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An economy on a wobbly base

Updated July 30, 2018

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ACKNOWLEDGING the ‘grave’ challenges he will have to tackle immediately after forming his government, Pakistan Tehreek-i-Insaf (PTI) chief Imran Khan laid a broad but sketchy plan to deal with them in his speech last Thursday.

The prime minister-in-waiting promised to enforce the rule of law, improve governance, build institutions and end corruption in order to turn Pakistan into a business-friendly country and cut the cost of doing business.

Mr Khan pledged to implement wide-ranging tax reforms, protect taxpayers’ money and cut the size of government, diverting money instead towards human development, improving agriculture productivity and supporting small and medium enterprises.

The economic challenges facing the country on the eve of the second democratic transition appear to be quite formidable, but not insurmountable

He also spoke of foreign policy challenges and vowed to work closely with neighbours for peace and stability in the region — an important prerequisite for economic progress.

In an encouraging development the Kaptaan, as Mr Khan is affectionately called, invited India to sit at the table with him to settle the Kashmir issue through dialogue and increase bilateral trade for a better future of the region.

The skipper also spoke of creating a “balance” in Pakistan’s relationship with the United States, which remains the biggest market for our exports. Although the PTI chief did not go into the specifics of domestic and external challenges, it is safe to assume for now that he will walk his talk for a better future of this country.

The victory speech came in the midst of allegations by major parties, including PML-N and PPP, of large-scale poll rigging. The PTI has emerged as the largest single party with 115 national seats and is poised to form its government in Islamabad.

The opposition has rejected the election results, but both PML-N and PPP have decided to sit in the assemblies and keep a watch over the PTI-led government.

Indeed, the economic challenges facing the country on the eve of the second democratic transition appear to be quite formidable, but not insurmountable.

The economy is in a much better shape today than it was five years ago. It grew by 5.8 per cent, the highest in 12 years, last fiscal. The momentum still continues even though many expect it to slow down this financial year if the external sector slide is not arrested quickly.

However, what is likely to occupy the mind of the new prime minister for at least the next couple of years is the expanding current account and a spiking trade deficit brought about due to rising imports and stagnating exports, as well as surging global oil prices.

The current account gap shot to a record high of $18bn or 5.7pc of GDP at the end of last financial year. The foreign currency reserves are down to just above $9bn or enough only for six weeks of imports.

The bank has devalued the currency by over 20pc since December 2017 to slow down imports, boost exports and close current account gap without much success. This is in spite of foreign borrowing of over $10bn during last fiscal year.

Public debt has spiked to 72pc of GDP and is forecast to soar to 74pc at the end of the present fiscal year. Caretaker Finance Minister Shamshad Akhtar has rightly pointed out recently that Pakistan is witnessing de-industrialisation and a lack of export orientation in the economy.

Former finance minister and leading economist Dr Hafiz Pasha drew a very bleak picture of the economy that the new government is going to inherit. “The bulging current account and depleting foreign exchange reserves have left no choice for the next government but to immediately approach the IMF.

“I think the new government will have to impose import quotas. This is the only way to reduce the trade deficit because our capacity to boost exports in the short term is limited,” says Dr Hafiz Pasha

“My advice is that the new finance minister should take the first flight to Washington, after being sworn-in, for talks with the Fund and the US administration (to seek their help for averting the imminent external sector crisis).”

Further, he said the country’s external financing requirements this year will go up to $28bn if the current account gap continues to swell.

“I think the new government will have to impose import quotas. This is the only way to reduce the trade deficit because our capacity to boost exports in the short term is limited. This is crucial to cut current account gap to $10bn this year from $18bn last year. Besides, the exchange will also have to be readjusted significantly.

“The negotiations with the IMF or the US will not be easy and we may have to pay both economic and non-economic cost to meet our needs,” he concluded

A PTI leader who spoke on condition of anonymity said a team led by Mr Asad Umar was working on developing an economic framework that the new government will start implementing soon after coming to power.

“We have been busy in the election campaign and now we intend to finalise our economic strategy in light of what Mr Khan said in his victory speech. In fact we have already given a few details about our economic strategy in our first 100-day programme and are confident of starting execution from our first day in power.”

What is encouraging is the fact that in his speech Mr Khan did not forget to hint that the new economic policy will be made in consultation with businessmen.

But one-time consultations are not enough. It will be more beneficial if the incumbent government sets up a permanent structure to receive external input as suggested by All Pakistan Textile Mills Association (Aptma) group leader Gohar Ejaz.

“The next government should create an economic advisory council chaired by the premier himself. It should be a body that has equal representation of technocrats, economists and businessmen representing the top four industrial sectors of the country,” the Aptma leader proposed.

He is of the view that the council should form a vision statement and develop a two-pronged strategy to boost investment in export-oriented sectors and import substitution industries.

“The ultimate goal has to be a Pakistan that has a trade and current account surplus. Nothing short of this should be considered,” Mr Gohar concluded.

Published in Dawn, The Business and Finance Weekly, July 30th, 2018