Falling further behind

Published October 31, 2022

Pakistan is resetting its ties with the US and is trying to balance its relationship with China and Russia. This rebalancing of geopolitical positioning has a deep impact on local politics.

Political division in Pakistan has morphed into a political confrontation of unprecedented scale. The concept of hybrid democracy is not working. But it remains uncertain whether the new era will be more democratic or whether democracy will continue to remain vulnerable to periodic shocks of authoritarian rule.

Keeping the above context in mind is important for a deeper understanding of Pakistan’s economy.

The post-flood performance of the economy is predicted to remain weaker, and now the ongoing political confrontation is further eclipsing economic growth potential. The external sector worries are far from over, and despite the inflow of $1.5 billion in financing from the Asian Development Bank, the rupee remains under pressure.

The government should immediately engage industrialists in policy discussion and try to minimise their problems to ensure at least moderate growth in large-scale manufacturing

Many more billions of dollars are expected to come from World Bank, other international financial institutions, and friendly countries. But even that would not rescue the external sector because all those inflows would be debt-creating and have to be repaid after some time.

Amidst such an alarming situation, the exports and remittances sectors need more focused attention. Going forward, efforts can be made to attract foreign investment as well. But there is seemingly no scope for attracting foreign direct investment in the short run unless that comes as part of the state-to-state financing package for Pakistan from its “friendly countries”, including China, Saudi Arabia and the UAE.

Deepening and expanding the scope of the China-Pakistan Economic Corridor (CPEC) remains an open option, and the government is trying to tap it. Prime Minister Shahbaz Sharif is scheduled to visit China for two days at the start of November “to consolidate” the momentum of CPEC.

According to the World Bank, the post-flood losses to Pakistan’s economy stand at around $32bn. Pakistan will be lucky even if it gets 10pc of this amount in foreign aid and grants.

The remaining amount will have to be arranged through foreign state loans or foreign commercial debt — and of course through enhanced inflows of exports, remittances and foreign investment. On the remittances front, Pakistan is doing reasonably well. It is also effectively taping the investment potential of non-resident Pakistanis through Roshan Digital Account (RDA).

The number of export product varieties has fallen from an average of 3,167 in 2007-2009 to an average of 2,894 in 2017-2019

Recently, State Bank of Pakistan Governor Jameel Ahmad also introduced Roshan Equity Investment (REI) under the umbrella of RDA to facilitate overseas Pakistanis to invest in the country’s equity market. They are already using RDA to buy houses and cars in Pakistan, besides investing in the government’s rupee and dollar-denominated bonds. So far, the RDA has brought in $5.2bn in Pakistan, and with REI, more forex inflows will pour in.

Our policymakers must also find ways to revolutionise our export sector. But to do that, they will have to create an enabling environment for greater productivity of both the big industries and small and medium enterprises (SMEs).

Large-scale manufacturing output grew 0.6 per cent in August this year, but July-August cumulative production fell 0.4pc on-year. Despite the catastrophic floods, growth in August proves large industries’ resilience.

The government should immediately engage industrialists in policy discussion and try to minimise their problems to ensure at least moderate growth in large-scale manufacturing during the current fiscal year. It is true that in some areas — like energy pricing — there is little that the government can do to facilitate exporters except to allow subsidies to continue for a short run. The reason is the International Monetary Fund conditions do not leave room for this.

But what impedes provincial governments, particularly in Sindh, from improving civic infrastructure around the industrial estates? And why can’t the provincial government improve the law-and-order situation in Karachi, Pakistan’s economic and commercial hub?

Quoting a study carried out by Pulse Consultant, Dawn reported on October 27 that 23pc Karachiites aged between 16 years and 55 “have directly suffered and lost belongings to street criminals” in the recent past. This high level of street crime prevents growth in business activities. The dilapidated conditions of road networks around Sindh Industrial Trading Estate (SITE), Korangi and North Karachi industrial areas show how much interest the Sindh government is taking in promoting industrial activity in Karachi. Factories and businesses in these and other industrial areas have long met their water requirements through paid water tankers. In which part of the world do industrialists do this? What happened to water supply networks in industrial areas? Can we expect that big industrythat big industry will grow and SMEs will work efficiently amidst such circumstances? Absolutely not!

Pakistan currently needs to reset its export sector and do it fast. Curbing most imports in the short run, as the country has done, is understandable in the short run, but in the long run, it hurts the economy.

A World Bank report of October 2021 has highlighted several weaknesses in our export sector. The most obvious finding of the report is that “the country has struggled to diversify its exports, falling behind the rest of the world in terms of both products and destinations.”

The report reveals that the number of export product varieties has fallen over the past decade “from an average of 3,167 in 2007-2009 to an average of 2,894 in 2017-2019.”

The report also highlights that in terms of export market diversification, Pakistan has made a negligible achievements. “In 2019, Pakistan reached 8pc of the pool of potential importers, up from 7.4pc observed a decade ago, and while it has made progress, it is still far from countries such as Vietnam (13.2pc), Malaysia (13.1pc) or Indonesia (12.8pc).

Published in Dawn, The Business and Finance Weekly, October 31st, 2022

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