OVER the past year, Pakistan has taken a host of difficult decisions, both on the fiscal and monetary fronts. Some measures were necessary in the short term. But if tangible medium- and long-term plans are not devised, on their own these short-term measures will impose a heavy burden on the economy.
In terms of fiscal policy, the existing economic team has been one of the most vociferous in recent times in expounding the importance of widening the tax base, attempting to close tax loopholes, and taking regulatory action such as in real estate. On the monetary front, the State Bank has allowed the value of the rupee to align more closely with the underlying market rate and has increased the benchmark policy rate to 13.25 per cent to fight inflation. The government has also worked with the IMF to try and negotiate better terms for loans made under the programme and embarked on a mission to increase the average maturity of the overall debt portfolio to enhance the debt-financing space.
What happened to the economy over the past year can be summarised with the help of a loose metaphor. If a well-functioning economy is like a happily whirring machine, Pakistan’s economy in early 2019 was clunking, spitting out cogs, and about to break down and catch fire. The government’s response was akin to dunking it into a tub of cold water. The sparks stopped flying and the smoke disappeared, but it also meant that the machine stopped making any sound whatsoever.
Allow me to explain. We all agree that the economy needs to grow, and at least most of us agree that it needs to grow equitably. But what form should this growth take? ‘Export-based growth’ is an amorphous idea that has been bandied about by various quarters. But competitive exports require a cost-effective, efficient industrial base driven by entrepreneurial spirit and fed by a robust labour market. They also require the availability of, and access to, domestic and foreign credit markets. But the government’s short-term strategies are not designed to provide a boost to any of these fundamentals of the export sector.
What form should economic growth take?
Devaluation on its own is insufficient to raise exports significantly. Sure, devaluation of the rupee makes exports cheaper so people outside the country buy Pakistan’s produce more, as shown by the upward trending quantity of exports over the past year. However, by definition, buyers buy at a lower price, leading to a smaller increase in the overall value of these exports.
Further, a devalued currency means that imports are more expensive. This no doubt aids in reducing the waste of resources on consumption of imported, luxury goods. But it also means that imported machinery and oil and petroleum-related products become more expensive, implying an increased cost of production for industrial units. On the other hand, policy rates as high as 13.25pc imply that the cost of borrowing for firms is very high, leading to dampened capital investments.
Cuts in funding for higher education, and a lack of a robust vocational training curriculum mean that there will be fewer managers to guide industrial workers, and fewer workers to make high-quality exportables. In this context, the medium- to long-term growth of the economy seems tenuous under the status quo. To make matters worse, inflation is rising — currently at 12pc — in part due to higher import prices and increased local, indirect taxes on consumption goods, cutting into the consumption budgets of households, further depressing demand for even those goods which are produced for local consumption.
The government needs an integrated framework for the medium- to long-term development of the economy. Broadly, some key areas that require urgent attention are higher education and vocational training aligned with the needs of the economy, both in its present and future forms; small and medium-sized enterprise development; revenue generation at the local level and improved public service delivery, both to domestic as well as industrial consumers; value-chain deepening in manufacturing; and research extension and yield improvement in the agriculture sector, to name a few. Clearly communicated plans serve as forward guidance, allowing the many actors in the economy to adjust, adapt and align themselves with the incentives set in such plans.
It is essential that the development of such a framework is not simply an intellectual exercise conducted by a siloed group of technocrats. Rather, it must face democratic debate and open scrutiny. The civilian government, industry stakeholders, the bureaucracy, and civil society must contribute to its development, as well as buy into its general direction for it to work. This will be a substantial challenge, requiring both the will to act and patience. But then again, Rome was not built in a day.
The writer is a doctoral candidate at Cornell University studying public economics.
Published in Dawn, January 15th, 2020