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Growth under the IMF

Opinion

May 12, 2019

In his recent bestseller, 'Factfulness', the late Hans Rosling shows us how much better the world is now than it was before. Many welfare indicators, such as poverty, longevity, and children’s health have come a long way in the last century. And though the book’s main theme is to challenge our assumptions about the state of the world, it also shows the importance of economic growth, which made possible these improvements. The indicators can be better, especially in Pakistan and South Asia where a vast number of those left behind live. So, economic growth is not an abstraction that concerns just the experts. Growth matters because it touches the lives of every person and firm.

In Pakistan, much has happened recently that would affect the economy. We are on the verge of a new agreement with the IMF to help us transit out of economic distress. And, we have brought in experts who know how to deal with such matters.

Without doubt, the IMF agreement would impose new discipline. This is much needed. Yet, we must think of ways to ease the pain that it may cause. I know that the government is preparing relief measures for the poor. Here I want to discuss ways to keep the economy going in order to allay the effect on jobs and growth.

I recommend four areas of focus. It is possible to act on them even while we work for stability. First, we must find ways for businesses to access more credit. Second, with Pakistan ranking poorly on doing business and other indices, we must do more to support our businesses. Third, measures adopted by governments in the last year or so have reduced the amount of transactions in the economy. This must change. Lastly, we must make special efforts to rebuild the economy’s base and to instill business confidence. Focusing on these areas would create jobs and avoid a slowdown.

Promoting the manufacturing sector is necessary for exports and growth. In Pakistan, manufacturing grew from the 1950s to the 1990s. A major factor in its boom was that DFIs offered fixed markup financing to the private sector. Political interference in the 1990s weakened the DFIs. In the following decade, GoP decided to wind them up completely. This ran against evidence on ground about the positive role of DFIs. In a report in 1970s, the World Bank wrote that DFIs played an important role “for private industrial development in Pakistan … concentrated heavily” on exports. The report went on to say that their role “will be very important” for the next phase of industrialization. Doing away with DFIs has been a major setback to our industry and exports. I recommend setting up a new DFI to revive investment.

In the same vein, I recommend that we get concessionary foreign funding to be used as a line of credit for new private investment. Businesses will import plants and equipment against this amount. We may also create an Infrastructure Fund. PSDP funds are not enough to meet the economy’s needs and to build its competitiveness. Seed money from federal and provincial PSDPs and cash-rich PSEs would help launch the fund. We may also interest IFIs to contribute to it. Sound management and credible project selection would ensure its success. The fund may lend money at fixed rates and may also take equity positions in financially viable projects.

Also, we must seriously upgrade support to businesses. I recommend that we rebrand the GoP’s Trade Policy as the Export and Manufacturing Promotion Policy with a three to five year horizon. Its main goal will be to promote private investment in manufacturing and services to boost our exports. The policy will announce incentives, such as tax and tariff concessions, access to credit and other support, including at the firm level. It must be prepared and owned by all major federal and provincial ministries, departments and organizations and equally by the private sector. It will be approved by the cabinet/CCI. A board headed by a federal minister will execute the policy. Various government organizations such as TDAP, BOI and SMEDA will coordinate their work to support the board. They will have to reorient their functions and culture to help businesses build competitiveness.

SEZs have been discussed for long and were proclaimed as a major part of CPEC. Yet, not one has been set up so far. SEZs are a market access tool as well as a way to provide infrastructure and facilitation support. China is shifting production in some industries to other countries. We must compete with them to attract Chinese export-oriented industries to Pakistan.

An economy is made up of many transactions. The comfort of businesses and individuals in conducting them is important, or else the economy could come to a halt. We must do away with the need for NTN for all transactions. As tax evasion is a concern, the FBR should proceed by using CNICs. In fact, increase in transactions will make FBR revenue grow. As a later step, the GoP must also review if the slew of indirect taxes are a help or hindrance to growth. In my view, they dampen demand and exact high cost on firms.

Pakistan must do everything possible to increase foreign remittance. As relations with the Gulf have improved, the GoP may conclude agreements with them to export more workers. Workers export is also a supply side problem. The GoP may immediately set up or upgrade training institutes and contract with international certification firms. This will improve our job seekers’ chances in the Gulf.

We must also end harassment of business. Of course, there is a need to be alert to terrorist financing and other ills. Yet, such powers must not be used to issue suspicious transactions notices indiscriminately. With similar action by NAB, FBR, and the FIA, businesses are left wondering if proving their bona fide is their main task.

The writer was commerce minister from 2002 till 2007. He is chair and CEO of the Institute for Policy Reforms.

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