LAHORE: Businesses hope that the new finance minister would concentrate on macroeconomic stability of the country. It remained elusive even a month after Pakistan’s default threat was addressed through the International Monetary Fund (IMF) deal.
The revival of the economy would be slow initially and economic managers must not create false hopes in this regard. Growth will pick up after macroeconomic stability is achieved through fair, transparent, and rule-based policies.
These policies would attract investment only if there are iron clad guarantees that the next government would not roll them back.
Past experience shows that the growth remained healthy during the periods when there was macroeconomic stability in the country. The exports remained buoyant when the rupee was stable, inflation was under control and the interest rates were in single digit.
Domestic demand also registered an increase during the period of macro-economic stability.
The devaluation of currency always hurts exports as after each major decline in the rupee value the foreign buyers ask for their share in the form of discount in unit rates. Soaring inflation which is one outcome of devaluation eats up all the advantage of devalued rupee.
The high interest rates are a natural consequence of inflation and increase the cost of production beyond the advantage provided by depreciated currency.
The major challenge would be to cut government spending as it is essential to bring down the budget deficit. Less government borrowing from the banks would leave more cash available for the private sector at lower rates.
Currently, domestic manufacturers are finding it hard to retain the local market as the cost of production has increased substantially due to declining macroeconomic indicators.
The imports from countries with macroeconomic stability in fact now have advantage over the local products as their products are now cheaper even after paying import duty that is around 20 percent. This precisely shows the level of non-competitiveness of local manufacturers.
Though most of the manufacturing concerns are operating on inefficient technology, even the local manufacturers having attained the highest production efficiency are in trouble because of the input costs, high interest rates, inflation, high energy, and petroleum rates.
The state should ensure that the local industry gets a level playing field by bringing macroeconomic stability.
Local consumption has also gone down because the value of the money they earn has declined appreciably.
The sharp decline in car sales is partly due to increase in rates, but mainly because of high interest rates that have more than doubled the monthly instalment of bank financed cars.
Lower middle class consumers can no more afford to buy the cheapest car through bank finance.
The lack of confidence of the general public in businessmen has given monopoly to the commercial banks as far as lending money is concerned.
This has resulted in high interest rates. If a fair return on shares is ensured, the businessmen can get free capital by floating shares of their concerns through stock exchanges or by issuing trade finance certificates. The government should formulate policies that ensure a fair return for the shareholders.
The Security Exchange Commission of Pakistan (SECP) as regulator should ensure full transparency in this regard. Industries would flourish if they generate low cost capital through the capital market.
If the secondary capital market is strengthened, banks would be forced to lower down interest rates.