Both investment and economic growth have decelerated over the last four years at a previously unimaginable pace. Investment is down to a 40-year low today, at 13.4 percent of GDP from as high as 22.5 percent in 2006-07. An almost nine percentage point decline in investment in four years should be a matter of concern for the political leadership.
Economic growth, which averaged almost 7 percent per annum during 2003-07, decelerated to an average of less than 3 percent over the last four years. Since investment affects growth with a lag, such a low level of investment is likely to restrain economic growth to the range of 2.5-3.5 percent over the next three to five years. Low economic growth creates less job opportunities and gives rise to unemployment and poverty.
Can Pakistan live in an environment of low investment, low economic growth, more unemployment and more people falling below the poverty line? Pakistan is currently in the midst of such an undesirable environment that the question of how to revive investment and growth has become a real challenge. An attempt is made in this article to identify measures that, if implemented, may lead to the revival of investment and economic growth.
There has to be a realisation at the highest level that a vibrant private sector is a sine quo non for revival of investment and growth. The private sector is clearly an engine of growth. It is the job of the government to create a conducive environment for the private sector to play its role as a growth driver. How to create that environment or to shape a good investment climate for the private sector is a challenge in itself.
There are three broad and interrelated elements that constitute a conducive environment: macroeconomic stability, governance and infrastructure. As regards the first element, a stable macroeconomic environment is characterised by low inflation, low budget and current-account deficits, and comfortable foreign exchange reserves. Reducing budget deficit is key to restoring macroeconomic stability. Low budget deficit (at around 3 percent of GDP) would reduce borrowing. This would slow down the pace of accumulation of debt, will help reduce interest payment and free resources for development spending. A low budget deficit would also keep current account at a manageable level and help bring inflation down to single-digit. Hence, reduction in budget deficit in the range of 2.5-3 percent of GDP in the next three years should be the number-one priority of the government.
Better governance is the critical component of a good investment climate. Bureaucratic hurdles, cumbersome labour laws, difficult interaction with tax authorities and irritants like these have been the major problems in doing business in Pakistan. Such irritants must be minimised to improve investment climate.
Peace in Karachi (the major growth pole of the country) is absolutely critical for reviving investment and growth. It will help restore investors’ confidence which, in turn, will help increase investment, production, exports, tax revenue and jobs for the people of Pakistan. The political leadership must realise that if Karachi bleeds so will the country. Can we afford a bleeding Karachi? It would not be out of place to mention that a relatively stable and peaceful Karachi has been one of the major contributors to higher economic growth during 2003-07.
The political leadership must also realise that if Karachi bleeds there would be no political stability in the country and, hence, there would be no economic stability. Peace must be restored and maintained at all cost in Karachi, lest Pakistan’s economic future grows anaemic. The decade of the 1990s has been regarded as a lost decade for Pakistan. What happened in the 1990s in Karachi is known to us all. Could we afford yet another lost decade? It is in the interest of the country and the people of Pakistan that we maintain peace and stability in Karachi.
Constant interaction of government with private sector is critical in restoring their confidence. The private sector has been sidelined and therefore Pakistani businessmen are not taking interest in enhancing their businesses. There are news reports that they are relocating their businesses abroad. We cannot afford this. The president and the prime minister should initiate regular interactions with the private sector. Such interactions would give confidence to businessmen. Either the president or the prime minister should meet Pakistani’s leading businessmen, chambers leaders, top industrialist and bankers at least once in two months. They must listen to their problems and try to address them in the shortest possible time.
The private sector is playing an important role in global prosperity. Over 40 percent of the world’s GDP owes to the global 500 firms. In Pakistan, 181 companies contribute 30 percent to its GDP and 22 percent to its tax revenue. Shouldn’t we encourage them by addressing their problems? If Asia has emerged as the world’s growth centre, it is because of their private sector. If India has joined the elite club of G-20, it is because of its vibrant private sector. If Pakistan attained the distinction of being one of the four fastest growing economies in the Asian region, along with India, China and Vietnam in 2007, and inducted in the elite group of “Next-Eleven” by Goldman Sachs, it is only because of its dynamic private sector. Given an opportunity and environment, Pakistan’s private sector would not disappoint the nation.
Infrastructure is the third element of the investment climate. Uninterrupted power supply at competitive rates, roads in good condition, well functioning rail and telecommunication networks, efficient port operations and quick custom clearance at the port, are important ingredients of any country’s infrastructure. These require serious consideration of the government.
Peace and stability in Karachi, restoring confidence of the private sector through constant engagement and providing energy at competitive prices are key to reviving investment and growth.
The writer is principal and dean at NUST, Islamabad. Email: email@example.com