Dr. Kamal Monnoo |
The bar is set high as the new Imran Khan government tries to grapple with the economic situation in the country. Falling right into the trap to live up to its opposition time rhetoric, its different tiers of leadership are busy giving confused and mixed signals to businesses and investors in-turn the markets on what could possibly be some dramatic changes to the workplace in coming days or months.
Meanwhile, the very ministry that should, in fact, be adding clarity to the next planned policymaking is still presumably undecided and lacks confidence in itself to take key economic and financial decisions on its own; it supposedly wants debates in the lower and upper houses before charting the next course of action. As if this rather vague approach in itself was not bad enough to lend uncertainty to the situation, in comes an economic advisory council loaded with academics with little hands-on experience or expertise on real-time economic management. Theories are great but unless operational bottlenecks are addressed, investors will not come forward.
The litmus test of this government’s pragmatism would be to see whether it merely tries to borrow from ‘traditional’ friends like China, Qatar, UAE and Saudi Arabia, or instead opts for a compound financing portfolio (that includes IMF as well) in order to get a better leverage in its borrowing terms.
After all, if we look at the last 30 years of Pak economic history, the single main difference between the good and bad periods has been the investment to GDP ratio: for example currently at 12/13 percent, it is almost half of what it was say in Musharraf’s good period! While one wishes this government well and would truly like them to succeed, its economic managers quickly require some basic management-101 lessons on transition: Keep things simple and do not open too many fronts at one time; Avoid any knee-jerk reactions just to be different; Spread confidence and calm in the marketplace instead of panic; Display decisiveness in decision making by not falling into the trap of over-spreading or “thinning” the decision-making matrix meaning, avoid unnecessarily large boards or committees or advisory councils (a mistake, which this government seems to be making from the very onset); and last but not least, just concentrate on providing an enabling environment and let the (private sector) entrepreneurial juices do the rest. And keeping to this very notion of maintaining focus on the obvious, this government in its first year (not 100 days) will do well by simply tackling the following main challenges currently facing the Pak economy (in the order of preference):
Getting Revenues in Order
The first and basic requirement for any turn around strategy is to secure one’s initial capital requirement. With negative cash flow that will always take time to reverse, an adequate level of reserve capital to sustain during the resurrection period is absolutely essential. The more the finance ministry delays arrangements to raise the necessary capital, the more difficult it will become to do so.
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As was also recommended by this author’s in last week’s piece, resorting to IMF for a workable support program is not a crime and should be evaluated professionally and not emotionally. The litmus test of this government’s pragmatism would be to see whether it merely tries to borrow from ‘traditional’ friends like China, Qatar, UAE and Saudi Arabia, or instead opts for a compound financing portfolio (that includes IMF as well) in order to get a better leverage in its borrowing terms.
The problem also is that by all accounts, unless the current trade equation improves very quickly, the borrowing requirements over the next 3 years could be as high as $78–80 billion, representing a deficit that may not be possible to bridge without the help of financial lending institutions. So really, not only time is of the essence, but also more importantly, the quicker we get into a financial straight jacket the better.
De-industrialization
Pakistan’s manufacturing sector for quite some time now has been grappling with the impact of high cost of production and unfriendly government policies, resulting not only in the closure of the installed capacity but also in failing to attract fresh investment to create new jobs. Adding new factories and manufacturing has simply been unviable of late and arresting this de-industrialization in the economy will be the key for PTI to deliver on its promises. According to the recent release of the National Human Development Report, youth unemployment in Pakistan surged to 9.1% in 2015 from 6.5% in 2007.
Over the years governmental policies have been negative whereby the industry has been burdened unnecessarily on account of taxation, excessive oversight and a high inputs cost owing to prevailing rent-seeking cum mismanagement in the allied sectors feeding into textiles – in the process rendering it uncompetitive.
Further, the report added that in fact, the International Labor Organization (ILO) has put the unemployment figure for the 15 to 24’s age group at 10.8%. Clearly, investors’ confidence is low, and adequate creation of new jobs in Pak economy is absent. A good policy here would be launch a “Made in Pakistan” initiative to shore up ‘domestic manufacturing’, whose share in the economy from being about 20% of GDP in 2005, today stands reduced to under 17%. Also, Pakistan’s labor and oversight laws are restrictive, imposing all kinds of red tape on factories employing more than 10 workers, which discourages businesses from thinking big. Add to this one of the highest cost of energy in the region and it becomes obvious why manufacturing in Pakistan struggles to remain competitive.
