IMAGINE a 200 per cent increase in outstanding foreign debt, 60pc decrease in inward remittances, 50pc decrease in exports, 30pc decrease in industrial activity, 25pc decrease in revenue collection, 20pc increase in unemployment and 20pc decrease in food security.
Sounds like fiction? Not exactly. It could be just a few months away from becoming a reality. The socioeconomic cost of Covid-19 will be far higher than health costs. Are economic managers ready for such a scenario? Probably not. Thus far, the economic policy has not indicated anything other than business as usual.
A paradigm shift in the economic policy and management is warranted. A special three-year development plan for post–Covid-19 economic management may be a good anchor for such efforts, which may include the following elements.
One, the focus should be on the internal/domestic economic sectors since the external sector will be volatile and risky in the near future. The International Monetary Fund (IMF) has already warned about the possibility of a recession or even depression in coming months. The World Trade Organisation (WTO) anticipates a sharp decline in international trade until 2021 at least. It will, therefore, be unrealistic to rely on export growth and inward remittances in coming months or even years. Pakistan should rather brace for a decline in these earnings.
The policy focus should shift to the agriculture and SME sectors
Two, the policy focus should shift, immediately and concretely, to the agriculture and SME sectors. Focusing on agriculture will increase food security and, owing to its potential for growth particularly in value-added and agri-business segments, absorb some of the forthcoming unemployment surge. The potential for growth and job creation is also high in SMEs.
Most incentive schemes in the past were tailored for large-scale manufacturers or service providers although the returns of fiscal and monetary incentives are much higher in the case of SMEs. A careful assessment must be made on the incentive structures. It will certainly lead to the reallocation of resources (subsidies).
Three, the increased availability of capital, particularly for SMEs and the agriculture sector, is the key. Concessional finance is available to mostly the export-oriented and large-scale economic operators. High interest rates and scarce private equity have hindered entrepreneurship.
Four, a paradigm shift in fiscal management is also needed. While the revenue shortfall is certain in 2020, the magnitude of the deficit is unknown. It provides us with an opportunity to experiment. At least for this three-year special economic management cycle, we should adopt a tax policy that is not enforced. It should rather enable businesses, thereby generating revenues as an automatic by-product. Unifying multiple taxes into one or two and simplifying tax compliance procedures will surely increase the tax base while a reduction in tax rates may actually increase tax collection.
Five, be proactive in debt management. Pakistan has a looming debt crisis owing to the approaching repayments while foreign exchange reserves and potential sources of inflows are going down. Without further ado, Pakistan should devise a debt restructuring strategy and start negotiating with foreign and domestic lenders. This will provide a cushion, even if in the short term, to focus on economic recovery.
Six, be innovative. Pakistan should try new approaches such as working on different economic units and clusters that can be geographic or sectoral. This will enhance internal competitiveness and productivity. There may be schemes to utilise the skill sets of returning expatriate Pakistanis.
It goes without saying that Pakistan must integrate globally and benefit from multilateral economic, financial and trade systems. It has been doing so. However, in the context of a looming crisis in those systems, Pakistan may rely on a population of more than 200 million and an economy of more than $300 billion.
Unusual times warrant unusual policies and practices. This is the time to break the silos, be creative and strive towards achieving more economic resilience. Pakistan needs to get out of the typical bureaucratic and task force–oriented economic policy and management. Timing is the most important factor in responding to Covid-19. It is even more important to mitigate the economic fallout.
The writer is an economist
Published in Dawn, The Business and Finance Weekly, April 20th, 2020