The rejection of the decision by the federal cabinet to upscale trade with India a day after the Economic Coordination Committee had voted in its favour demonstrates the intersection of politics and other considerations in the country’s economic policymaking. It is not for the first time that the Imran Khan government has abruptly altered its view on important economic policy decision; it just brings out the entrenched confusion in the economic policymaking process of the present government more prominently. The indecisiveness within the ranks of the government over which economic route it wants to take also shows up in the frequent changes in the political and bureaucratic leadership of its finance team.
It is not only that the present administration appears clueless when it comes to making decisions on issues critical for tackling the country’s economic troubles and bolstering growth; it has just outrun its predecessors in this arena from the very first day in power. For example, it took the government almost a year — after sending confusing signals to the market — before it signed a deal for a $6 billion bailout with the International Monetary Fund (IMF) to support the nation’s deteriorating balance of payments position, which saw it overturn and rethink many of its earlier policy decisions.
The inordinate delays in the announcement of the new textile policy to boost textile & clothing exports is another example signifying the entrenched policy confusion, creating deep uncertainty over some incentives like subsidised energy prices for the exporters the industry deems essential for improving its international competitiveness. There are numerous other examples where the government needs to move fast, but where the delays in decision-making have caused the economy significant tangible and intangible losses.
Effective governments deal with difficult issues in difficult situations and then stick to their decisions
Consequently, we have seen a significant increase in economic policy uncertainty in the last two and a half years, which is influencing the performance of the economy, as well as investment and other decisions of the businesses. For instance, the recent withdrawal of certain tax exemptions enjoyed by the corporations is feared to impact their future business diversification and growth plans. There is a lot of research literature to suggest that some policy uncertainty is part of every economy. But when the policy uncertainty crosses a certain threshold, it starts to affect the performance of the economy and corporate decisions by sending confusing signals to the markets.
The lack of clarity over economic policy decision-making also underlines the presence of the ongoing tussle among different ministries and the absence of a well-defined coordination mechanism for taking on board all stakeholders before making a decision. Some in the government prematurely relay economic policy decisions through social media before getting input from other relevant ministries and this also underlines the lack of coordination at different levels of the government.
On top of that, there also exist conflicting views within the government on how to tackle the economic troubles and other issues related to investment. The issue of arbitration over the K-Electric’s dispute over unpaid bills owed to the company by some government entities and the payables claimed by them against it is but just one glaring example of the lack of intra-government coordination. After an agreement with K-Electric investors to establish an independent arbitration for resolving longstanding issues, which has held up the takeover of the only privatized power distribution firm by China’s Shanghai Electric Power for over four and a half years, a lobby within the government seems to have become active to derail or delay the deal once again.
Additionally, the way the administration had twisted the arms of independent power producers to compel them to agree to revise their power purchasing agreements for reducing their returns has also sent negative signals to investors — domestic and foreign both. For the time being the government may have extorted some concessions from investors, but people will pay a heavy price for this in the shape of a higher risk premium in future. The treatment meted out to investors who had set up generation plants in the 1990s explains the subsequent increase in the returns allowed to investors under various power policies since 2002. The consequences of the dissolution of the agreements with Reko Diq and Karkey investors, leading to international arbitration and exorbitant fines, show the fickleness of our policymakers.
It is because of the delayed decision-making and policy inconsistency that Pakistan has never been a choice destination for foreign investors. While non-debt creating foreign direct investment (FDI) inflow to Pakistan has never been more than 1pc of its GDP even during the best of times, according to the Pakistan Business Council, the comparable economies have attracted FDI at least 3pc of their size of GDP.
Dr Moeed Yusuf, the special assistant to the prime minister on national security and strategic policy planning, had told Dawn in October last year that the government planned to create a formal mechanism to ‘streamline’ coordination between the different economic actors — ministries, provincial governments, businessmen, etc — for a quicker resolution of issues and hurdles in the implementation of sectoral policies and strategies, as well as the attainment of the targets set under the economic diplomacy project: Economic Outreach Initiative. The proposed mechanism remains non-existent to date.
The government should realise that a consistent and predictable economic policy and decision-making process is critical to growth. Investors look for a clear sense of direction where the government is headed before they make their investment decisions. Indeed, the holdups and reversals in economic policy decisions and their implementation reflect very difficult political conditions in the country that time and again force the government’s hands as it tries to respond to the issues. But that is what effective governments do — deal with difficult issues in difficult situations, and then stick to their decisions.
Published in Dawn, The Business and Finance Weekly, April 5th, 2021