Defending the Value of the Pak Rupee
It is imperative that the Rupee is not allowed to devalue beyond a certain point, as in such a case the repercussions on the long-term sustainability on development and growth can be disastrous. One can only hope that the new government will learn quickly by not only looking at experiences of like-to-like developing economies that have recently suffered on this account, but by also realizing that unless Pakistan addresses its own specific issues vis-à-vis Rupee’s parity, it will simply be sucked into the larger global cycle currently at play, where the gradual but consistent strengthening of world’s reserve currencies is resulting in capital erosion of the smaller economies.
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Meaning, while the rich gain in stock the poor lose out! The dilemma though is that the capacity to maintain desirable currency parity of most emerging market economies is still quite limited and the flow of displaced money from the West is literally swamping the developing borrowers in a way that diminishes their ability to repay their debts. This is precisely what is also happening to us, referred to as the external account crisis and what’s the remedy? Answer: Well, for us to declare an import emergency in the short term and to work on increasing exports and foreign direct investment over the long term.
Increasing Exports
Regardless of what anyone says, the PTI government must be mindful that there are no quick fixes to declining exports. Meaning, unrealistic expectations should not be raised, like that exports will be doubled over the next 3 or 5 years. Textiles still constitute the lion share in our national exports and this sector suffers from structural issues. Over the years governmental policies have been negative whereby the industry has been burdened unnecessarily on account of taxation, excessive oversight and a high inputs cost owing to prevailing rent-seeking cum mismanagement in the allied sectors feeding into textiles – in the process rendering it uncompetitive.
Pakistan’s second largest expenditure is incurred on meeting the losses from the Public Sector Enterprises like PIA, the Pakistan Steel Mills, power sector and Pakistan Railways. Either there should be a clear roadmap to privatize them or an innovative out of box solution should be evolved to turn them around
To add at best $3-5 billion over the next 5 years or even to safeguard current levels, the government will have to adopt a holistic approach by partnering the very stakeholders who actually make it happen. For starters: the present industrial power tariff for textiles should be fixed for at least the next three years by correlating it to the correlation benchmark of Rs128: USD1; release all stuck refunds of the exporters; ensure raw materials like polyester, cotton, dyes, chemicals, etc. at regionally competitive rates; introduce one-window oversight cum compliance facility for exporting industries; and last but not least help the industry in skill development so that it can achieve enhanced value addition. Promoting Exports takes creating a culture and mindset, which is a slow and tedious process entailing efforts as elementary as improving ‘ease of doing business’ to the more complex things like renegotiating trade treaties.
Increasing Tax Base
A reform process in the FBR is all very well, but one has been hearing about it from as far back as one can remember. The reality is that taxpayers (individuals and companies) who are already on the net are in fact over-taxed and over-regulated. Instead of creating panic and to avoid the risk of witch hunting or corruption, the government will do well by simply rationalizing excessive taxation (like Super-tax on larger companies, the rate of sales tax, etc.) and by assigning a singular target to the FBR of adding at least 20% new taxpayers every year.
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In fact, the outgoing government of Shahid Khaqan Abbasi has laid down a good framework of some desirable cum prudent tax reforms (tax slabs, equitable incidence on different sectors, the necessity of a tax number in key transactions, etc.). This should not be dismantled just because the previous government devised it. Even the tax amnesty was a very prudent move, which is likely to bear more fruit as the Whiteners file their future tax returns!
Privatizing the State-owned Enterprises or giving them on 10/20 years Management Lease
Pakistan’s second largest expenditure is incurred on meeting the losses from the Public Sector Enterprises like PIA, the Pakistan Steel Mills, power sector and Pakistan Railways. Either there should be a clear roadmap to privatize them or an innovative out of box solution should be evolved to turn them around. In wake of constant political challenges to sell them, perhaps a good compromise would be to give them out on a 10-20 years management lease.
A strategy that has already been previously tested in Pakistan during Zia’s time, which not only partially achieved its objectives of curtailing institutional losses, but also ultimately paved the way for disbanding institutions such as the State Cement Corporation and Ghee Corporation of Pakistan, leading ultimately to the privatization of the cement and the Ghee (edible oil) industries in Pakistan
Dr. Kamal Monnoo is a political analyst, he can be reached at kamal.monnoo@gmail.com. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.