Thursday December 07, 2023

Reprofiling the economy

April 15, 2022

Pakistan’s economic performance is very discouraging. There is an immediate need for a policy shift on the economic front. One of the options could be to reprofile the economy to overhaul the economic performance, getting rid of the heavy load of IMF debt. But it is not only the IMF conditions that are creating problems; there are also other factors. So, what is the way forward?

The reprofiling of the economy could be one of the policy options to take decisions regarding monetary and fiscal policy initiatives. The incentives for investors are key to attract investment in the country. The investment climate can be created by providing security to investors so that they can feel secure in all respects, especially security to their investment and profits. Economic reforms need to be strengthened to attract foreign direct investment, which could in return contribute in a big way to boost GDP growth. Before going into the details of factors other than the core issues of the economy, let’s discuss the possible contours of economic reprofiling as a policy option for economic growth.

The fiscal and monetary policy works in tandem to balance and support each other to achieve optimum level of economic growth. Pakistan’s economy is suffering from external and internal debt with all sorts of economic ills including but not limited to high inflation, low investment, high security risk and least incentives for businessmen. The downward revision of policy rate by the State Bank of Pakistan is crucially needed to attract and create an investment-friendly atmosphere in the country. But that is not possible if we still want to go with the umbrella of the IMF programme. We have to calculate and estimate the reprofiling of debts and fiscal deficits and results thereof. So, the first policy intervention as part of the reprofiling of the economy is to bring down the interest to acceptable levels to promote investment in the country.

The interest rate needs to be brought down to 3.5-4.5 percent from the present level of 9.75 percent, which would not be possible in a short period of time. What is to be done is to revise the policy rate slowly and steadily in two years. The possible mechanism could be to bring it down by about 100 basis points every three months for the first year and 50 basis points for the next year again on a quarterly basis. The estimated investment through this policy intervention could range approximately from $25 billion to $50 billion in two years. That can bring a revolution to the country, but it would again depend on our security atmosphere. Practical steps need to be taken to provide safety and security to the investors, otherwise such intervention will only contribute to the surging inflation. The current double-digit inflation is already playing havoc.

The massive depreciation/devaluation of the Pakistani rupee is another blow to economic stability. The exchange rate needs to be revised; it should be brought back to Rs125 per dollar, as our exports and imports are almost inelastic, especially our exports. One of the purposes of devaluation is to enhance exports but we need to adopt some other measures to enhance our exports to earn foreign exchange. By doing so we can avoid adding to our debt and servicing liability. The estimates are that by such reprofiling vis-a-vis interest rate and rupee appreciation we may avoid the cumulative effect of the debt burden by about 50 percent, comparing our liabilities today.

GDP growth through these monetary policy measures can be achieved at about 6.5-8.5 percent per annum through the proposed intervention to make it sustainable. Foreign direct investment (FDI) could contribute a lot, again subject to proper and practical steps ensuring economic reforms on a long-term basis. The foreign debt of the IMF, World Bank, ADB and others could be offset by pursuing a more aggressive investment policy, coupled with impressive GDP growth enhancing exports to get rid of their conditions. The investment climate in the country can only be generated through a robust strong economic system supported by a strong political system that needs to be strengthened through rule of law. It is beyond any doubt that political stability is a precondition for sustainable growth. The role of politicians and institutions is all the more important to strengthen the political system to achieve sustainable economic growth.

The government needs to create incentives for the people to contribute to the economy by providing subsidies. The cost of doing business is so high that no one wants to take risks. The factors of production, except for labour, is so high that the manufacturing sector, especially large-scale manufacturing, is not feasible in the present scenario of a high cost of energy. It has to be revised downward by providing subsidies to the manufacturing sector to enhance exports and make products competitive. Export growth is needed to pay back multilateral and bilateral loans. The total external loans of about $127 billion are a real problem for Pakistan, as the main chunk of our annual budget goes into debt servicing.

Fiscal side reprofiling is immediately needed, as we see a lot of subsidies and exemptions done away with to fulfil IMF pre-conditions. The development budget was slashed by about Rs300 billion, exemptions of Rs300 billion withdrawn, rates of energy raised to generate almost Rs600 billion. The cumulative effect of these fiscal-side measures has contributed nothing to the economy but brought more inflation, offsetting the feel-good factor of our growth in exports and foreign remittances. The tax targets for the FBR have been revised upward for the first time in the history of Pakistan due to these fiscal measures overall contributing to the disturbance of the common masses.

Incentive schemes, including exemptions in taxes to the vital sectors of the economy, are absolutely needed to enhance growth. Amnesty schemes should be reintroduced for more investment and taxes, as Pakistan has been surviving and thriving over the informal economy. Exports should be incentivised for foreign reserves and remittances to pay back our costly loans. The overall incentives – right from growers to industrialist manufacturers to services sectors, especially e-commerce – should be extended. These fiscal measures, incentives, exemptions and subsidies of about Rs2000 billion will generate about $15 billion to $25 billion in addition to our current foreign reserves, enough to pay back our loans in 7 to 10seven to ten years.

The long-term planning and reprofiling of the economy on the above policy lines is immediately needed to get out of the present economic mess. The IMF programme should be discontinued; instead, a new mechanism as proposed above may be put in place to support foreign reserves and pay back loans. Otherwise, we may face a Sri Lanka-like crisis situation in the coming days and months.

The writer is an economist.