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Thursday September 29, 2022

Lifting the economy’s speed limits

August 14, 2022

­Independence Day should be a day of reflection — a conscious endeavour helping us unpack the past and spawn new ideas for the future. For Pakistan’s economy it means understanding that the growth engine is broken, fundamentally flawed and in need of reforms. Persisting with the current trajectory will confirm that claims of Pakistanis having a better future are little more than sloganeering.

There is no use tiptoeing around the pressure that the majority of the Pakistanis are facing. They feel it every day — at retail outlets, in their pay package and especially when their electricity or gas bill arrives. The time for disregarding the bad news, glossing over the glaring issues, is far from over. Our problems will not solve on their own no matter how much more we wait. Nor will anyone from the outside solve them for us.

The country is yet again in the throes of a balance of payments (BoP) challenge. The current situation can be best understood as a short-term liquidity crunch driven by a host of endogenous circumstances, turbocharged by exogenous shocks, especially commodity price hikes. Political uncertainties have restricted a more timely response and deft handling which could have diluted the severity of the situation.

Liquidity crunch: Some of the factors that led to the dollar liquidity crunch have started to unwind. Resumption of Pakistan’s programme supported by the IMF is in sight, opening doors to additional disbursements by multilaterals and bilateral creditors; global commodity prices are receding; imports are moderating in July after a hefty June; and local demand of petroleum products appears to be declining as price pass-throughs are taking effect.

Assuming everything lines up in the country’s favour, the extreme panic and jittery sentiments seen in the FX, Eurobond and credit default swap markets are likely to stabilize. However, the FX reserves with the State Bank of Pakistan (SBP) remain at a critically low level of $7.8 billion (August 5, 2022) due to debt payment pressures. Pakistan’s external sector could possibly be stabilised in FY23 through the adjustment path agreed in the context of the Extended Fund Facility of the IMF. This breather must be used wisely.

As we reflect about our future we realize that the global picture is complex. World economy is treading a precarious and perilous path - higher global inflation, slower global growth estimated at 3.2 percent (IMF), ongoing conflict, impacts of COVID and clogged supply chains. All of these affect Pakistan, in some way or the other.

Fundamentals: Pakistan’s 75th anniversary should be a day of broad acceptance of the hard things we have to do now and a pledge to build a genuine appetite to address our challenges. The recurring BoP challenge is a reflection of the way the economy has become wired — putting a speed limit on the economy’s potential to grow beyond four per cent.

The defining aspect in this regard is our growth model reliant on high consumption (accounting for more than 90 per cent of the country’s output); concessional financing schemes; imports (25 per cent of GDP) with low rates of investments (below 15 per cent of GDP) and savings (11 per cent of GDP); and weak productivity (productivity of five staple crops is less than 50 percent compared to the world leaders). Additionally, an inefficient energy sector driven by imported inputs pushes the cost of doing business higher. This constellation keeps driving the country into an unmanageable current account deficit. Not a pretty picture.

Our 75th anniversary should be about devising a well-researched growth agenda to lift the economy’s speed limits by tackling the fundamentals. In short, growth has to be underpinned with the creation of a lightly regulated market economy — with a scaffolding of higher investment and productivity.

Budget: A good starting point is to be more forceful on budget repair, with a clear commitment to rein in the budget deficit and bring down government debt as a percentage of GDP. Building our resilience against future shocks means starting to deal with the low?quality spending embedded in our system. Going through the budget line?by?line and making sure that expenditures are about building value. The budget should be about high-quality investments in the right priorities. Let us complete this task in the next one year.

Domestic resource mobilization can ensure our addiction away from foreign borrowings. It is about digitized tax administrations; equitable and across-the-board tax policy; evidence-based tax assessment and tax audits; simplified tax codes; and effective alternative dispute resolution mechanisms. A plan communicated to the nation is the least one expects in the next six months. Provincial taxation cannot remain paltry and must be targeted to move to at least five per cent of GDP through GST on services, agriculture income tax, and property and motor vehicle taxation. A statement of intent is the minimum to expect.

Productivity: Our goal for the future should be to build a stronger and more resilient economy, which converts the potential of our people into prosperity for our nation. An economy built on giving the country a domestic productivity-based strategy. The country has the potential to substitute food and agricultural imports by increasing the productivity of our farmers. This will also save precious foreign exchange and help manage the current account. We can energize the plethora of agri-research institutes to engage with the farming community for results with-in the next 12 months.

In the more medium term the right investment in skills and local manufacturing capability will see our productivity grow and the country move to medium and even high technology products. A well researched plan to diversify manufactured exports should be put together with the private sector.

Energy efficiency: An economy powered by cleaner, cheaper, more reliable domestically sourced inputs for production is Pakistan’s survival. Private sector led distribution and moving to local inputs like Thar coal can be managed in the near future. But we must begin the general surgery today for it to yields results.

Investment: Pakistan’s investment-to-GDP ratio is 133 among 151 countries for 2021. Global markets are still there to be captured; investment is there to be won. On the part of the government, within one year a strong regulatory guillotine effort beyond the normal must come through. Rethinking of investment incentives away from real estate can channel investment to productive avenues including stock markets and small business. Revamping zoning laws can make investment in cities more viable. All these tasks are doable in the next 12 months.

The private sector must be geared to manage some portion of the external financing gap by attracting portfolio and foreign direct investment. Private enterprises must be incentivized to become self-sustaining in raising money from abroad to import machinery. We have to think about the model of financing machinery in the country, which puts less pressure on our current account.

State: A read of works of economist Mariana Mazzucato informs us that innovation and growth is an outcome of a collective effort, both by private enterprise and the public sector. If we want to solve the country’s biggest problems, it is best to understand that. State reform has been the hardest to undertake. Functions of the state are thought of as “spending, regulating and facilitating”. It gives the image of an omnipotent beast. Let us put a different paradigm for debate — a Pakistan state of the future based on the principles of “thinking, innovating and entrepreneuring”.

We must believe in limiting government interventions and footprint in agriculture markets, manufacturing (state-owned enterprises), distribution and trading sectors. Creating markets is essential in the country and should be defined as a primary role of the many regulators. Let us specifically task them to improve the functioning of the markets in the next one to three years.

Conclusion: The economic picture we have set out represents a convergence of challenges, the kind which comes around once in a generation. But these once-in-a-generation challenges also present once-in-a-generation opportunities for Pakistan. That’s why our agenda for lifting the speed limits on the economy is a multi-year effort for a multi-generation benefit — Inshallah.

The writer is former adviser, Ministry of Finance.

He tweets @KhaqanNajeeb and can be reached at: khaqanhnajeeb@gmail.com

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