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Pakistan in great need of financing, economic policy measures

Consistent export decline a drastic indicator for the economy, overhaul of TDAP policies best for the future

Interview with Dr. Ayub Mehar — a leading economist of Pakistan

PROFILE:

Dr. Ayub Mehar is serving as Professor at Iqra University and is also associated as Economist with the Gerson Lehrman Group, Austin USA (Political Upheaval and Global Competitiveness project for World Economic Forum). Before this, he has been working on various responsible positions in industry and academic institutions in Pakistan. He has served Federation of Pakistan Chambers of Commerce and Industry (FPCCI) as Director General (R&D) for 6 years. He is alumni member of the International Academy of Leadership (IAF) Gummersbach Germany, where he completed training courses in New Public Management including Political Administration and Public Finance. In recognition of his expertise, the Technology Policy and Assessment Center at Georgia Institute of Technology acknowledged its membership in the distinguished panel of international experts for Indicators of Technology-based Competitiveness Project (supported by the US National Science Foundation, United States Government). He has also been member of various committees, think tanks and working groups including Cotton Crop Assessment Committee (Government of Pakistan), Working Group on Balance of Payment for MTDF 2010-15 (Planning Commission), Independent Economist for MTDF 2005-10 (Planning Commission), Task Force on Taxation Reforms (CBR/ FBR), USAID Empowering Pakistan Project, USAID Business Support Fund, UNDP SSGATE Program, and the Private Sector Credit Allocation Committee (State Bank of Pakistan). In 2005, he was appointed as Independent Economist/ Consultant to write the draft chapter and evaluate the Monetary and Financial Sector of Pakistan economy for the Medium Term Development Framework (Five Year Plan) 2005-10.

PAGE: WHAT IS YOUR TAKE ON THE ECONOMIC PROGRESS OF PAKISTAN? 

AYUB MEHAR: Multiple changes have been observed at the political and economic stage of Pakistan during last four years. This period can be considered a surprising regime in the history of political economy of Pakistan as several economic and political incidents are witnessed in national and international scenarios. Several steps in policy transformation have been initiated. The policy dialogues and debates on China-Pakistan Economic Corridor (CPEC), revision in the FTA with China, outlining a free trade area among ECO member countries, FTA with Thailand, completion of some energy related projects, Panamagate scandal, political disturbances in Islamabad, operations Zarb-e-Azb and Radd-ul-Fasaad against terrorists’ activities, tension along the line of control, critical role of Pakistan in changing of political alliances in Gulf region, acceleration in the operation against criminal elements in urban Sindh, and quite visible steps to enhance tax collection by broadening tax base are the obvious phenomena, which have been observed.

At international fronts Pakistan has entered in a new era: it is the post Britain exit era; it is time of republican in USA led by Donald Trump who issued disputed statements against free trade and economic liberalization; it is the time of openness in financial markets; it is the time of change in Afghan policy; it is the time of post sanctions Iran; and the time when Russia is establishing its close economic and political relations with Pakistan.

Some macroeconomic indicators have shown U-turns in the economic progress of Pakistan. First, a hyper growth in the value of US dollar in term of Pak rupee was converted into the appreciation of Pak rupee, then stability was observed in the currency market. A declining trend of inflation and its arrival at 4 percent in term of Consumer Price Index (CPI) and the controlled decline in the basic (policy) interest rate have also been witnessed in the economy of Pakistan.

The fiscal year ended on 30thJune 2017 indicates a recovery in GDP growth rate. The growth in GDP (in real term) was recorded at around 5 percent. The share of services sector in the economy has arrived at more than 50 percent, which indicates its significant participation in the aggregate growth of GDP. The declining share of agriculture and fast growth in the contribution of services sector in GDP is not a bad indicator in absolute term. It is a common indicator in all growing economies. The shares of services sector in USA and European Union are more than 55 percent. The share of services sector in some advanced countries (like UK) was recorded at 70 percent. The deterioration in investment activities in the country can be assesses through the declining trend of FDI. Once the FDI in Pakistan had arrived at 7 billion dollars; now after a consecutive decline during the last 10 years it has arrived at less than one billion dollar.

PAGE: KINDLY GIVE YOUR VIEWS ON EXPORTS, IMPORTS AND BUSINESS SENTIMENT: 

AYUB MEHAR: The adverse side of macroeconomic indicators is the uncontrollable growing trade deficit. This growing trend in trade deficit can be observed since last two decades. Though, Pakistan’s trade deficit was increasing since early 1990s. But this increase was mainly because of the quantum jump in imports of oil, machinery and edible products. However, during the last three years, Pakistan’s export was showing a declining trend which is a drastic indicator for the economy. The official trade statistics indicate the deteriorating trends in external trade and continuous failure of trade policy and this drastic indicator has wiped out the benefits of GSP Plus status granted by European Union. Thanks to workers’ remittances, which helped the economy to reduce the current account deficit and to maintain its foreign exchange reserves. Imagine the drastic picture of foreign debts and IMF conditionalities in the absence of workers’ remittances. Though, Pakistan has achieved the status of GSP Plus from European Union, but the benefits of GSP Plus status have not been materialized as it was indicated by the aggregate value of exports.

