In times of severe economic crises, it is not business as usual. It is the political economy that tends to play, sooner or later, the primary role in setting the correction course, particularly during the transformational phase in an extended period of hard times.
Responding to mounting domestic business, citizen and political pressures to revisit the government’s policies, Prime Minister Imran Khan has reiterated that his foremost priority is to run the economic system on a sustainable basis: a system which would help create job opportunities, enhance investor’s confidence and promote local industry. His focus is also shifting to achieving price stability to subdue the growing double-digit rate of inflation.
In this endeavour, the prime minister has called for regular meetings of his economic team so that enhanced inter-ministerial coordination is ensured for formulation and implementation of policy decisions. The finance team may have to be more receptive to what other economic ministries have to say. Currently, it is too preoccupied in tackling challenging twin deficits while dissenting voices are becoming louder that it needs to look at a much bigger picture. The prime minister has himself started weekly monitoring to ensure that ensuing problems are quickly resolved.
The finance team is too preoccupied with tackling the twin deficits to look at the bigger picture and be more receptive to what the other economic ministries are saying
Similarly, the powers to allow supplementary grants have been transferred to the federal government from the finance division. And no grant was issued during the first quarter of the current financial year.
The policy to boost tax revenues at the cost of looming de-industrialisation seems to be under review. For relocation of Chinese industrial units to Gwadar and for installation for machinery and other equipment at the port, the government has granted a 23-year tax exemption to China Overseas Ports Holding Company. There is some official talk of exchange rate stability and policy rate coming down early calendar year 2020. The pickup in economic activity may yield better tax revenues.
No doubt the immediate problem is to stimulate investment and shore up the sagging manufacturing sector when the private sector borrowings from banks are showing an alarming negative trend. In the first quarter of the current fiscal year, the private sector retired Rs49. 39 billion as compared to net borrowings of Rs113bn in the same period of last year.
In fact, the government was stated to have emerged as the sole borrower from scheduled banks. The commerce advisor Razak Dawood says industrial production is set to slow down as imports of industrial raw materials are plummeting.
For the forging of an economic system running on a sustainable basis, the prime minister may find some comfort in the statement of the new International Monetary Fund (IMF) chief who has some serious advice to offer. She says “the key is to recognise that inequalities are a drag on multilateralism and a drag on growth.”
In her first speech, IMF Managing Director Kristalina Georgieva said: “policymakers for too long have ignored the people harmed by globalisation which tends to be good for educated, urban, younger people.”
Incidentally, in Pakistan unemployment among the more educated and qualified professionals is disproportionately higher. And “the prevalence of decent work is extremely low,” says Dr Abdul Hafeez Pasha adding that “typically workers put in long hours but are underpaid.”
Overall, 53 per cent of the labour was not paid prescribed minimum wages, as determined by the findings of the Pakistan Labour Survey 2017-18. The ratio jumped to 89pc among farm labour and 56pc in manufacturing and 54pc in wholesale and retail trade. As against this, only 9pc of the workers in public administration and defence services earned less than the minimum wage.
And the World Bank report on South Asia Economic Focus: Making Decentralisation Work says “poverty reduction, which was uninterrupted since 2001, is expected to stall during the macroeconomic adjustment period.”
As joblessness and poverty are rising, Ms Georgieva’s observations need to be translated into IMF policies being pursued by Islamabad. This creates an opportunity for borrowers like Pakistan to seek a review of the Fund’s policies to have a better adjustment of growth vs. stability strategies.
From time to time, independent economists and businessmen have stressed that policymakers have to find space, sooner rather than later, to encourage domestic industrial production.
They do not expect the government to deviate from the agreed broad IMF policy framework or the policy direction set by it but want reforms to move with a more appropriate pace to shore up growth. ‘When the majority is struggling for the bare sustenance, the need for a productivity-enhancing growth strategy is absolutely critical’, says former Deputy Chairman of the Planning Commission Dr Nadeem ul Haque.
In the context of the much needed industrial growth, the critical problem areas are the over-ambitious tax revenue target, rising utility prices, double-digit inflation, higher than core inflation policy rate and an undervalued rupee. IMF’s economist Gian Maria Milesi-Ferretti says the performance of the agreed programme with Islamabad has exceeded our expectations and the country is now picking up stability.
While the policymakers are still struggling with much of the conventional wisdom to resolve the current crisis, the international economic literature tends to offer fresh ideas to come out of the current difficult predicament: economies with less inequality will perform better.
Against the background of growing inequality worldwide and Sino-US trade frictions IMF Chief Georgieva said “in 2019, we expect slower growth in 90pc of the world. The global economy is now in a synchronised slowdown. It is a crisis where no one is immune and everyone has a responsibility to act. ”
Imran Khan has come up with the idea that priority should be given to small industrial units at a local level to create job opportunities. But for things to change at the grassroots it is necessary to develop participatory democracy which is considered a tool for social change. Giving voice to the voiceless or less heard and empowering the disadvantaged are crucial for removing inequity and inequality.
The investment in human capital — the primary productive asset in this digital area — will generate its own resources and momentum of economic growth.
Published in Dawn, The Business and Finance Weekly, October, 2019