Challenges facing economic recovery

Updated 12 Oct 2020

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Having provided liberal fiscal and monetary stimulus, policymakers are looking forward to an economic recovery. — AFP/File
Having provided liberal fiscal and monetary stimulus, policymakers are looking forward to an economic recovery. — AFP/File

Having provided liberal fiscal and monetary stimulus, policymakers are looking forward to an economic recovery driven mainly by the manufacturing sector and the construction industry. However, stimulus alone will not be enough. In the case of manufacturing, the growth has to be synchronised with an increase in agricultural output and the establishment of China Pakistan Economic Corridor (CPEC) related Special Economic Zones (SEZs) equipped with all infrastructure facilities.

Sustained growth in the construction industry is primarily linked to the speed with which a vast network of small dams is built across the country.

Not sufficiently diversified and with sluggish exports, the manufacturing sector depends heavily on the rural market for the sale of industrial goods as well as overall domestic demand. Agriculture provides raw materials and primary commodities for processing/manufacturing which contribute the bulk of the export earnings.

That the large-scale manufacturing sector recorded five per cent growth in July was a positive development. The growth was however concentrated in a few industries like cigarette, wheat and grain milling, cement and medicines. The remaining sector, estimated at 90pc by an independent economist, had shown zero growth. Lately, car sales have picked up and even fetch a premium price in the market.

The issues facing the various under-performing manufacturing sectors and the official measures taken for their recovery so far were reviewed at a meeting chaired by Prime Minister Imran Khan on October 1. Manufacturers from various sectors, including pharmaceutical, cement, textile, chemicals, house appliances etc presented their points of view. The prime minister was assisted by the country’s top economic managers comprising minister for industries, advisor commerce, advisor finance, state bank governor and senior officials.

Take the issue of CPEC–related industrialisation. The CPEC Authority Ordinance of October 2019 has lapsed and its chairman has lost his authority and legal status. The ordinance, originally valid for 120 days, was extended for another 120 days by a resolution of the parliament. The federal minister for information says a bill would now be moved in the parliament and hoped the opposition would support it.

A Special Parliamentary Committee meeting on October 2 noted that no progress has been made in CPEC projects in Balochistan since 2017. In response to the briefing given by officials of provincial ministries and allied departments, the Committee Convener PPP Senator Sherry Rehman said they were shifting responsibility on one another and there seems to be no institutional collaboration. Senator Usman Khan Kakar regretted that 132kV grid station in Bostan, a site for SEZ, could not be started due to the non-availability of funds.

In a related development, the CPEC Parliamentary Committee unanimously agreed that the National Transmission & Despatch Company would execute the 220kV grid station project of Dhabeji Special Economic Zone for which the Sindh government will provide the land, the right of way and other ancillary facilities. The secretary power assured that PC-1 of the project would be revised and submitted to the planning commission at fast track.

The committee also directed The National Electric Power Regulatory Authority to look into three prioritised Special Economic Zones with regards to the supply of electricity and suggest resolution of the problem.

Reviewing SEZs progress, Chief Minister of Khyber Pakhtunkhwa Mahmood Khan said: all the existing plots of the Jalozai SEZ were sold out within a month; Nowshera SEZ extension was ready for commercial launch; Rashakai SEZ development agreement has been signed; he has been invited to inaugurate Dera Ismail Khan SEZ.

More importantly, a state-of-the-art software technology park was inaugurated in Gilgit on October 6 by Chief of Army Staff Qamar Javed Bajwa.

The provincial government would need to ensure that SEZ’s land allotments do not lead to trading in plots and relocation of industrial units from elsewhere to the zone as happened in the past in the case of industrial estates then eligible for tax holidays. Punjab’s minister for commerce and industries recently proudly claimed that within a short span of two years the provincial government had started work on 13 Special Economic Zones and industrial estates. He did not talk on how many of them have been made functional.

The growth of the construction sector on which the PTI government is also banking to kick start the economy appears to be gathering some momentum. In September, cement sales peaked at the highest monthly figure at 5.21 million tonnes, up from 4.27m tonnes in the same month last year. Local sales jumped by 17.65pc and exports surged by 41pc. Despite record sales, price of 50kg cement bag has been raised by Rs30 which will have an adverse impact on low-cost housing.

An analyst of Top Line Securities says the cement demand is primarily led by the private sector and the resumption of house-building activities. And the growth is conjoined by the start of construction of different dams.

While mega-dams take a long time to be built, small dams could be constructed in a much shorter time. But the work on these mini projects is painfully slow. Of the 100 mini dams on which initial work is underway in Balochistan, only five have been completed while another four are under construction.

In Khyber Pakhtunkhwa, the PTI government had initially planned to construct 358 small dams in 18 months. The latest position is not available but by February 2018 construction work was underway on 114 projects and critics then said with the slow pace of work even the prioritised ones would not be completed in five years. On the other hand, the World Bank is likely to extend a loan of $200m for building small dams in Sindh.

There is great potential to boost the construction industry if the building of small dams can be expedited. That would simultaneously spur farm production primarily in arid zones by doing away or reducing both water and electricity shortage there.

With agriculture underperforming, the growth in manufacturing will be severally handicapped. Just take the example of the cotton crop. According to the US Department of Agriculture, the 2020-21 cotton crop is forecast at 6.3m bales against previous year’s 8m bales. This is a steep fall from the peak output of close to 15m bales only a few years ago. The textile industry’s consumption is predicted at 11m bales this year. The actual shortage has to be met by imports.

The fiscal and monetary stimulus, while significant enough to revive one or two sectors, may produce only sporadic growth that will not be sustainable. There is a need to synchronise and harmonise growth in all sectors of the economy.

Published in Dawn, The Business and Finance Weekly, October 12th, 2020