Prime Minister Imran Khan says his government has taken several initiatives for wealth creation so that it could get rid of heavy foreign loans with a strong emphatic assertion: “We want to create more and more wealth to retire heavy foreign loans some of which are causing more loans.”
In December, the Fitch Rating had downgraded Pakistan’s long-term debt rating from ‘B’ to ‘B-’ due to what it described as a high debt repayment obligation, low foreign reserves and fragile fiscal situation. Since then foreign exchange reserves have continuously improved on the back of a surge in workers home remittances, foreign financial inflows and significant rescheduling of debts.
In terms of local currency, foreign debt servicing will come down if the present persisting trend of the rupee getting stronger against the dollar sustains or the foreign exchange rate is stabilised at the present levels. This will have a positive impact on the government’s fiscal position. The resumption of International Monetary Fund (IMF) reforms has enabled policymakers to get more foreign loans from international lending agencies and raise funds from the international market.
But given the overall macroeconomic trends, growth with stability seems to be as elusive as ever. PTI Minister for Planning, Development and Special Initiatives Asad Umar says the industrial policy tools that Pakistan used in the 1960s, were now outdated. It may be recalled that President Ayub’s industrial revolution was also stimulated by heavy foreign debt with political implications as evident from the title of his book “Fiends, Not Masters’.
Policymakers are now looking at fresh approaches/policy options for the transformation of the economy propelled by rapid domestic capital formation. The Planning Commission has initiated a public debate through a seminar held recently held in Islamabad, where Economic Advisory Group(EAG)/Prime Institute’s executives presented a conceptual framework for economic transformation.
Based on estimation from the gravity model of trade, the latest World Bank’s Pakistan Development Update says the country’s potential exports are estimated at $88.1bn, about four times the current actual level. This large gap between the actual and potential exports places Pakistan among the top quartile of the distribution of countries ‘with missing exports’
Analyst Javed Hasan reminded the seminar audience that the wealth of nations is closely linked to their productive structure, as reflected in the diversity and sophistication of goods and services they can produce and export. Unfortunately, he noted that in terms of its relative level of sophistication, Pakistan ranked 99 among 133 countries in the Economic Complexity Index.
Based on estimation from the gravity model of trade, the latest World Bank’s (WB) Pakistan Development Update says the country’s potential exports are estimated at $88.1 billion, about four times the current actual level. This large gap between the actual and potential exports places Pakistan among the top quartile of the distribution of countries ‘with missing exports.’
Addressing the seminar, Asad Umar stressed that a deeper understanding and new levers are needed to trigger growth, and for that, the most important government function is to provide policy signalling, a framework of competitiveness, and supporting regulatory architecture.
It was also stressed in the discourse that economic transformation required continuous reallocation of resources towards productive activities ie producing more sophisticated products requiring higher capabilities. The speakers included Deputy Chairman Planning Commission Muhammad Jahanzeb Khan, Chief Economist Dr Muhammad Ahmed Zubair, Prime Institute Chief Executive Ali Salman and EAG’s Dr Ahmed Pirzada.
One may argue that the core issue is not merely of the economic transformation but that of the political economy as briefly touched upon in his address by Jahanzeb Khan. Dwelling on the dimensions of political economy Khan said the federal-provincial relationship should be considered in any plan for economic transformation.
The Federal Government Budget Strategy Paper 2021-22 has projected a provincial revenue surplus of Rs440bn against Rs210bn this year to show a consolidated deficit of Rs3.2 trillion or 6 per cent of the GDP.
The persisting deadlock at the National Finance Commission on sharing of resources between the federation and the provinces is a stumbling block in further development of fiscal federalism required to boost tax revenues and reduce the consolidated fiscal deficit. The Federal Board of Revenue’s collection at estimated at 9.8pc of the GDP this fiscal year is proposed to be increased to 11.2pc in 2021-22 but is still short of the target of 15pc set under the 7th NFC award.
Asad Umar has advised economists participating in the seminar to conduct work on the political implications of the reforms and conduct empirical research on the impact of structural reforms on the lives of citizens.
And the latest World Bank’s Pakistan Development Update has linked the restructuring of the state-owned enterprises with the resolution of political economy implications. For the first time, the IMF programme has set deadlines for measures and laws that require parliament’s approval.
In the past, the IMF officials did interact with parliamentarians for exchange of views on Fund’s reforms but acknowledged that they (members of the National Assembly) could not be dictated. Though unjustified, the IMF intrusion into parliamentary affairs also shows that the IMF reforms require broad-based political ownership to succeed. The approval of reforms- related legislative matters are blocked in a dysfunctional parliament.
The country needs a political ceasefire. In a much-belated move, the prime minister has advised his spokespersons to refrain from criticising the opposition as it was ‘harmless’ and ‘did not matter.’ The question being asked is will it lead to a policy shift. The government has invited individual parties — PML-N, PPP and JUI-F — for talks on controversial issues while refusing to recognise the now split Pakistan Democratic Movement.
In the budget strategy paper approved by the Cabinet, the government has revised the growth rate estimate for the current fiscal year to 2.9pc against the budgeted 2.1pc and has set a target of 4. 2pc for 2021-22. All growth forecasts for the near term are far below 7-8pc growth per annum required to absorb the growing number of unemployed entering the labour market.
The GDP growth rate of 4pc projected by the IMF for the next fiscal year has also been questioned by former finance minister Dr Hafiz A Pasha. He argues that the said estimate ‘looks optimistic given the knockout blow by the intended much higher power tariffs and indirect taxes.’ Similarly, referring to IMF estimates for the current year, he says ‘exports are pitched too high and imports are understated’.
The view voiced at the Islamabad seminar was that existing and forthcoming policies including tax and tariff structures, should be modified, so they can promote economic transformation rather than prevent it.
Significant improvement in productivity — the key source of GDP growth — is needed for stability to last and the sustained growth of capital formation.
Published in Dawn, The Business and Finance Weekly, April 19th, 2021