The blind pursuit of growth

Published September 11, 2023

The caretaker setup led by Prime Minister Anwarul Haq Kakar has clearly hinted at changing the course and speed of the economy.

Speaking to the media persons on Friday after six hours of deliberations on numerous issues facing the country’s moribund economy at the first session of a two-day meeting of the army-backed Special Investment Facilitation Council (SIFC), the key caretaker ministers minced few words to send across the message that the interim administration is preparing to gun for faster growth by ’revitalising an economy that has seen months of decline due to strict import regulations“.

That appears totally in line with the views of army chief Gen Asim Munir, who was quoted by Karachi-based builder and stock broker A.K. Dhedhi to have told the businesspeople that the country must now move towards growth. Mr Dhedhi had also implied that the army chief is looking beyond the current International Monetary Fund programme as he expects large official capital inflows of $75 billion from the oil-rich Gulf states in the shape of investments, with an additional $10bn as deposits from Saudi Arabia to immediately shore up the country’s foreign exchange reserves.

The ministers said the government had decided to open imports across the board to facilitate exports, job creation and economic activities affected by months of import restrictions to curb the outflow of dollars amid depleting foreign exchange reserves.

The promised investments add up to an improbable 30pc of our GDP but even if they materialise, the economy is in no shape to manage such large inflows

Caretaker finance minister Dr Shamshad Akhtar argued that Pakistan direly needed to revive the economy, for which it was necessary to remove import restrictions across the board since Pakistan was an import-intensive country.

Asked if she agreed with the timing of opening up imports given a tight foreign exchange situation, Dr Akhtar said that managing foreign exchange reserves was a “very high priority for us, and we are closely monitoring the situation”.

In response to yet another question about the strength of the economy to withstand foreign exchange requirements of a possible import splurge, she contended that fresh inflows from multilateral institutions were expected to be around $6bn during the year on the basis of ongoing discussions with agencies like the World Bank, Asian Development Bank and the IMF. Besides, she also anticipated the rollover of the deposits kept by friendly countries with the State Bank of Pakistan. “The situation is reasonably okay for now,” she assured.

Trade Minister Gohar Ejaz, always a proponent of rapid economic growth, low-interest rates and low energy prices, argued that inflation could only be effectively managed by augmenting exports, suggesting that the high dollar price of Rs300 could potentially decrease to Rs250, simultaneously mitigating inflation, by raising exports.

While we will hopefully get more clarity over the caretaker government’s economic strategy under the SIFC framework for the interim period to the next elections in the coming few days, many remain sceptical of an early turnaround of the economy or the Gulf nations’ promises to invest large amounts.

“The amount of investments the government claims the Gulf states have committed is enormous, almost 30 per cent of our GDP. I don’t think they will be ready to pour this kind of money into Pakistan’s economy even if they have promised it. Nor do I think that our economy is in a shape to handle and absorb such large inflows,” a financial analyst based in Karachi says on the condition of anonymity.

As a small economy, even tiny inflows of $5-7bn can rev it up but that is not a sustainable or long-term solution to our structural problems

Some businessmen who participated in recent meetings with the army chief in Lahore and Karachi have quoted him saying that both Saudi Arabia and the UAE have committed $25bn each. Others claim that Qatar will also invest a similar amount. On top of that, Riyadh is said to have promised to provide a $10bn deposit to shore up Pakistan’s foreign exchange reserves in the near term. Most expect the money to start pouring into the country over the next six months.

“The markets and investors also remain sceptical of these claims. Otherwise, there wouldn’t be a need for the stick to control the rupee’s free fall in recent weeks. That said, even if we accept the claim for a moment, these investments will be staggered over a long period. For perspective, we should remember that China has invested $25bn in the last eight years under the China-Pakistan Economic Corridor initiative (CPEC),” the analyst said.

“No amount of investment and dollar inflows can fix our economic problems on a sustainable basis unless we implement fiscal and governance reforms and boost our industrial and agricultural productivity. The CPEC investments haven’t solved our structural issues either. Rather, these have multiplied our debt problem.”

Fahad Rauf, the head of research at Ismail Iqbal Securities, agrees. “I think that the focus of the interim setup should be on the issues that the political governments are always afraid of dealing with.”

He says the focus of the caretakers should be on stopping smuggling for good, privatising state-owned enterprises, fixing the energy sector and handling other structural issues facing the economy to increase productivity.

“Pakistan is a small economy. Even tiny inflows of $5-7bn can rev up it. But that is not a sustainable or long-term solution to our structural problems. Personally, I doubt the kind of Gulf investments we are talking about will come due to the global economic conditions,” he says.

He is of the view that political and economic uncertainty in the country means foreign investors would not come to Pakistan. “We have seen that no commercial loans are rolled over, and foreign direct investment is decreasing in spite of the IMF’s $3bn programme.

“Not even hot money is flowing in, although our interest rates have gone up 22pc and increasing. Back in the day, we were successful in attracting hot money at 13pc interest rates. It is because the investors do not have confidence in Pakistan’s economy at present. Local companies will not invest at the present borrowing costs.”

Mr Rauf warns against the blind pursuit of growth without restructuring the economy, as it always results in long periods of economic depression after a brief growth boom.

“A company suffering losses first focuses on eliminating those losses before moving on to making profits. So, we should first fix our issues. Once we fix the issues impeding economic growth, we will start attracting private foreign investment, which is more sustainable rather than always looking for a few billion in deposits.”

Published in Dawn, The Business and Finance Weekly, September 11th, 2023

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