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February 25, 2020

CPEC and the state of the economy


February 25, 2020

There are loud noises over the perceived mismanagement of the economy by the present government. In this environment, it is worthwhile to review the relevant literature.

Economist Shahid Javed Burki’s Institute (the Burki Institute of Public Policy) has recently launched its 12th annual report on ‘The State of Economy’. It has some chapters written by Burki himself and others by his co-authors. We are going to refer to certain parts of this report in this article.

The report in the beginning gives credit to the PTI government for being different from “patron-client and dynastic politics” (that is debatable), yet it states that the government’s accountability drive and its financial austerity measures are the two “unwritten policies” that have resulted in a decline of private and public investment in the country. These policies have affected the economy negatively and GDP growth has gone below 3 percent from slightly over 5 percent in FY2018 (before the PTI government took over).

The PML-N government was able to grow the economy on average around 5 percent, yet this growth did not lead to better human development outcomes in terms of social sectors such as health and education. The PML-N government also supervised decline in exports – despite the availability of GSP Plus – and an increasing current account deficit.

In the PTI government, inflation has risen as the consumer price index (CPI) is likely to increase to 7.3 percent from 3.9 percent in FY2018. Similarly, both the public and private fixed investment will go down to 13.8 percent from 15.1 percent in FY2018. Fiscal management is not looking promising either with an expected budget deficit of 8.9 percent of the GDP having increased from 6.6 percent the year earlier.

The only achievement that the government can claim is reduction in current account deficit to 4.8 percent of GDP from FY2018’s 6.3 percent and it has been done by containing imports. In other words, Pakistan “is grappling with soaring inflation, a crippling balance of payments crisis, a depreciating currency and poor export performance”.

However, a real contribution of the report is its continued focus on CPEC. It has also comprehensively discussed various aspects of CPEC and its relevance to the economy. Five out of nine chapters of the report analyze CPEC, written by various co-authors.

One strong point made in the last chapter on CPEC is that the government has reserved information on CPEC and there is a veil of secrecy around CPEC. There is a dire need for an effective communication strategy. If the government wants to build investor confidence and wants Pakistani entrepreneurs to be active collaborators in Special Economic Zones (SEZs) as part of CPEC, then its needs to provide timely information and maintain transparency. This sharing of information needs to be done in a systemized and planned manner.

CPEC is also analyzed from the Chinese point of view. The overall message is that the Chinese government is pursuing a policy to develop its western regions. China is moving people from its over-crowded eastern part to the sparsely populated western part. China’s western provinces (geographically close to Pakistan) do not have adequate potential to meet its food needs. Pakistan can export vegetables, fruits, animal products, and dairy to help them meet their demand.

The report recommends some short, medium, and long-term measures for the government of Pakistan to tap the CPEC potential fully, considering that CPEC is enlisted to go on till 2030. In the short term (2020-2022), Pakistan should focus on exporting horticulture, high value crops and livestock. The focus should be on “production and processing” facilitated by the development of technology and jointly conducted research.

In the medium term (2022-2025), the Pakistan government should develop its agro-industry and focus on industrialization through the avenue of SEZs. It should integrate with the global value chain at the regional level, and speed up income generation through the commercialization of agriculture.

In the long term (2025-2030), Pakistan needs to focus on joint ventures and investments and expand into corporate farming. There is further need to integrate with global value chains and facilitate relocation of the ‘traditional’ manufacturing sector of China to Pakistan.

The Preferential Trade Agreements are useful if both sides have equal access to each other’s markets, and they help to deepen economic integration. In the immediate future, Pakistan can for example concentrate on the cultivation of Chinese rice that has increasing demand.

Similarly, an improved governance structure is needed to develop global value chains. Farmers in Pakistan need to be given an incentive to work on ‘climate smart’ agriculture. There is also the need to take into account the nature of global value chains as some of them require more intensive contracting work that may be complex to handle.

Looking beyond CPEC, the report – like other economic analyses – recommends increasing domestic investment to around 25-30 percent of national income as it is way too low right now. This increase in domestic savings and investment is needed for a higher growth of the economy. Moreover, there is a need to develop new sectors of the economy. There is equal emphasis to increase exports based on production. Another message is to focus on the development of urban areas. Pakistan is believed to under-count and not fully develop its urban areas. There is a need to focus on high-value crops in agriculture, turn the SME sector to be part of global supply chains, and train the large young population in the modern sectors of information technology, healthcare, finance, higher education, and tourism.

The writer is an Islamabad-basedsocial scientist.