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Ranking in ‘doing business indicators’ needs to be improved; weak rupee is not a bang for future economy

Fragile governance a main hindrance in economic progress; monetary policy overhaul can give boost to SME sector

Interview with Dr. Ayub Mehar — an economist

Profile:

Dr. Ayub Mehar is currently 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 at 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 and Economic Advisor in Economic Cooperation (ECO) Chamber of Commerce and Industry. He is alumni member of the International Academy of Leadership (IAF) Gummersbach Germany, where he did 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 are your views on the economy of Pakistan?

AYUB MEHAR: Multiple changes have been observed at the political and economic stages of Pakistan during last five years. After stagnancy, now the value of US dollar in terms of Pak rupee once again is appreciating which means weakening of Pak rupee. This may be a harmful trend for the economy because it will lead to inflation and poverty and the quantum value of external debts will increase in term of Pak rupees. It means government needs more money to repay its debts and debts servicing. This situation indicates the imposition of further taxes mainly GST. A declining trend of inflation may be reversed.

The fiscal year ended on 30th June 2017 indicating a slight recovery in GDP growth rate and it is expected that Pakistan will achieve 5.5 percent growth target at the end of fiscal year 2017-18. But the important aspect of this story is that the minimum required rate of growth for the revival of Pakistan economy is 7 percent. So any growth less than 7 percent is meaningless. The share of services sector in the economy has reached 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. Another adverse development is the declining trend and the heavy volatility in stock market. The deterioration in investment activities in the country can be assessed through the declining trend of FDI. Once the FDI in Pakistan had reached at 7 billion dollars; now after a consecutive decline during last 10 years it is than one billion dollars.

PAGE: What must be done to increase remittances?

AYUB MEHAR: During last few years, the workers’ remittances have played a very important role in developing the foreign exchange reserves of Pakistan. These remittances have set off the losses occurred due to high trade deficit. The exports during last 3 years have shown a continuous declining trend, while a fast growth in import was observed. Thanks God that increasing remittances provided a room to set off these losses. Despite declining exports, Pakistan has succeeded to manage its economy by setting off the losses of foreign exchange through workers’ remittances during last three years. However, in the present situation and political scenario in Middle East a declining trend in the workers’ remittances is predicted. However, now a gradual decline in workers’ remittances has been witnessed. The unfavorable conditions in Middles East, growing competition in European markets, and US polices against foreign workers are main causes of this declining trend. Personally I think we should not depend on workers’ remittances. There are some countries in world like Philippines, Mongolia, Mexico and Caribbean states which have to depend on the remittances because these countries do not have much indigenous resources to develop their economies.

The case of Pakistan is entirely different. We have more than sufficient indigenous resources. The problem is their proper utilization. We have the best location in the world which provides a nexus between Middle East, South Asia and Central Asia. We have rich mineral resources. We have one of the largest stocks of world’s young population, and we have sufficient agriculture land. Despite all these facts, we do not have policies to utilize these resources. It is the failure of vision and planning.

PAGE: How could we promote small and medium enterprises in Pakistan?

AYUB MEHAR: It is an established fact and global phenomenon that Small and Medium Enterprises play an important role in the economic progress of the countries. This phenomenon is common not only in developing countries, it has also been noted in industrialized countries. For instance the major share in the exports of European Union countries belongs to the SMEs products. This share is higher than the exports of the goods produced by gigantic multinational corporations. In USA, SMEs indirectly contribute to the value-added products of the big corporations. SMEs have vertical integration with large scale industries. Sometimes they supply their finished products to the large scale industries where these are used as intermediate products and sometimes they provide their services as selling point of the large scale industries products.

It is a notable observation that share of services in global trade is rapidly increasing. The information technology, health services, tourism, travelling, transportation, real estates and education are included in these services. The important point is that the majority of services providing industries belong to the Small and Medium Enterprises.

It is unfortunate that in case of Pakistan this sector is badly ignored. One of its major reasons is the monetary policy bias. It is notable that in 40 percent of the banks’ credit to private sector belongs to SMEs; this ratio is 25 percent in India, while in case of Pakistan this share is less than 4 percent. It is enough to know the ineffective role of SMEs in the development and progress of Pakistan economy. It corroborates that to promote SMEs we will have to remove this monetary policy bias and enough credit should be provided to the SME sector. In past a Business Support Fund with the collaboration of international donor agencies was established, and developing finance institutions have launched various schemes but they have not been succeeded.

