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Mending economy

Pakistan is celebrating 72nd Independence Day this month. Politically Pakistan got independence in 1947 yet it has to achieve economic independence though it got many opportunities to improve its financial health. Pakistan first made its 5 years plans in early fifties, which were successfully developed and implemented but in later years it was become more of an exercise than an economic activity. Agriculture was 60 percent at the time of independence and in later years a lot of incentives were given to locals’business community to promote industrialization. It is said that in fifties and sixties, average growth was over 6 percent which was later dropped to less than 5 percent during seventies and eighties and thereafter less than 3 percent. It was a time when China was opening its borders, Soviet Union was commanding with full might, socialism was at its peak, US was badly stuck in Vietnam hence Pakistan got influenced by socialism.

Nationalization of 1971 was undoubtedly one of the worst events of Pakistan’s financial history. On top of that, induction of party sympathizers in the state owned companies where salaries, pension and retirement benefits have made those companies financially unviable and then corruption made them complete sick units. Tata or Birla, all were at the same level in India where Sehgal, Adamjee or Habib Group were in Pakistan in 1971. But nationalization broke the backbone of Pakistan’s industrialist. They were shy away from further investing in the country. If there were any labor exploitation, it should have been addressed through laws rather than through nationalization. The effect of nationalization can be felt even today. Today, we see National Accountability Bureau (NAB) doing similar service. Questing and challenging ECC decisions of Government of Pakistan have made investment environment completely unfriendly. Controlling and curbing corruption is good but there should be a method of doing this.

Gen Zia (late) opened the market for the private sector in his later years of rule, it was more in the hate of Zulfikar Ali Bhutto than in the love of industrialization. The World Bank advised the then government to open the power sector for the private sector because Water and Power Development Authority (WAPDA) was in severe financial crisis at that time. Even then, government took 7 to 8 years to form a policy and attract the private sector to evaluate the power sector of Pakistan.

Pakistan’s first ever private power policy was announced in 1994. Prior-1988 were more or less good days of Pakistan as corruption was hardly any issue. But in later years, Pakistan was completely overrun by the corruption and now there is hardly any project or deal, which is not tinted with corruption. Pakistan’s history can be divided into following four eras; pre-nationalization i.e. before 1971, post-nationalization which starts from 1971 till 1988, post-88 i.e. from 1988 till 2001 and post-9/11, which is from 2001 till today. There is a consensus that pre-nationalization era is the best era of Pakistan followed by the post-nationalization era. It is interesting to note that we have declined gradually and reached to this point.

Pakistan got a number of golden opportunities to revive its economy but all gone wasted due to personal interests of policy makers and rulers. Supporting US in war in Afghanistan gave Pakistan an opportunity to attract international investors but it failed to retain them. A lot of foreign banks came to Pakistan in early 2000 and now almost all of them have gone. HSBC, Barclay, or Deutsche all came and gone. Citi curtailed its operations. These banks are replaced by local banks but they have their own limitations. No one at the policy making level realized that leaving such big names from the financial sector of Pakistan would eventually weak Pakistan’s financial sector. It is now becoming difficult to open an LC (letter of credit) for exporters if it has to work in Europe or North America, moreover, such big names always bring a lot of credibility to the sector when country is presented internationally. Giving some additional benefits for retaining them has various advantages and Pakistan can capitalize their presence.

Pakistan biggest challenge today is current account imbalance which was over USD 20 billion in Financial Year 2017-18. It has come down to USD 13 billion but it has to be as minimum as possible. Pakistan has to solve current account balance, which can also be addressed through bringing discipline in the fiscal regime. Without having enough exports, Pakistan will not be able to cover the current account balance. Pakistan’s exports are also not diversified, almost 60 percent of the exports are from the textile sector and Pakistan’s target market is also stagnant. There is a need to approach new markets for its exports. In 2013, Pakistan got special status from Europe but even that couldn’t increase exports. There is a need to evaluate list of imports, we can find a lot of items without which we can even live happily but that cost us billions. Smuggling is a big issue, Pakistan cannot progress without addressing this evil.

One of the biggest issues Pakistan is facing is inconsistent policy of various governments. Hate would be a strong word but there is no other word which could explain the behavior and sentiments of an incumbent government against the previous government of its opponent. There is a deliberate effort to malign previous government’s flagship projects so as to get a short term political advantage without realizing how much it will damage the country. Every government has people who are close to one sector or another and then we see rent seeking. Rent seeking means manipulating public policy or economic conditions as a strategy for increasing profits. We see textile and sugar are two particular sectors, which are doing rent seeking since long. There are better ways to do everything, we can address half of our financial issues if we just bring in transparency in policy making. Policy is one thing that can make or break a sector. It is extremely important to make long term polices where every government must not withdraw incentives of their predecessors even if they like it or not.

Business community should also evaluate what they have done with this country. Making profit is their right but not paying or under-valuing their profits is definitely not their right. Government should give tax incentives if an industrial unit expands its capacity or starts a new industrial unit. Industrialization of Pakistan is the only way forward. Pakistan should also start producing electronic goods instead of assembling the units. There is a huge potential of making electronic goods then why not make export quality electronic goods. Time has come to export high value items as well. Textile is a good sector but its export value can’t go beyond to a certain level. Therefore, it is important to diversify exports as well otherwise, in coming years Pakistan will further dilute its position.

