In the world of medicine, timely intervention is often the key to achieving successful outcomes. Delaying treatment can be disastrous, leading to prolonged suffering and debilitating consequences.
However, the same principle holds true beyond the realm of healthcare. When it comes to a nation’s economic health, swift action is essential to prevent irreversible damage. Failure to act decisively can lead to a downward economic spiral, threatening the country’s stability.
The impact of the Covid-19 pandemic and Russia’s war with Ukraine has been felt by all countries, with emerging markets being hit particularly hard. One example is Bangladesh, which managed to recover quickly from the pandemic but became a bystander victim of the conflict between Russia and Ukraine.
As fuel and food prices soared, inflation in Bangladesh quickly rose, the current account deficit expanded, foreign exchange reserves dropped, and economic growth slowed. However, Bangladesh’s policymakers not only recognised the challenges ahead but also took preventative measures by immediately seeking financial assistance from the International Monetary Fund (IMF).
Bangladesh approached IMF last year when its foreign exchange reserves still had four to five months of imports cover, which exceeded the IMF’s recommendation of three months. The country’s policymakers did not wait for reserves to drop to alarming levels but instead quickly signed up for a $4.5 billion support program. They are now working to stabilise the country’s financial health.
Pakistan has enrolled in more IMF programmes than any other country, yet there is no evidence of stability
That’s in stark contrast to what has happened in Pakistan, even though it has been in an IMF programme since 2019. The country’s financial health has been in a critical state, with its foreign exchange reserves dwindling to dangerously low numbers, representing an import cover of a few weeks.
Despite the urgency of the situation, the government exhibited little sense of alarm. Just two months ago, the incumbent finance minister was trivialising the need for an IMF bailout. The result of these delays is now glaringly apparent, with reserves slipping further.
Pakistan is now at risk of developing stagflation, a disease marked by high levels of inflation and unemployment. Unlike Bangladesh, Pakistan’s treatment will be painful.
The policymakers are currently in a frenzy, undertaking measures to fulfil IMF’s preconditions to obtain the much-needed loan tranche of $1.1bn. Additionally, they may be contemplating a larger loan programme to cater to the country’s financing needs.
Remember, Pakistan has enrolled in more IMF programmes than any other country (23 to be precise) and has received over $27bn in loans. Despite the substantial inflow of funds, there is no evidence of economic stability. It is high time for policymakers to move beyond the IMF and adopt strategies that can drive sustainable economic growth.
Policymakers should learn from the growth and economic transformation of Asian countries such as Malaysia, Thailand, and Vietnam. These nations have not only experienced rapid growth in recent decades but have also restructured their economies in terms of output and employment.
Vietnam, in particular, has shown remarkable success, with its per-capita GDP expanding by 39 times between 1990 and 2021, according to the World Bank. In contrast, Pakistan’s per-capita GDP grew by a mere 4.3 times over the same period. It is worth noting that Vietnam has only sought IMF’s assistance three times. Its most recent programme concluded almost twenty years ago.
Countries such as Vietnam are fast approaching the level of developed nations. Many studies have linked their swift economic growth with industrialisation, particularly the manufacturing sector, which is often regarded as the ‘engine of growth’.
The expansion of the industrial base, particularly manufacturing, increases labour productivity, leading to higher per capita income levels and improved living standards. Thus, promoting industrialisation to enhance labour productivity is one of the fundamental steps that Pakistan must take to achieve sustainable economic growth.
In newly industrialised nations, the manufacturing sector typically plays an increasingly significant role in the economy, often contributing more than 20 per cent to 30pc of GDP. However, in Pakistan, the manufacturing sector’s share has remained stagnant since the 1970s, representing just 12.4pc of GDP in the previous fiscal year, according to the latest Economic Survey of Pakistan.
It is imperative for the government to prioritise the formulation of policies that can strengthen the country’s manufacturing sector, including industries such as textiles, food and beverages, petroleum product manufacturing, and pharmaceuticals.
The question is, which industries should the government target when it comes to policies?
The government should pick the low-hanging fruit instead of attempting to establish new industries with complex technologies or supply chains. Policymakers should prioritise existing industries that employ a significant amount of labour and have the potential to increase exports or produce import substitution goods.
The oil refining and the textile industries, for instance, offer significant opportunities for increasing the production of import substitution and exportable goods, respectively. In an era of high commodity prices, the costly import of petrol and diesel has been a significant burden on Pakistan’s trade balance.
Policymakers could incentivise the expansion of domestic oil refineries and encourage higher levels of petrol and diesel production at home to reduce dependence on imports, saving valuable foreign exchange.
The textile industry, on the other hand, already represents around 60pc of Pakistan’s exports, and it is also a labour-intensive industry whose expansion could positively impact employment levels.
A prescription of an IMF programme may provide transient relief to Pakistan’s economic health, but it cannot cure chronic issues. Policymakers must utilise this period wisely and formulate policies that aim to enhance industrialisation to put Pakistan on the path to sustained economic growth.
The writer can be reached at
He tweets@sa_cubes
Published in Dawn, February 27th, 2023
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