Economy: policy problems

Updated August 04, 2019

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The writer is a former Pakistan ambassador to the UN.
The writer is a former Pakistan ambassador to the UN.

OVER the past year, the PTI government’s economic focus has been on redressing macroeconomic imbalances. However, there are a host of other policy problems that require honest, competent and decisive decisions. Here are 10 important examples.

Reko Diq: The recent $5.9 billion award by the World Bank’s court (ICSID) against Pakistan is a classic outcome of misplaced patriotism, incompetence and corruption. Like India, and as suggested by the UN trade organisation UNCTAD, Pakistan should have long ago denounced the unequal investment treaty which allowed a foreign company to sue it.

The court’s award on Reko Diq is now final and contesting it further may be futile and impede foreign investment, and further delay exploitation of the huge ($1 trillion) deposits of copper and gold in and around Reko Diq. While rejecting the award in principle, the government ought to explore a pragmatic solution which circumvents the exorbitant award and enables early, efficient and beneficial exploitation of the mineral resources.

There are several areas in the economic landscape that require competent decision-making.

LNG imports: Although well aware of the rapid depletion of Sui gas, Pakistan’s preceding leaders failed to arrange for sustainable imports, eg through the Iran pipeline. The previous government negotiated a ‘sweetheart’ LNG deal with Qatar. Two LNG terminals were assigned in an equally opaque exercise. Now, an intricate game appears to be underway to determine who gets the sorely needed third terminal. To remove the smell of rotting fish, the government should make the entire decision-making process on the LNG business totally transparent.

‘Autonomous’ entities: Over 300 government entities cumulatively lose two per cent of Pakistan’s GDP each year. Everyone agrees these entities have to be restructured, divested or closed down. For over a decade, nothing has moved. Previous governments found it difficult to divest or restructure politically sensitive but commercially disastrous entities like PIA and the Steel Mills. The temptation is to sell off the most profitable enterprises first (eg the two Punjab power plants). Instead of trying to reinvent the wheel, the government would do well to hire one or more specialist firms to propose a plan and execute it quickly.

Housing and wealth creation: The allocation of government land and financing of home acquisitions are traditional vehicles for wealth creation and GDP expansion, as illustrated by the history of America and modern China. In Pakistan by contrast, government land has been parcelled out through official entities mostly to house the rich and powerful rather than the poor or middle class. This has accentuated economic and social inequality. The prime minister’s housing scheme can be the vehicle not only to provide shelter, but also create wealth for the poor and middle class (and expand GDP) through the allocation of adequate land and cheap credit for affordable housing.

SMEs: The heavy borrowing on the local market by recent governments has consistently squeezed out lending to small and medium enterprises which are the main creators of jobs, goods and services. Today, many SMEs in Pakistan are borrowing money for business development at exorbitant 20pc to 30pc interest rates from so-called private financing channels. A conscious policy is required to provide easier credit at market rates through normal banking channels to SMEs.

SEZs: The establishment of Special Economic Zones including under CPEC have been delayed mainly due to the fight over whose land would host the zones (and be sold at enormous profit). The government ought to promulgate a law on ‘eminent domain’, allowing it to requisition sites for SEZs at pre-industrial prices. This will save the government money and speed up creation of the SEZs.

Waste disposal: Pakistan’s major cities are drowning in their own filth, as illustrated by Karachi’s plight after last week’s monsoons. Karachi produces 11,000 tons of solid waste daily; Lahore 7,000; Hyderabad 4,000, etc. Waste-to-power plants are one answer to dispose of solid waste. Some Latin American countries are paying 16-20 cents p/kwh to have US and Swedish companies fully finance the installation of the most efficient plants. In Pakistan, provincial authorities offer nine to 10 cents. The one Chinese plant set up in Lahore at this rate has been abandoned. Realistic power rates and collection fees are essential to attract investment for these waste-to-power plants.

Thar coal: Pakistan will be unable to fully exploit the vast Thar coalfield for power generation because there is insufficient water to cool the plants, the carbon emissions will be unacceptably high and the electricity produced is not much cheaper than alternatives because the cost of mining (with outdated equipment) is very high ($40 vs $8 in Virginia, US). Thar coal could be used for power, fertiliser and other purposes if gasified to pipeline quality, the carbon emissions captured and mining made more efficient. Advanced technologies to achieve this are available. The government and power companies need to make the decision to invest in and apply these technologies.

Read: Thar coal plant begins pumping power into national grid

Manufacturing: In Pakistan, manufacturing contributes only 10pc to GDP. The country will remain non-industrialised unless it builds the essential tariff and non-tariff ‘protections’ for its nascent domestic industries (disregarding the suicidal ‘liberalisation’ advocates) and/or encourages its enterprises to enter into joint ventures with efficient foreign producers (who will enter such joint ventures if they cannot export into Pakistan).

CPEC: Pakistan needs infrastructure to develop; only China is ready to build it; its official loans are ‘cheap’ (2pc to 3pc with long repayment periods, akin to ‘grants’). The loans for power projects to Pakistani companies were ‘commercial (around 6pc interest). Chinese companies have executed most of the projects, since Pakistan had limited capability to do so. The equipment supplied for the power plants was mostly Chinese but many of the turbines and boilers were sold by America’s General Electric. The power projects are highly profitable, perhaps excessively so. There is no ‘debt trap’. The Chinese loans will be easily repaid (unless the projects are rendered economically unviable by retroactive conditions).

Expanded cooperation with China remains the best route to Pakistan’s industrial and commercial development. In the afterglow of the Washington visit, some among Pakistan’s business and official elite seem susceptible to the Western propaganda against CPEC and China. They risk making a major strategic blunder.

The writer is a former Pakistan ambassador to the UN.

Published in Dawn, August 4th, 2019