 

Last government tried its best to privatize state owned entities but due to opposition parties, it failed. Now, this government has plans to privatize few state owned enterprises, which would be a challenge in present day situation. Presently economy is not in a good shape, you get good price of an asset when economy is growing. We missed that opportunity in 2014 to 2016 when stock market was all-time high and other economic parameters were also encouraging. PIA, Steel Mill, distribution companies all are in trouble since long. It is not difficult to turn them around. On PIA, all segments should be split in separate divisions, operations; repair and maintenance; ticketing; printing; and even catering. Every division should operate independently on a cost-plus basis. By doing this, all the segments would ultimately be in profit except the holding company. Ticketing division should be the last one to calculate its profit on the basis of input it will get from other divisions. When ticketing division has the numbers from all other departments then it can decide the level of air fare. While calculating the air fare, repayment of debt should also be considered to an extent. Not generating enough cash to pay off its debt installment is one of the main issues PIA is facing these days and therefore, it has to get more loans to pay off its existing loans. A reverse calculation can give a level of loan to the management of PIA at which PIA can afford and bear a debt installment. Over and above to that level needs to be addressed separately. It is practically not possible for PIA to pay off current level of debt therefore, it’s better to first analysis how much debt it can pay from its operating cash flows and restructure entire organization accordingly. All this can be done through a software. Once the restructuring is done then all the excess long term debt should also be parked in a separate company owned by the government of Pakistan. Lenders would ask for the security against their debt, which PIA as a whole can continue providing and even today PIA’s long term debt is backed by government guarantees. Excess staff should also be put in a surplus pool and should not be allowed to come to office because it not only creates inefficiencies but also becomes a source of corruption to some level. Not all are corrupt but optimizing staff is a key to success. Focused approach can turn around PIA in three or four years.

Similar case is with circular debt, how is it possible to have such a high circular debt. Difference between payment and receipt of companies involved in the power and energy sector is called circular debt. Level of subsidies is not of that magnitude that it chock entire energy sector. Selling price of electricity should be equal to the buying price of electricity plus transmission losses at a level plus corporate overheads plus a profit margin. Debt of DISCO and NTDC is to be repaid by DISCO and NTDC itself. Then there is only a gap left, which is due to advance payments to furnace oil and LNG suppliers, what else is the difference? This means there is something else as well in it which is inefficiencies and that needs to be addressed. Over staffing and operational inefficiencies are also big issues. Economic turnaround can only be possible if politics is not involved, and no one supports the trade unions. Tariff wise, all the electricity distribution companies have same tariff but there is a huge gap in recovery and transmission losses. First further split the DISCOs and thereafter privatize. Let private sector handle this but make sure private sector must not create cartel or make a situation similar to K-Electric.

Pakistan opened mobile phone sector in 2004-05 but didn’t work on mobile phone manufacturing side. Presently Pakistan has over 100 million mobile users which means Pakistan has over 100 million phone sets if we also include the current stock at shops. Government should ask all the mobile phone manufacturers of the world to manufacture cell phones in Pakistan and thereafter ban usage of all other cell phones what so ever. Some like to use iPhone or Samsung but if they are not manufacturing phone set in Pakistan then there is no harm in putting a ban on usage of that phone set.

We have to make polices from the country stand point and not on the basis of personal like or dislike. Similar thing happened in the laptop sector, last government distributed millions of laptops by buying assembled laptops. Why didn’t they ask DELL or HP or any other company to install a manufacturing plant in Pakistan and then allow only two or three computer companies to sell and operate in Pakistan? People should be forced to use those two or three brands only. There is an annual usage of millions of laptops in Pakistan but there is no manufacturing plant in Pakistan. Assembly plant must not be allowed anymore. No one is interested in installing a manufacturing unit in Pakistan unless it gets a good volume. Making compulsory use of made-in-Pakistan brand in Pakistan can ensure the international companies to get the required volume.

Automation of economy is not so difficult but it will take time. Banks should be forced to issue debt cards without annual fee. Presently banks are charging its customers for issuance of debt or credit cards. Such services should be free of cost. And all the shopping stores must have debt card machines thus usage of paper currency will be reduced ultimately. This will bring in discipline in the economy and sales of traders would also be documented automatically. Usage of paper currency should be discouraged. Even big stores/shops should be asked to procure goods from a wholesaler on debt cards only if making cheque is an issue for them at all. It can be done step wise, starting from the importer and manufacturer. Forcing them to sell goods only through a banking channel. Thereafter it will have a trickle down effect and in few years’ time, entire economy would be documented. But it seems that government is in a rush. They want to do many things simultaneously which is not possible. Revival of economy on solid bases takes time and also requires consistency. If they are able to lay the foundation on solid bases then we can foresee the revival but as we speak, things are out of control and no one is taking the ownership.

Government should focus on economy and stabilize the political environment. People now want recovery of so called looted money. There is no doubt, national exchequer was plundered but how to recover that is an unsolved riddle so far. Physical torture is simply out of question in a civilized society, therefore, improving judicial system, inducting intelligent lawyers and financial experts, and engaging foreign governments can bring back the money. It’s a long term process, which will take time therefore, government should equally focus on reviving the economy which needs serious attention and adhocism will not work.

The writer is an Islamabad based infrastructure investment consultant and can be reached on Twitter @ aroojasghar

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