Sunday December 05, 2021

The growth gamble

August 25, 2021

LAHORE: Pakistan’s current growth is closely linked to imports, which are a headache for the government as they drain foreign exchange and weaken rupee that in turn exerts pressure on interest rates.

Moreover, imports are a major source of revenue for the state. In its initial two years the PTI government squeezed imports through various measures ranging from regulatory duties to the condition of opening letter of credit with 100 percent advance. As a result was the growth nosedived to 1.9 percent in its first year and to -0.4 percent next year (partly due to Covid-19). During these years it could not meet its revenue targets as well. It however contained the fiscal deficit to almost zero until the import restrictions were relaxed. In the last month of fiscal year 2021 the imports shot above $6 billion for the first time and the country posted a current account deficit.

This government took two extreme measures. First was to strangulate imports at large that impacted the raw materials as well. The industrial activities suffered and growth crashed. In the second phase the imports were liberalised rightly so for industrial raw materials but it was unwise to offer huge duty concessions on import of high value luxury electric and hybrid vehicles.

The domestic consumption was boasted as a result of this policy and even the consumption of gasoline shot up sharply, which is still increasing. The so-called stability achieved in the first two years of PTI vanished and the pressure on rupee increased which resulted in its sharp devaluation. The central bank is under stress to even maintain current policy rate, while businesses are demanding a decrease. Our policy rate is the highest in the region. It would have been wiser to selectively liberalise imports for machinery and raw materials and subjecting all other imports to high tariffs.

This regime faces the dilemma of maintaining growth momentum without increasing imports. It is stuck in a vicious circle.

Imports generate revenue but kill rupee value that weighs on interest rates. Imports for consumptive purposes benefit the members of affluent society only that mostly live in urban centers. The rural economy is being paid lip service. Poverty is more pronounced in the rural areas where the population depends on farm economy. The farming land remains the same and the crop productivity is unfortunately either declining or stagnant. We need non-farm jobs in rural Pakistan to trigger meaningful growth.

Our planners will have to create opportunities through incentives for setting up industrial zones particularly for agro-based industries in rural areas. The only long-term solution is to make rural areas a better habitat for job creation. For the time being, we cannot take jobs to people; we are constrained to take people to jobs through migration to urban centers. The current infrastructure deficit reinforces an already skewed geography of work by amplifying job clustering to existing cities rather than creating new ones.

The only sustainable, long-term solutions lie in an integrated approach to education, employability and employment -that will arise from the reform of current regimes in infrastructure, education, skill development and labour laws.

It is high time the government earmarked substantially more resources for rural regions that would create new markets. If the government succeeds in eradicating rural poverty mainly by creating non-farm jobs it would facilitate 65 percent of Pakistanis, who reside in small towns and villages. They will have more money in their pockets and spend more on consuming value-added products. It has the potential to bring about a paradigm shift in our economy. More affluence in rural Pakistan would increase consumption of industrial products from toothpastes to television, cars, bikes, etc. It will create new jobs required for providing these value-added products and services around the country.

The key in this regard would be the quality of governance. Besides transparency the additional resources should be accompanied by innovative thinking and clear planning for ensuring the ambitious spending plan of the government that delivers growth.

The planners will have to take into account behavioural economics on how rural spending by the government can be productively used by rural consumers to enhance their quality of life.

The weight of poverty falls most heavily on women in rural areas who have a very low level of education and are subjected to a multitude of cultural and other social constraints. Women are vital contributors to the economic survival of poor households and family reliance on women's earnings increases with the extent of poverty. Funds are hard to come by for women welfare projects as they do not fit the scheme of conventional development. The challenge going forward is for this segment of the social sector to redefine the rules.