Reform agenda

Published February 19, 2022
The writer is managing partner at a UK regulated firm investing in global private markets including Pakistan. He has served in executive positions with leading multinationals.
The writer is managing partner at a UK regulated firm investing in global private markets including Pakistan. He has served in executive positions with leading multinationals.

IT is an established fact that Pakistan punches way below its economic potential. A nation of 220 million hardworking and creative people should not be limited to a GDP which is lower than the market capitalisation of any one of the world’s top 30 companies and hampered by a slower economic growth rate than most of its regional peers.

This was not always the case. Up till 2007 Pakistan was considered a potential leader in the next generation of growing economies. This expectation was largely based on the promise of reforms which would unlock higher productivity and the growth that would follow from that. Some, such as Vietnam, have gone on to realise that potential while others, including Pakistan, have struggled to achieve it. The principal reason is that successive governments did not implement a meaningful reform agenda.

The starting point for reversing this underperformance is to provide certainty on our economic objectives and the reform programme to achieve these. The objective, at a minimum, should be a country that can live within its means and has a sustainable path to prosperity for its people. The IMF provides a particular, ‘Washington Consensus’-based view on what these reforms should be and their subsidised financial support is contingent on implementing this.

An open market economy needs capable regulators.

The government position suggests that it is entering the IMF programme under duress. That leaves stakeholders in a state of uncertainty about the reform agenda knowing that the government may abort this programme, as has happened previously, without proposing any credible alternative. This uncertainty is at the very heart of our low FDI, high foreign exchange volatility and other issues.

FDI flows are fungible and investments become uncompetitive once Pakistan’s macroeconomic uncertainty is priced into the cost of capital and other financial variables. Similarly, the ability to manage a floating exchange rate rests less on currency reserves and more on the markets’ belief that the country is moving in a trajectory that justifies the band in which the currency is meant to float. The case of the sterling exiting the ERM (European Exchange Rate Mechanism) in 1992 is a famous example of this.

The underlying assumption of most proposed reforms is that our route to prosperity is via an open market economy. That is absolutely correct as the historical record is clear. No closed economy (as is Pakistan today with one of the lowest trade-to-GDP ratios) has ever generated sustainable prosperity for its people. However, an open market economy requires capable regulators and competent engagement with the outside world.

The challenge is that capabilities that are sufficient within a small, closed economy prove completely inadequate when dealing with sophisticated, international counterparties. The consequences of these limitations at the macro level are obvious and have resulted in Reko Diq, Karkey, IPPs’ dispute, etc costing the country billions in arbitration, lost investment and immense reputational damage. We have also failed to deploy our strengths in constructing mutually beneficial, balanced economic relationships with other countries. This capability gap will also impair our ability to execute our policy on geo-economics which is a matter of national security.

It is also unfair to task civil servants to manage these pivots in economic strategy, negotiate commercial agreements or aggressively market investment opportunities. In past years, this lack of professional understanding has led to the deployment of policy ‘broadswords’ (such as in trying to fix exchange rates) where a surgeon’s scalpel would have been more effective in achieving the objectives.

The same limitations apply at the level of individual firms as the development opportunities and global relationships offered by international banks, leading multinationals and cross-border service companies which professionally trained my generation have diminished markedly over the last two decades. This is particularly unfortunate as Pakistan was acknowledged as a talent exporter by many leading multinationals in previous years. The impact of this on our ability to operate an open economy is visible today.

Finally, the world is facing a profound transition that offers considerable opportunities and challenges including in climate change, digital transformation, artificial learning, automation and healthcare. Pakistan is well positioned in some ways to take advantage of these trends; the nascent but vibrant venture capital ecosystem is testimony to this. Positive examples, such as Saudi Arabia, are already introducing rapid reforms that take advantage of these trends. There is clearly a moment to take action and that moment will pass us by if we do not respond in a timely manner.

The writer is managing partner at a UK regulated firm investing in global private markets including Pakistan. He has served in executive positions with leading multinationals.

Published in Dawn, February 19th, 2022

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