introduce market-oriented reforms to compete with India or Bangladesh, and in short, to become a globally competitive economy.

The role of the World Bank and the IMF has shrunk sharply in the last four decades. Foreign private investors are a much bigger source of global capital flows than these once-mighty multilateral institutions ever were.

Since 1990, Bangladesh’s exports have increased by 6.2 times compared to Pakistan’s, measured in terms of exports per capita, and that of India by 6.8 times. Exports continued to struggle despite economic liberalization and privatization, and despite a sustained period of exchange rate stability with no energy shortage between 2001 and 2005.

These facts suggest that the reasons for Pakistan’s poor export performance are deep and structural. The 2019-20 improvement in the current account deficit has been largely the result of more than a $5bn fall in energy imports and (possibly one-off) record rise in the worker’s remittances as overseas Pakistanis return following the huge surge in unemployment across the globe including in the Middle East.

It is wrong to focus on just the so-called twin deficits: current account and fiscal. These are just symptoms of much wider and deeper issues including Pakistan’s chronically low savings and investments rate compared to its GDP.  We need a growth model.

An exports-led growth model has lifted hundreds of millions out of poverty in countries like China, South Korea, Taiwan and Singapore. China invested heavily in education, particularly science and technology, as well as in heavy engineering and other capital-intensive industries. Foreign investors looking for trained and low-cost workers found no shortage of human talent as the ‘communist’ China had invested heavily in basic education and its Special Economic Zones (SEZs) jump-started the labor-intensive exports-led industrial revolution that has transformed China.

Tax concessions and government-guaranteed yields may have succeeded in attracting investments in the energy sector but this is an unsustainable model. Economic progress cannot be imported or borrowed. It has to come from long term pursuit of appropriate strategies through policies implemented consistently through competent governance. A successful national growth plan must have a 3D strategy: deregulate, devolve, and digitize.

Deregulation is essential to harness the energies of the private sector (especially medium-size businesses) severely constrained by bureaucratic hurdles and rent-seeking. Without devolution, it is impossible to provide basic services in a country with one of the fastest urbanization rates, and without digitalization, Pakistan cannot compete in a world defined by the digital divide as Bill Gates has put it. Imran Khan has three more years to change course. His success or failure would depend on how correctly he identifies the challenges and what resources and people he employs to meet those.

However, for Pakistan such reverses are not sustainable. Laden with chronic external account challenges, the country needs exports and especially from friendly markets such as that of China. According to the Pakistan Bureau of Statistics, the country’s exports tumbled by around 15 percent in the month of August 2020 year-on-year to $1.58 billion compared to $1.86 billion in the corresponding month of last year. Clearly there is a problem. With the markets of traditional trade, friends like the US and EU contracting due to the COVID-19 pandemic, we need support and market access from our all-weather friend

Its economic managers made its 2020-21 budget on the assumption that the economy would fully recover from the impact of the corona virus pandemic by October 1, 2020, which owing to the second wave of the pandemic—now nearly all around the globe—has not been possible. Primarily, the ambitious tax collection target of the Federal Bureau of Revenue (FBR) at Rs4.963 trillion was at the time prepared on this premise. Now with the effects of the pandemic still looming large in the shape of an economic slowdown resulting in large scale unemployment and a spike in poverty, ambitious and coercive taxation drives will simply be counterproductive. The more the state endeavors to suck capital from the markets and investors, the more it will get dragged into a vicious cycle of economic erosion. What it needs to realize is that the fallouts from the pandemic are still very much a reality and at present, ongoing. For now, the time still calls for providing a stimulus to the economy and for bringing ease in doing business more than ever before. It will do well by honestly revisiting and implementing some of its very laudable budgetary proposals that look to tangibly support small and medium size enterprises, address manufacturing concerns to arrest the current process of deindustrialization in the country, tackle supply-side challenges to contain inflation, renegotiate trade deals by taking private sector stakeholders on board, not to undertake any coercive or ambitious taxation drives that unnerve the investors and scare away capital, and last but least, to unleash a monetary policy that is pro-growth and pro-investment. Unless investment and consumption returns, unemployment will keep pushing up, in the process heaping misery on low to medium income families.


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