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Current economic situation and the best stimulation

Revival of economy is the biggest issue of present day Pakistan. It is important to address this issue just now as country cannot afford any further meltdown, delay in policies making thereafter its implementation. It is being said that government is focusing on the revival of economy and addressing to correct the fundamentals whereas all state institutions are supporting the initiative of the government. Inflation, high interest rates and fear of FBR and NAB are three most important issues presently Pakistan is facing. There was a time when security and terrorism was the prime concern but thanks to the security forces for controlling the terrorism.

It is a well-known fact that business community and business leaders are not comfortable with the economic situation of the country. There are some areas which are of great concern for the business community and they are continuously raising voice against that. Business community is willing to invest in the country but they are reluctant because of high cost of doing business, governance and management related matters.

Federal government has completed its first year without any significant political crisis, yet it is struggling to stabilize the economy, which is its biggest challenge. There is now an acknowledgement even at the government level that Pak Rupee has been devalued in last few months more than what was actually required and now rupee is slowly and gradually adjusting itself. Even an ordinary person can smell the foul play in the manner Pak rupee was devalued. How was it possible that dollar was appreciated by more than 1 to 3 rupees every day without any significant international payment whereas difference between selling and buying rates went as high as up to 5 rupees. In normal circumstances, the difference between selling and buying rate is usually not more than 2 rupees. This gap itself shows that the devaluation of rupee was artificial and was not market-driven. Currently, rupee dollar parity is being adjusted by the market forces and is evident from the fact that the changes are less than a rupee.

In sheer haste and trying to turn around things in weeks, present government has created an environment of fear, fear of NAB and fear of FBR, this environment has virtually stopped everything in the country. It would have be better if government addressed the matters one by one and in a sequential order rather than opening all the fronts in one go. A systematic approach can always give better results. There is no doubt that it will now take a considerable time for the government to bring the economy back on track. Apparently, government wanted to turn-around the economy in months and weeks instead of years, this disconnect and haste has actually wasted their first year and damaged their economic plans. Government formed so many task forces in every ministry, which was not a good idea at all. First year is always a smooth year for a new government where everyone supports the new government. Expressing anger on the business community and asking them to become a patriot and invest in the country will defiantly not work.

Due to IMF bailout package, government is pushing traders to take the ID card number of the buyers, which is defiantly not a good idea. If you see the FBR portal, it has basically taken the information from the wealth statement and income tax return of past years whereas travel details have been taken from FIA immigration counter at the airports. Not sure how this travel details will help tracking the tax defaulters. Salary class travels too much especially people from the marketing department. The best would be if government started this drive from big business houses, traders and industrialist and gradually came down to the middle class. It would not have created panic and sense of fear then. End of the day, it would be middle class only who would be paying the price. FBR system is very simple, they first take the tax even forcefully by blocking the bank account money and then you keep following up with them for a refund, which even takes years.

 

All the above is affecting ordinary people and their purchasing power, which onward affects less consumption of consumer products. People have seriously curtailed their grocery and only buying what is necessary. In emerging economies; growth, employment, wealth creation is done by the private sector and private sector pays taxes when they make money whereas government runs its business from the tax collection. Private sector is asking the government officials about the policy so that they can make their plans accordingly.

It is not the responsibility of the government to run business but to make polices and to facilitate the business community. Private sector can create jobs which will create money circulation and thereafter demand for consumer products. Recently in a TV interview, a high government official was told that a large multinational consumer product manufacturing company has posted single digit profit this year after almost 7 years and the response was; may be the taste of people has changed and people have shifted from that product to another product due to which profit of that company has decreased significantly. Now, just imagine how the government officials are being briefed about the economic situation of the country. There would not be a single home where people would not be using the products of that company. The reason is simple and straight, people have stopped consuming the products, they have to prioritize their needs. When they have to choose between flour or tea, they will obviously choose flour.

As per independent analysts, it will now take time considerable time to correct the indecisiveness of last 12 months. Lack of economic policy is hurting the most. Interest rate is unnecessarily increased which was not even required. No business can survive at this level of interest rate. The best economic policy is to focus on the growth only instead of curtailing development expenditures. The first and easy thing to do is to correct the macro-economic policy which is mainly related to the fiscal deficit. It was never related to the private sector’s excessive spending or excessive borrowings. Controlling inflation through hike in interest rate will not work. Increasing interest rate is not required in a situation where everyone seems convinced that inflation is also not as high as it was envisaged by the State Bank of Pakistan (SBP). The latest last three months core inflation rate is 8.5 percent whereas interest rate is presently at 13.25 percent (that means real interest rate is of 5 percent). The gap is even double than what IMF requires. The interesting part is that SBP is continuously projecting high inflation rate in coming months which then creates uncertainty in the financial market and panic among the masses and this is just to justify keeping the interest rate at this level.

In current situation, it is important to bring interest rate down, make polices which could give confidence to the business community, allow local business houses to invest without fear, promote SMEs and control smuggling. All critical indicators show that Pakistan is approaching to recession and in this situation one thing that can be done is to reduce interest rates.

The writer is a consultant and can be contacted on twitter@aroojasghar

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