Deteriorating law and order situation, energy crisis, holding of sales tax refunds with FBR and failure in improving the image of Pakistani products through diplomatic efforts are mentioned as the major causes of continuous declining in exports. By mentioning these reasons one can easily shift the responsibility of failure to the government. This stereo type reasoning leads avoiding from finding the real causes of endless declining in exports. Though it can be easily observed that law and order situation in industrial cities particularly in Karachi has been improved significantly during the last three years. Similarly, the severity of energy crisis is declining gradually as the duration of load shedding in urban areas has reduced in all over the country. It corroborates that energy crises and the law and order situation are not the real causes of declining in exports during the last 3 or 4 years. The exports from Pakistan have been showing increasing trends during the extreme bad days of energy crisis and deterioration in law and order situation in urban Sindh. So far as blocking of sales tax refunds in FBR is concerned, this issue was more serious in previous regimes in quantitative term. Contrary to previous policies, the present government has granted zero-rated facility to five major exporting sectors. So, this issue cannot be linked directly with the declining exports during the last three years.

Granting GSP Plus by European Union, upgrading sovereign rating of Pakistan by world leading rating agencies, improving ranking by Economic Intelligence Unit (EIU), and expecting significant improvement in investment and economic outlook by Wall Street Journal, World Bank and IMF reflect the success on economic diplomatic front during the last four years. So, these commonly propagating reasons do not explain the declining of exports from Pakistan.

PAGE: YOUR VIEWS ON THE PERFORMANCE OF PAKISTAN ECONOMY IN 2018 AS COMPARED TO LAST FIVE YEARS:

AYUB MEHAR: It cannot be claimed that economy necessarily will perform better. It entirely depends on the political governance and the policy formulating institutions. In case of decline in foreign exchange reserves Pakistan has to face the problems at two different sides: To manage the minimum requirement of foreign exchange reserves it has to go again to IMF and has to accept the conditions, which may restrict the government priorities and development planning.

Declining foreign exchange reserves will pressurize the value of Pakistani rupee in terms of foreign currencies. Depreciation in the value of Pak rupee will increase the prices of imported products including industrial raw materials, petroleum, medicines, chemicals, machinery and edible oil. Consequently an increase in CPI (general rate of inflation) will create further economic miseries in the lives of common peoples. This situation leads further poverty. Exports, foreign exchange reserves, inflation, value of local currency in international market, investment and poverty are closely interrelated variables. The decline in exports is not simply a matter of declining in foreign exchange reserves; it affects also the production and industrial activities in the country. Consequently, it affects investment, employment and poverty in adverse direction. Exports, foreign direct investment and workers’ remittances are three major sources of the inflow of foreign exchange in Pakistan. Despite declining exports, Pakistan has succeeded to manage its economy by setting off the losses of foreign exchange through workers’ remittances during the last three years. However, in the present situation and political scenario in Middle East a declining trend in the workers’ remittances is predicted. Now, a further decline in exports accompanied by negligible growth in foreign direct investment (FDI) and stagnancy in workers’ remittances will hamper the foreign exchange reserves.

PAGE: WHAT IS YOUR TAKE ON EMPLOYMENT OPPORTUNITIES IN PAKISTAN CURRENTLY AND IN NEXT COUPLE OF YEARS?

AYUB MEHAR: The creation of employment opportunities is directly related with the investment activities. Honestly speaking in the absence of investment activities, which are indicated by declining FDI, one cannot expect the creation of employment opportunities. Moreover, declining exports will lead to decline in production activities. In this situation you should ready to face unemployment crisis in future. The only hope is that investment opportunities will be created because of CPEC. It was estimated that this corridor will directly create more than 700,000 employment opportunities during the next fifteen years and accelerate the economic growth by 3.5 percent to bring it at 8.5 percent per annum. However, materialization of these benefits depends on our economic policies.

PAGE: WHAT ARE YOUR SUGGESTIONS FOR THE GOVERNMENT FOR BETTER ECONOMIC PERFORMANCE?

AYUB MEHAR: The most important requirement is the focus of economic policies on export enhancement. Trade Development Authority of Pakistan (TDAP) is the institution, which is responsible for this. This becomes a dead institution. A complete revamping is required in its role and functions. We should leave the focus on ‘tomato and potato’ trade, we should not focus on the selling of cloth. It is unfortunate that 70 percent of world trade basket belongs to knowledge based products and only 5 percent belong to the primary and resource based product. The share of resource based products is declining year by year, but we are focusing on primary products like yarn, cloth, sugar, fruits and vegetables. Even our policy makers are promoting and encouraging resource based products by providing incentives in terms of duty drawbacks, sales tax refunds, subsidies, and tax rebates etc on these products. It is unfortunate that incentives are not available for knowledge based products, technological advancements and inventions.

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