Economic chess board
Pakistan’s economy is in a state of paralysis with every indicator showing a drastic decline. Income-expenditure gap has increased at an alarming rate. The rising import-export gap has stifled progress. In fact, the agriculture and manufacturing sectors (backbone of our economy) paint a dismal picture. With this backdrop, the economy suits the vested interests of the elite. All these factors culminate in the form of distorted policies by the state.
The performance of the economy is usually defined by numbers and unfortunately even high growth rates are aspired to at the cost of inflation, but still it is a jobless economic growth. Distribution of growth benefits is unfair and increases income inequality. Why can’t high economic growth be sustained? The question chanted in the policy corridors. But the right question should be is the economic growth of Pakistan sustainable, or not?
The external economy lies at the heart of Pakistan’s staggering financial affairs. Galloping import-export gap has become a headache for the office bearers. Post-2000 has marked a rapid increase in the reliance on foreign goods. Perhaps, the most shocking aspect is that our manufacturing sector is dependent on imported raw materials, throwing local materials out of the question. This is a structural anomaly in our system. Moreover, Pakistan’s service’s deficit is negative and it is confusing to see that most of the foreign direct investment (FDI) in the country is in the service sector. Conversely, in China FDI has largely been in manufacturing for export.
The Pakistani rupee continued to depreciate against the US dollar, FDI was heading in the wrong direction, with negative flows of $30.4 million in March, and fiscal and current deficits growing. The relief package was not well thought and right targeted. Meanwhile, the International Monetary Fund’s $6 billion lending program remained suspended, with $3 billion undisbursed. Pakistan’s foreign exchange reserves went below $11 billion, most of what remained was callable short-term capital from friendly countries. Pakistan has been on the brink of economic collapse. The lack of foresight is witnessed in policymakers of Pakistan who seem hell-bent on conforming to traditional economic policy tools: raise interest rates, control inflation. If this policy was, in fact, practical, then it would have worked to curb inflation in Pakistan, which has skyrocketed to 13.8 percent (SBP May 2022).
Challenges for the government
The present government faces multiple challenges. Foremost among those is the political uncertainty overlapping with economic uncertainty without a reform agenda. In addition, time and space for policy interventions is very limited, but expectations run high. This government also has to negotiate with the IMF, when the political cycle is about to complete.
The government also has to undertake measures to manage imports (the recent ban by the government is a positive move); oil payment deferral arrangements; negotiations with the IMF; and re-evaluating subsidies on fuel and food (removing petroleum subsidies was inevitable as the earlier decision to provide those were politically motivated to keep the public content rather than on sound economic policies).
Going forward, the annual budget will define the stability of the government, depending on whether it is a people’s budget or an election budget.
Another challenge that this government faces is the strengthening of the social contract between the state and citizens.
Pakistan first-politics second
Eight hundred years ago in the same month (June, 15), King John of England sealed the Magna Carta, a ground-breaking legal document that served as the foundation for our constitutional democracy. There is extreme political polarization in Pakistan, political parties are playing blame games without focusing on solutions. The lack of political will to take hard decisions and resolve structural problems persists. Economic thinking resides with the electoral gains.
No political party thinks in the long run. A broad framework for economic reforms in this country has been floating around since 2011. However, till date no tangible steps have been taken on having a Charter of Economy.
In such circumstances, it becomes absolutely impossible to execute sound economic policies. It is to be kept in mind that political economy is an essential component for long-term progress. And constant political fiascos jeopardize the internal state of the economy.
Light at the end of the tunnel
Pakistan needs an inclusive economic system free from political interference. The country needs broad multi-party political consensus on economic policy. Prosperity should not be a matter of party affiliation but a common task for all political actors who want to see a better Pakistan not new or old.
A charter of economy is immediately needed to create a stable economic base. The charter will help in identifying the nature of problems or constraints before solutions or reforms are proposed. Tax revenues, exports, savings and investment are the lifeline of an economy. The country needs to focus on capital account liberalization and use it judiciously keeping the productivity mantra in mind.
Projects of a particular variety should be initiated. Capital accounts are not used for speculative measures. There needs to be a clear understanding of what remittances mean for Pakistan. About reliance on remittances in Pakistan may lead to Dutch disease.
Once these essential prerequisites are taken only then we can spearhead the process of structural reforms such as revising the taxation system, enhancing productivity and creating employment opportunities. Failure to do so would plunge the country into the same vicious cycle of debts and deficits. Economy is a combination of statistics and sentiments, both are essential for economic prosperity. Positive sentiments come from political stability and certainty that in turn induce investor’s confidence and deter capital flight.
The writer is the chair, economic security at Islamabad Policy Research Institute