THE difficult economic outlook on the eve of the budget is not very reassuring. The lethal combination of low growth and high inflation is accompanied by a high fiscal deficit, growing unemployment and a rising debt burden.
Similarly, the sense of despondency and despair arising from rising insurgency and a difficult security situation on our eastern and western borders, has been compounded by the Abbottabad operation of May 2, creating new strains in Pakistan's relation with the US and seriously eroding the image of the army.
Against this background, there is widespread consensus across the political spectrum that the country cannot safeguard its sovereignty and vital national interests unless it reduces dependence on foreign loans and grants, especially those that come with political- and security-related conditionalities.
The first milestone on the road to self-reliance is a decisive revival of the economy to accelerate the growth rate to five-six per cent in 2011-15 and beyond. It is depressing to recall that despite the short-lived spurt in 2004-2007 (seven per cent) the average growth rate has declined from six per cent in 1985-95 to 4.4 per cent in the 15-year period from 1996–2001 and only 2.9 per cent in 2007-2011.
The factors that have contributed to this slowdown are varied and complex, but the forthcoming budget must prioritise revival of growth in the following sub-sectors.
One, accelerated growth in small-scale industrial and commercial sectors. Pakistan has 3.3 million economic establishments of which 90 per cent employ less than five workers and another four per cent between 6-50 workers. An active policy of support and facilitation to this sub-sector through organisations like Small and Medium Enterprise Development Authority (Smeda) and Technical Education and Vocational Training Authority (Tevta) can stimulate investment, growth and much needed employment. The provincial governments can play a predominant role in promoting entrepreneurship by supporting larger firms in providing marketing channels and technical assistance to smaller firms.
Two, a bold programme of incentives and policies for an export-led growth strategy. This will include higher priority for value addition in textile and other sectors, strong partnership with exporters' associations to find new markets for value-added products and special fiscal and credit support.
Three, attracting foreign investment from the Middle East in agriculture and livestock sectors. Many of these countries need an assured supply of items like wheat, rice, milk, poultry meat, edible oil, flowers, fruit and vegetables and are ready to invest on the basis of longer-term supply contracts.
While the policy of leasing land to foreign investors has many adverse implications, the federal and provincial governments can facilitate longer-term supply contracts between large importing companies in the Middle East and corporate entities in Pakistan which have benefited from the recent spurt in commodity prices. Such arrangements, which have to be guaranteed by the government against unexpected policy changes, will also accelerate the process of diversification into high value agriculture and generate additional employment.
Importantly, these measures to stimulate growth will not yield full potential unless the structural weaknesses responsible for the decline in the investment-to-GDP ratio from over 20 per cent in the early 1990s to less than 16 per cent in the past three years are addressed. This decline is partly due to the deteriorating security situation but also due to the shortage and high cost of energy, growing incidence of corruption and the rising cost of doing business in Pakistan. These negative factors must be addressed on a war footing to improve investment climate in the country.
The third set of policies required to achieve economic self-reliance lie in the traditional area of fiscal deficit, inflation and monetary policy but through non-traditional policies. Measures to increase the tax-to-GDP ratio and to reduce non-development expenditures, no doubt, deserve high priority to narrow the gap between revenue and expenditure, but there is also a dire need to seek a judicious balance between growth and macro-economic stability.If we continue current efforts to control inflation through tighter demand management and higher interest rates, we might reach what the late Dr Mahbubul Haq called “the equilibrium of the graveyard”. It should be possible to devise a discriminatory credit policy that promotes industrial growth, exports and employment generation along with an energy policy that provides and assures electricity and gas to these sectors at affordable prices. Unless we take such steps to reduce the cost of doing business in Pakistan, our growth will remain low and the problem of poverty and unemployment will become even more explosive.
Finally, economic self-reliance has become a political imperative which, if properly pursued, can overcome the sense of political and social anxiety which has descended on this nation like a dark cloud. What is needed is a message of hope that will rekindle the confidence and trust of the people and the interest and enthusiasm of local and foreign investors.
The writer is a former finance minister
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