A new company – Pakistan Export Finance Guarantee Corporation (PEFGC) with Canadian participation was established. The main objective of this company was to promote the exports of SMEs products but this scheme was failed. Small and Medium Enterprises Development Authority (SMEDA) which is a public sector organization has not proved its effective role in promoting the SME sector. The United Nations Development Program (UNDP) has also introduced a program (SSGATE) in collaboration of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI). The objective of this program was to provide long term debts and equity participation to Pakistani SMEs. This program was badly flopped because of inadequate human resources and bad governance.

 

PAGE: Your views about strengths and weaknesses of the economy of Pakistan:

AYUB MEHAR: I have mentioned earlier that there are several strengthening and unique aspects of the economy of Pakistan. Its strategically important location which provides a link between Central Asia, South Asia and Middle East is too important. Except 70 years of Soviet regime, this location was always important for trade, migration of the population and cultural transformation. Another important thing is its cropped area and rivers’ water, which is unique in the world. The fairly of large mineral resources including oil, gas, gold, copper, coal, iron, gypsum and sulphur provide a source of development in chemical industry.

More than 220 million population mostly young group with per capita income more than $1500 dollar per annum indicates the existence of a big market of consumer goods in the country. Multicultural society, pluralism in economic and political ideologies and adoptability are the characteristics, which provide catalyst for the development.

Pakistan is one of the seven English speaking countries in the world which belong to the Commonwealth. All such factors provide a solid ground for taking off in economic progress. Unfortunately, extreme bad governance since last several years damaged the economy. The deterioration in law and order situation, energy crisis, political turmoil, extremism, and ineffective role of the public sector institutions are the consequences of bad governance only. When an institution in public sector is failed in performing its activities, the top level governance decides to privatize it. The most astonishing fact is that after transfer to private sector its performance is further deteriorated. PTCL, K-Electric, and several such institutions are the examples of such failures. The ineffective role and continuous deterioration in Pakistan International Airlines (PIA), Trade Development Authority of Pakistan (TDAP), Pakistan Telecommunication Authority (PTA), NEPRA, PIMR and Higher Education Commission of Pakistan (HEC) do not reflect the insufficient resources, it is indicator of bad governance. The most important and crucial aspect of these failure belong to the Planning Commission. This institution is considered as a pivotal point to link all the economic and social policies. It is responsible for the reforms, planning and coordination among the various organs of state. The Prime Minister is the chairman of this institution which indicates that Planning Commission is supreme than other ministries. However, since last several years this has become a powerless and ineffective organ of the state. All this discussion indicates that governance is the only issue and weak area of the economy.

PAGE: How could Pakistan get rid of trade deficit, current account deficit and ever increasing imports?

AYUB MEHAR: No doubt, the adverse side of macroeconomic indicators is the uncontrollable growing trade deficit. This growing trend in trade deficit can be observed for last two decades. The value of exports at the end of fiscal year (30th June 2017) was around 20 billion dollars while imports were recorded at $53 billion, resulting US$33 billion trade deficit. 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. Here it is important that 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 four years, Pakistan’s export was showing a declining trend which is a drastic indicator for the economy.

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. 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.

In case of decline in foreign exchange reserves Pakistan has to face several problems. 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. 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 cries 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 5 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.

Trade policy review by WTO and the Trade Enabling Report by the World Economic Forum (WEF) explain the real causes of declining exports from Pakistan. These comprehensive reports are released by the World Economic Forum (WEF) and World Trade Organization (WTO) after every 4 years. In last reports it was concluded that the top most reason for this deterioration is the absence of Trade Portal in Pakistan (e.g. lack of required information to importers and exporters about Pakistani products). Weak market access, business environment and infrastructures’ backwardness are the supplementary causes of this low ranking in trade enabling. It is notable that national chambers in most of the cases (or a public sector entity for trade promotion) manage and maintain the trade portals for providing the services to entrepreneurs in term of match-making, marketing, and searching of the products and entrepreneurs.

The global economic indicators reflect that Pakistan is included in those countries where economic dependency on export (export-to-GDP ratio) is minimal – less than 20 percent. It is notable that according to the World Economic Forum (Geneva), Pakistan is ranked at 116 (out of 138 countries) in ‘Trade Enabling Index’. WTO report (enabling trade) has clearly indicated the fundamental problems in trade policy of Pakistan which belong to physical infrastructure, working capital and lack of awareness. These reports identify the problematic areas in enabling exports from Pakistan. The identified problems do not belong to the demand management (or monetary and fiscal policies); they emphasize on the restructuring of institutions and infrastructures.

Over the last about 20 years, there has been a drastic change in the world of export markets, where the focus has shifted from the traditional Western countries to new markets in Asia, which now account for almost 50% of global exports. The export promotion efforts must incorporate this aspect of global changing in the pattern of international trade.

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