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March 5, 2021

Growth myth busted


March 5, 2021

LAHORE: The government circles are desperately trying to sell the idea the economy has turned around. Their critics are not buying it, arguing this overhyped long-shot revival, deeply dependent on big borrowing, is short-lived.

We have seen exports going up in the last eight months, mainly because we are heavily subsidising power and energy for the exporters. We continue to provide them credit at half the market rate. The subsidised markup is picked by the government.

No efforts have been made to make the power and energy sectors efficient. After an increase in power rates last month, the subsidy amount for the exporters has further increased as the power and gas rates for exporters remain the same.

The imports are down from previous levels as there are new investments and mega projects in the pipeline. Luxury imports were checked for a while but currently luxury cars and imported food and cosmetics are being imported despite regulatory duties.

The rich in fact have more consumable surplus than the pre-covid-19 level because their foreign travel and excursion tours with the families have been drastically curtailed. They are consuming these savings on buying expensive imported luxuries. The inability to travel abroad has reduced the foreign exchange outflow for at least $500 million a month. The religious tourism like Hajj and Umra has also seen a marked drop. These are the circumstantial savings that have got nothing to do with government policies.

The domestic consumption increased as the manufacturers started using part of their idle capacities. The textile sector is operating to capacity. Still the overall increase in textile exports is less than 8 percent. This does not make sense.

If we are operating at full capacity our exports should have been much higher. Or we lack the export surplus because of capacity constraints.

The textile orders were diverted to Pakistan as it was the second textile exporting country after China to open its economy. It’s more efficient competitors have also opened now. The Bangladeshi exports have entered a positive zone, while Vietnam and Cambodia are also back in business. The Indians are slowly increasing productivity though their textile exports are still in negative.

Many of our large textile entrepreneurs have gone for expansion but the majority is still waiting to see whether the orders are here to stay or go back to the efficient economies. The delay in expansion of capacities may not augur well with the foreign buyers. They would shift to their original suppliers if we delayed expansion.

Inflation remains a headache for the planners. The businessmen are demanding reduction in bank markup but with average inflation still higher than the policy rate of the central bank further easing of markup is not possible. The bank markup in our competing economies is lower, which gives advantage to them in borrowing. These are the economic realities that we have to face.

The state borrowing has been higher than ever both from domestic as well as foreign sources. Higher foreign borrowing coupled with depreciating rupee has increased the debt servicing cost very high. The non-development expenses have increased at a very high pace while the development expenditure has declined.

This is slowly enlarging the infrastructure deficiency (new projects and maintenance of existing projects) is on the rise. The long-term sustainability of growth is linked to the upgrade of infrastructure.

This government has still not been able to address the issue it had with the bureaucracy. This is delaying implementation of decisions. The services of bureaucrats are protected by law. The worst government could do is to transfer them to non-lucrative regions. But the person that replaces them is reluctant to take prompt decisions until their fears are adequately addressed.

This government has created thousands of jobs through its construction package. The unskilled labour has been absorbed in construction activities that are a relief for the poor. There are few new manufacturing jobs that are more permanent in nature. The minimum wage of workers has remained static in the past three years.

The inflation during this period has curtailed the value of minimum wage by at least 40 percent. No economy flourishes where workers are so brutally exploited.

Another positive aspect this year has been the ability of the federal board of revenue to surpass the monthly tax collection targets. The targets are much higher for the last four months. The government would have to slap more taxes to achieve the revenue target.