Pakistan is currently facing a foreign exchange crisis where boosting exports on a sustainable basis should remain the prime focus of the new government. New government has inherited not so strong economy, high budget deficit, high debt profile and frustration among young voters looking for a change. The checklist is long, but there are four critical areas to immediately focus on including fiscal belt-tightening, improving the business climate, first controlling and later improving deteriorating current account deficit and curbing corruption. Pakistan has so far failed to get foreign investment from US, Europe and Middle East while most of its infrastructure needs are being taken care of by China only. One such project which federal government can initiate right now is to start projects that are easily begun, such as construction of affordable housing schemes that will generate jobs and will have a multiplier effect on iron and steel, construction materials and transport. Pakistan had highest growth rate in fiscal year 2017-18 in 15 years, which is difficult to maintain in fiscal year 2018-19. The drop in growth rate would mainly be attributed to certain fundamental issues therefore it is safe to say that stability will not be achieved without correcting the fundamentals.
Reviving economic growth
As per one of the World Bank’s reports, main risks to the economic outlook are domestic, including fiscal slippages, increasing liabilities related to infrastructure projects and weak tax revenues that can derail fiscal consolidation efforts. Activities were strong in the areas of construction and services and there was a slight recovery in agriculture production with a return of normal monsoon rains. This government has pledged to create millions of jobs through construction and housing sector. This might create short to medium term job opportunities but definitely not on a long term basis. Secondly, creating jobs in the housing sector means less opportunities for qualified people, which will result in serious unrest among youth and will also create economic disturbance. In any case, new government should focus on economic growth, regulate housing sector and encourage entrepreneurship at least.
New government has run its election campaign on the slogan of curbing corruption. It was considered that bringing back wealth of Pakistanis abroad is some low-hanging fruit that a new government can easily pluck right away, which would not be the case at all. Now, it is taking steps to reduce corruption by introducing certain measures, forming task forces to monitor and investigate cases, and simplifying procedures. It has also pledged to set up a task force to recommend amendments to existing laws or bring new laws to check the flow of black money, and track and bring back black money stashed in foreign banks.
New government has to first restrict the overall budget deficit to a certain level and then try to reduce the gap, which should eventually end up in eliminating the entire deficit in 7 to 8 years time. This can be started from strict controlling over federal development spending, and implementing fiscal discipline without compromising on funds available for the development. It is being said by the government officials that the current account deficit would be reduced aggressively by focusing on exports and reducing dependence on imports. There is a significant gap in the trade account, where imports are now more than twice the level of exports. On the services account, we have a surplus mainly because of overseas remittances, which partly offsets the trade deficit but the overall balance of payments (current account) remains in deficit, which last fiscal year was at $16 billion that was more than 5 percent of GDP. Two years ago this was less than 1.5 percent of GDP. All successive governments have always relied on remittances from overseas Pakistanis and used it as a yardstick of their popularity. On one side, government is incentivizing foreign direct investment (FDI) but on the other money is moving out of the country at a higher speed. Current government should look into the matter and should identify the root-cause of transfer of wealth to out of Pakistan.
In recent years, country has witnessed CPEC, which is probably the only concrete foreign direct investment in Pakistan in recent years. It is analyzed that increase in imports are mainly due to increased demand for machinery for CPEC and power generation, industrial raw materials and petroleum products, which shows rising economic activities in the country. It is important to note that imports can be financed through a combination of foreign currency loans and foreign direct investments. But on the other, drop in exports is a real concern, which should not have happened at the first place. However, the real problem is not the increase in imports as such if machinery and equipment is being imported instead of import of cell phones and consumable items but the drop in exports and how to finance the import bill is a serious challenge. New government should give incentives to exporters especially in the textile sector.
One of the most important steps new government should take immediately is to boost the manufacturing. Pakistan would not come out of its current economic situation on a sustainable basis without boosting manufacturing and installing new manufacturing facilities. Government should form a small but effective and focused task force to revive micro, small and medium enterprises, cut red tape; clearances, consents and permits should be made transparent and time-bound, incentivize SMEs, and offer cheap loans.
Pakistan is still far behind in agriculture from its peer countries and has not yet optimized its agri productivity. Government should develop a proper agricultural innovation policy to enhance the productivity and agro-based exports. Innovation in agriculture can bring about some required structural shift in foreign trade account. It is important to promote tunnel farming, usage of quality fertilizers and introduce the concept of high-roofed greenhouses. It is equally important to focus on improving the yield of all the crops and put a ban on selling agricultural land for housing societies, which is a policy issue.
There is no shortage of advice on what new government should do after coming into power. Today, local and foreign newspapers have been publishing articles on country’s current financial health and suggesting what needs to be done to help Pakistan in reaching its potential.
Policy failures (fiscal and current account deficit) are the prime reasons for continuous instability and unsustainable economic conditions. In last government, Pakistan witnessed growth momentum, price stability, CPEC, rising investments, strong consumer demands whereas in 2013, all these conditions were missing, low growth, high inflation, declining investments, drying up of foreign resources, etc. New government should first conduct a detailed root cause analysis of every sector without any political influence, then form sustainable policies and thereafter start implementing those policies. If economy is evaluated without any political influence and policies are formed on the basis of merit with justifications then there would be no reason to conclude that new government can reshape the economy that would bring sustainability in the economy.