Monday May 20, 2024

Recuperating a dying economy — snags and strategies

By Azizullah Goheer
February 27, 2024

Pakistan’s economy is currently facing multifaceted challenges, spanning an economic downturn, high inflation and political turbulence. To address this, Pakistan should execute structural overhauls and switch from its ‘bricks and mortar’ economic model to one focused on equal opportunities and prosperity for all.

The major ingredients in country’s economic and social malaise are the exchange rate caps, import controls, and delays in the International Monetary Fund’s (IMF) Extended Fund Facility program. As a result, growth dipped sharply to -0.2 per cent in 2023, down from 6.1 per cent in 2022.

Inside view of a textile mill in Pakistan. — AFP File
Inside view of a textile mill in Pakistan. — AFP File 

The drop was primarily due to sluggish growth in industrial and services sectors. This recession translated to greater unemployment, which reached a record high of 8.5 per cent in 2023, surpassing the 6.2 per cent observed in 2021. Under this highly challenging economic situation, rapid surge in inflation has made the life of the people more difficult, who are already struggling to make ends meet. High inflation is also acting as a deterrent to investment and economic growth. Pakistan is desperately looking for options to overcome economic and financial challenges. A review of economic history of the world reveals that economies can neither deteriorate nor revive quickly.

It requires patience and wisdom to steer the process in an orderly manner. Economic revival is only possible through a suitable set of policies, consistency in implementing policies, and applying indigenous wisdom to lead the way of economic revival. The policies, models, or plans must be devised or tailored according to the needs of the country.

The large-scale manufacturing sector (LSM) accounts for a significant portion of the country’s GDP. The negative growth experienced by this sector is alarming, particularly in light of existing challenges such as high inflation and growing current account deficit. Government must address these issues and save the industrial sector from further decline. Inconsistent policies, including changes in tax rates, import/export policies, and regulatory frameworks, create uncertainty for investors and hinder long-term planning and growth.

To unleash the full potential of industries, structural policy initiatives are urgently needed which can play a crucial role in enhancing the competitiveness and sustainability.This includes maintaining consistent tax rates, import/export policies, and regulatory frameworks to provide certainty for investors and encourage long-term investment to enhance economic growth of Pakistan. Structural policy initiatives aimed at addressing underlying inefficiencies, promoting innovation, and enhancing productivity are essential for laying the foundation for long-term prosperity. SMEs are pivotal in fostering economic growth, contributing around 40 per cent to the country’s GDP.

These enterprises make up approximately 90 per cent of all registered enterprises and employ a substantial portion of the national workforce. However, rampant inflation has devastated the SMEs, which has had a severe impact on employment rate and overall economic growth.

The complex tax system must be simplified by reducing excessive documentation requirements, lowering compliance costs and improving the efficiency of tax administration to incentivize economic activities.

The system of granting exemptions and concessions through regulations should be abolished. The government should also foster a fair and competitive environment to encourage private sector investment, enhance productivity and drive innovation and growth. Job creation, especially for the youth, requires facilitating private sector engagement in productive activities but success will also depend on implementing broader reforms. Allowing greater financial inclusion and technology will help Pakistan to harness its e- commerce potential.

Pakistan needs to address the quality of its labour by investing in the development of skills, education, health and mindset.

Widespread access to the internet and equipping youth with advanced information and communications technology skills are essential for Pakistan’s global competitiveness. There is a need to revisit the role of technical vocational institutions to ensure they meet future work requirements. The labour market can also be strengthened by redefining the social protection strategy to focus on graduation-based programs rather than expanding unconditional cash transfers.

Pakistan’s economy relies heavily on its textile industry, which is the single largest contributor to country’s foreign exchange earnings, accounting for over half of total exports. However, the high cost of production has made it difficult for textile manufacturers to remain competitive in the global market.

The textile industry is the major economic driver accounting for 8.5% to the GDP; however, in seven-month period of current FY, textile exports experienced a concerning 3.0% year-on-year decrease.

