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Pakistan in great need of financing, economic policy measures

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

Interview with Dr. Ayub Mehar – an economist

PAGE: Tell me something about yourself, please:

Dr. Ayub Mehar: Currently I am serving as Professor at Iqra University and am also associated as Economist with the Gerson Lehrman Group, Austin USA (Political Upheaval and Global Competitiveness project for World Economic Forum). This is an important institution doing policy-oriented research. My portfolio mainly belongs to the international trade, financial markets and macroeconomic policies.

In recognition of my 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). I have 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, I 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. I am alumni member of the International Academy of Leadership (IAF) Gummersbach Germany, where I completed training courses in New Public Management including Political Administration and Public Finance.

PAGE: How would you comment on the key economic challenges being faced by Pakistan?

Dr. Ayub Mehar: Multiple challenges are being faced by Pakistan. The last fiscal year ended on 30th June 2017 and indicated 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 arrived at more than 50 percent, which indicates its significant participation in the aggregate growth of GDP. Another adverse development is the declining trend in FDI. Though there is a slightly improvement in the magnitude of FDI but the size of growth is negligible. 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. The breakup of this growth in FDI tells an interesting story. The growth in FDI is not from our traditional partners; more than 60 percent of FDI in current year belong to China and Malaysia. Obviously it covers also the inflow of foreign investment as component of CPEC.

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 belong to young group with per capita income more than $1500 dollar per annum indicate 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. However the only requirement is the development of the institutions by placing right person and right place. The recent history indicate the deterioration in the governance of the institutions because of the political influence and nepotism.

PAGE: What is your take on the current account deficit and trade deficit?

Dr. 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 since last two decades. The value of exports at the end of fiscal year (30th Jun 2017) was around 20 billion dollars while imports were recorded at $53 billion, resulting $33 billion trade deficit. Here it is important that Pakistan’s trade deficit was increasing since early 1990s. But this increase was mainly because of the growth in the 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. Though since last 6 months there is a slight growth in exports, but the magnitude of growth is negligible. Now, a further deficit in trade and account balance 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 IMF again 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. Another expected consequence of the IMF conditionalities is the increase in the primary (policy) rate of interest. The increasing rate of interest at this stage will affect the business competitiveness because the cost of borrowing will definitely increase and all other rate of interest including consumer financing, industrial financing, project financing, leasing and commercial loans will increase.

Another least discussed aspect of increasing rate of interest is the competition of Pakistani commercial banks with the international banks. The banks in other countries including China are facing problem of higher investable funds. They want to place their funds while the interest rates in their countries are much lower than Pakistan. If they decide to invest in Pakistan, our commercial banks will not be in a position to compete them. Here once again I want to mention that ‘Trade Policy Review’ by World Trade Organization (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.

 

PAGE: Your views on the business activities in Pakistan:

Dr. Ayub Mehar: In the present situation one can observe multiple changes in the business scenario. But unfortunately there is no policy to handle with these changes and the consequences of these changes. At least there are four categories of these changes: Pakistani society is rapidly shifting to ‘consumer oriented society’. You can see that despite of complains about growing poverty, increasing rate of unemployment and inflationary pressure, there is a growth in the sale of consumers’ products.

The increasing numbers of super stores, food restaurants, imports of consumer products, growing use of cell phone services and growth in fashion industries indicate the rising of ‘consumer society’. It pushed the commercial banking towards consumer financing including personal loans. It is diversion from lending for industrialization and new projects. Second change is the use of foreign currency and particularly credit cards in shopping, which is another change in the business financing and working capital management. Another important observation is the migration from rural areas to urban areas. This migration has also changed the buying and selling patterns. Moreover many persons who migrated from rural areas have started their businesses in urban areas and the changes of business ownerships in terms of ethnic groups has changed in big cities. I think it is a positive sign but it requires social policies to handle these changes. The last observable change belong to the growth in ‘domestic commerce’.

Our policy makers have totally ignored in the importance and implication of the growth in domestic commerce. They have been emphasizing on the ‘trade policy’ which belong to the international trade only. I think that in the context of China-Pakistan Economic Corridor (CPEC) the importance of the size and patterns of domestic commerce will become an important concern of economic ad as well social policy. Another aspect of the business activities in Pakistan belong to the growth in business activities and ‘Doing Business Indicator’. It is notable that size of the business activities is growing but this growth is mainly concern to trading activities. There is no serious progress of enhancement in industrial activities. It is a serious apprehension that Pakistan may become a trading economy where endogenous industries will be removed gradually. We are creating attraction in trading activities at the cost of industry. To create attraction in industrial ventures we have to improve ‘doing business indicators’. It is true that there are visible improvements in the uninterrupted supply of energy, law and order situation and infrastructure, but there are several other requirements to improve Pakistan’s ranking in ‘doing business indicators.

PAGE: What is your take on the depreciation of Pak Rupee?

Dr. Ayub Mehar: The present depreciation in the value of Pakistani Rupee against US dollar has badly affected the expectations about the future of Pakistan economy. However, it is noteworthy that this decline was not a ‘natural disaster’ which was happened suddenly. It was quite expected. How one can expect that there will be no depreciation in the currency in the presence of growing current account deficit and trade deficit. There was no significant inflow of foreign investment. So, decline in the foreign exchange reserves was quite obvious. How in this scenario we can ignore the devaluation. It was quite expected. After a stagnancy now the value of US dollar in term of Pak rupee once again appreciating which mean 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 need 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 other important consequence of this situation is that we will have to go IMF. Because significant decline in the foreign exchange reserves (which may negative after payment of short term liabilities an repayment of current installments of loans) will affect the credibility of Pakistani buyers (importers) in international markets. If we do not get success to build our foreign exchange reserves equal to 8 weeks import requirement, the acceptability of guarantees issued by Pakistani banks will be affected and LCs (Letters of Credit) issued by Pakistani banks may suffer. To avoid this situation Pakistan has to build its foreign exchange reserves. The government is focusing on building the reserves through ‘Tax amnesty scheme’ or launching again Pakistani bonds. But in the present political situation when a care taker set up is expected in near future, I do not think that these option will be materialized.

PAGE: Your views on the exports from Pakistan:

Dr. Ayub Mehar: 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.

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. In bottom line I would like to say that a medium term solution of all economic problems is based on two things: Sustainable growth in exports and significant and sustainable inflow of foreign direct investment (FDI).

We will have to take revolutionary steps at those front. The growth in exports and FDI will build the foreign exchange reserves and improve the value of Pakistani rupee. Obviously it will lead the control over inflation and induce the investment by import of industrial goods and machinery at cheaper prices. The growth in industrial activities, massive employment opportunities and growth in GDP are its ultimate destinations. This strategy is known as ‘Export-led Growth Strategy’. To achieve these targets we have to prepare a framework which must be quantifiable, measureable and verifiable. Only right persons at right place can provide this solution. The traditional measures and approaches cannot provide any solution.

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