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Domestic investors’ voice

Updated January 18, 2018

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FOR a number of years now, the Pakistan Business Council (PBC) has been conducting an exercise they call the Pakistan Economic Forum where they put out a report identifying key strengths and weaknesses in the economy, and suggest a remedial path forward.

The last such exercise concluded yesterday in a presentation made to senior government officials responsible for economic management, and the agenda staked out by the group deserves close study.

The PBC is a think tank set up by 66 of the largest business enterprises in Pakistan, all domestic investors with heavy participation in the domestic economy. They range from financial services to automobiles to cement to power generation, and more, and their voice deserves careful attention, whether or not one is inclined to agree with them, for two reasons.

Reason one is that the people involved in the drafting of the report on the macro economy are credible individuals with serious track records. The team was led by Dr Ishrat Husain, Salim Raza and Shaukat Tarin, the first two being former State Bank governors and the third a former finance minister with an unblemished record of pushing things through.

There were others with input, but the presence of these three alone means the output is a serious product and merits close review.

The report put out by the PBC opens with a view on three macroeconomic indicators: the rate of investment, the savings rate and the trade deficit.

Reason two is more important. The PBC is today the only large voice that domestic investors and manufacturers have. The myriad chambers of commerce in various cities no longer advance any serious macroeconomic picture due to their capture by trader and speculator interests, as well as their reluctance to engage in any research-based advocacy.

In an era when imports and foreign investment under specialised incentives through the CPEC framework are swamping the economy, the voice of the domestic investor with large stakes in the formal economy acquires greater importance.

Thus far, the only other voices speaking on the macroeconomic scene of the country are either the donor agencies, led by the IMF and the World Bank, or the State Bank of Pakistan. The donor agencies primarily focus on the tax base and the foreign exchange reserves as their areas of primary interest, while the State Bank primarily looks at the national debt and monetary developments (of course, there are other chapters in their annual report, but the ability of the State Bank to speak candidly about issues like reserves and fiscal developments is limited).

By contrast, the report put out by the PBC opens with a view on three macroeconomic indicators: the rate of investment, the savings rate and the trade deficit. After acknowledging the rise in the growth rate of GDP, and the CPEC investments coming into the power sector that will debottleneck the power supply situation, the report goes on to say that “challenges remain with a widening balance of payments position due to a heavy consumption-led, import-fuelled growth”.

Investment spending has dropped to 9.9 per cent from 10.4pc two years ago, which is the near the lowest level ever in Pakistan’s history (including the years of nationalisation). Likewise, the savings rate has dropped to 13.1pc from 14.7pc two years ago, compared with 29pc, 30pc and 45pc for India, Bangladesh and China respectively. No wonder our growth spurts for the past quarter century (at least) have always been short lived and always ended in tears.

The savings and investment rate are the fuel and motor force for a sustainable growth process, and no other participant in our economic conversation places sufficient emphasis on these indicators.

The result is declining productivity of the economy relative to competitors, and the growing trade deficit. Exports have fallen 13pc in the last three years, while imports have grown by 16pc in the same time, rising to a staggering $48.5 billion now. Without restoring competitiveness, this trend cannot be reversed and the trade deficit will swallow our economy.

“Local industries are increasingly unable to compete even in local markets, flooded with cheap imports” the authors note. Perhaps this is due in some measure to insufficient business acumen, but the sharp disparities in the savings rate between Pakistan and its competitors is a hard binding constraint to reversing the situation.

Some of the solutions that the authors point towards include prioritising housing for low- and middle-income segments of the population, and mobile banking to help lift the deposit base of the banking system from 33pc of GDP to 50pc in the next three years.

Revival of exports, according to the authors, begins with short-term measures like the exchange rate flexibility and incentives, but the gains from these will be short lived if they are not quickly followed up with medium- and long-term steps, such as fiscal and corporate structure reforms to encourage capital formation, reducing the cost of doing business amongst much else.

For the longer term, the authors stress education, particularly in subjects like science and technology, mathematics and engineering, as well as vocational training “to scale up the work force for the digital age and the jobs of the future”. Absent this crucial priority, Pakistan is at serious risk of becoming a country of petty traders and manual labourers.

Regarding CPEC, the authors first call on the government to “share the detailed [long-term] plan with the business community” and go on to warn about duty free leakages from any transit trade under CPEC, the way leakages from the Afghan transit trade have posed serious challenges to some local manufacturers. “Already damaged by the FTA with China, many businesses in Pakistan are concerned that Chinese companies will use the CPEC ‘umbrella’ to further increase their share of the domestic market, through the proposed SEZs, or through the incorporation of Xinjiang within CPEC” the report states.

Not everything in the report is agreeable. One can argue that it presents an elaborate protectionist strategy of an outmoded sort, but some form of protection to domestic investors is part of every government’s economic strategy. Whatever one’s opinion, the report deserves close study and vigorous discussion.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn, January 18th, 2018

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