This industry is facing several challenges, including high energy tariffs, surging raw material prices, liquidity issues, high interest rates and intense global competition leading to a decline in its performance and contribution to the economy.

High priced energy, which accounts for approximately 30-40% of production expenses, has immensely damaged the export growth and adversely impacted the textile industry. There is a significant difference in energy tariffs of Pakistan with competitive countries in the region.

Electricity charges in Vietnam, India, and Bangladesh are US cents (kWh) 7.2, 10.3 and 8.6 respectively. While in Pakistan, power tariff has exceeded a critical threshold of 12.5 cents/KWh, which makes the industry unviable within the region. Similarly, there is also a significant difference in gas tariffs. Gas rates in Vietnam, India and Bangladesh are 9.8, 6.5 and 7.5$/MMBTU whereas in Pakistan, this is 10.75 $/MMBTU for Industrial sector and 11.12$/MMBTU for captive. Further, economic inefficiencies like cross subsidies and stranded costs embedded in power tariffs cannot be passed on to international consumers. The government must review power tariff policies to reverse the further catastrophe; negotiate sustainable energy tariffs with the International Monetary Fund (IMF) and rationalize cross subsidies on industrial energy tariffs to support growth. Just raising energy tariffs is not going to work. Strict enforcement is required to reduce T&D losses and full bills recovery. Current hike in gas and electricity tariffs is disastrous for the economy. The implementation of zero-rated GST on energy bills for export industry can have far-reaching benefits.

It can reduce the cost of production, improve competitiveness, stimulate export growth, and encourage investment in energy-efficient technologies. By supporting the export industry in this way, the government can help drive economic growth, create jobs, and enhance the country’s industrial competitiveness.

Industries often require working capital to fulfill their orders, purchase raw materials, and cover operational expenses.

However, due to various reasons such as delayed payments, high borrowing costs, and limited access to credit, these industries frequently find themselves in a cash crunch. Liquidity crunch can severely hamper their ability to fulfill orders on time and meet the growing demand for their products.

This liquidity crunch faced by industries is due to delay in the disbursement of tax refunds and other incentives by the government. For instance, a significant portion of the working capital of textile industry is stuck in the refund regime. Textile exporters often rely on these refunds to finance their operations and investments.

In today’s global economy, many countries, including Pakistan, heavily rely on imports to meet their domestic needs. Excessive dependence on imports can have detrimental effects on a nation’s economy.

It can lead to trade deficits, currency depreciation, and vulnerability to external shocks. To mitigate these risks and foster sustainable economic growth, it is imperative to focus on mobilizing domestic resources. One of the key reasons for the reliance on imports is the inadequate development of domestic industries. This has led to a situation where countries are forced to import goods that could otherwise be produced domestically. By mobilizing domestic resources, countries can create a conducive environment for the growth of domestic industries, thereby reducing the need for imports.

With all these challenges, Pakistan is standing at a critical juncture in its economic journey, where strategic reforms are imperative for sustainable growth and development. Among these reforms, privatization of state-owned enterprises (SOEs) emerges as a vital tool to unlock economic potential, foster competition, and improve efficiency. State-owned enterprises often suffer from bureaucratic inefficiencies, political interference, and lack of accountability, which can hinder their performance. Privatization opens up opportunities for domestic and foreign investment, injecting much-needed capital into the economy. Furthermore, privatization fosters competition by breaking monopolies held by SOEs, encouraging market entry by new players, and driving down prices. This competitive environment benefits consumers through greater choice, improved quality, and lower costs. By promoting efficiency, attracting investment, fostering competition, and enhancing governance, privatization can drive economic transformation and improve the well- being of citizens.

In conclusion, while the industries of Pakistan including textile export industry, face several challenges, there are also opportunities for growth and development. Hence, it is essential for the government and relevant stakeholders to address these issues by streamlining refund processes, introducing consistent policies, negotiating with IMF regarding energy tariffs, improving access to credit, and providing a conducive business environment for businesses to thrive. It would be essential for Pakistan to carefully consider the terms and conditions of any agreement with the IMF to ensure that they align with the country’s long-term economic and environmental objectives.