Pakistan’s economy beyond the IMF

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VIANadeem Naqvi
SOURCEBusiness Recorder
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Pakistan’s economy is stuck between a rock and a hard place. On the one hand, historically poor domestic revenue generation by successive governments, excessive untargeted subsidies, poor governance and political imperatives in public sector units have led to unsustainable domestic fiscal deficit and its financing problems. On the other hand, misguided exchange rate policies, rampant corruption by importers and their collaborators in customs department, and lack of coherent strategic industrial policy have reduced the country into an industrial wasteland where even rudimentary everyday use items are largely imported. As a result, the current account deficit went out of whack which, as usual, led the new government to seek assistance from abroad to shore up foreign exchange reserves, including from the IMF.

Also Read: IMF predicts Pak economic turnaround from 2020

The IMF, in turn, diagnosed the problem in the classic traditional manner and suggested the usual set remedies for demand suppression – via hiking interest rates, massive depreciation of the rupee against the dollar, regulated price hikes to contain sectoral deficits, while exhorting the government to raise tax revenue. All this of course give a feeling of déjà vu to any observer of the Pakistan economy. While there is always talk of structural reforms and conditionalities related to privatisations it does not address the heart of the matter, the root cause of economic deficiency. In the meantime, bulk of the population – middle and lower income groups – is bearing the brunt of the ‘economic adjustment’, in terms of lack of employment opportunities, high inflation and loss of purchasing power, and savers whose dollar value of savings fell by over 40% due to devaluation of the currency and continually rising regulated rates/prices. Business investment and expansion is almost at a standstill due both to higher tax scrutiny (which is good) and unbridled accountability by various law-enforcement divisions, such as NAB (which is bad).While the Government’s recent policy decisions have led to some macro indicators showing improvement such as tax collection and current account deficit, the core issue remains largely un-tackled.

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It is unfortunate that the multilateral finance institutions appear to be sticking to the old rule book of policies which have again and again been tried and found wanting in terms of desired outcomes of getting the economy back to a sustainable, balanced growth over the medium to longer term. One only has to take a look at the history of economic policymaking the world over to realise that pure market-driven policies seldom lead to successful economic outcomes for majority of the population. Even in the free market citadel of the United States, early economic development needed the helping hand of the government through Eisenhour’s market intervention and Roosevelt’s New Deal policies. After the excesses experienced by the Friedmanite “free-for-all” market mantra in Thatcher and Reagan-led era, egged on by the central bankers of the Greenspan ilk, the pendulum is swinging back towards Keynesian view of greater role of the government in directing economic development in one way or another.

In the developing economies’ context, every single success story of economic development – particularly in East Asia – is closely linked to an overarching medium to long-term strategic economic road map, where domestic industrialisation has been a key plank of the overall economic policy, regardless of the government in power. The focus here is not the political shape of government but rather the model of a centrally directed strategic macroeconomic plan which has sustained execution. Even in Pakistan, highest rates of sustained economic growth were achieved in the 1950s and the early 1960s under five-year plans with targeted sectors and priorities which were centrally directed.

Fast forward today. Economic nationalism, led by the US in particular, is gradually becoming the norm despite collective warnings by many opinion leaders who highlight the benefits of global free trade. In fact, in Western academia and in their policy think-tanks, the current thinking among the most ardent free-trade proponents is that the benefits of globalisation have been unevenly distributed. Western multinational corporations (and their executives and investors) and the emerging market countries that focused on outsourcing and exports, have benefited the most (with large proportion of their populations moving from poor to middle-income category) while the traditional western middle-class, primarily in the manufacturing sector as well as several service sectors, has found itself left behind in terms of income growth and wealth distribution. To be fair, this is only a part of the story. A significant chunk of industrial and white-collar unemployment in the Western world has to do with rapid technology-driven automation of work. Nevertheless, the anti-globalization narrative is used successfully by Western nationalist leaders to build strong domestic political platforms.

It is in this changing world that the new government in Pakistan finds itself. It is still coping with the crisis caused by aforementioned factors and could not focus the central issues properly such as maximum self-reliance, large-scale job creation, fully leveraging the infrastructure enhancement opportunity presented by CPEC, import-substitution wherever possible, induction of technology-driven productivity enhancement both in the private and public sectors and importantly, redesigning of the financial system landscape to foster medium-sized enterprises that can generate significant private sector employment while supporting larger scale import-substitution industrial enterprises. Further, the central bank’s (SBP’s) focus should go beyond macro-prudential regulatory aspects to micro-prudential level with specific sector financing emphasis.

This does not mean that the other structural reforms should not be undertaken. They can and should be fast-tracked, especially those related to loss-making state-owned enterprises which eat up massive financial resources of the government; the streamlining of the FBR and Customs department; bringing the civil-service quality back up to par; accountability of ministries, to mention a few. The present government has embarked on several of these initiatives and it should continue to push forward on these reforms.

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At the same time, it is absolutely critical and a clearly thought out road map for longer term sustainable economic growth, driven by maximum practicable self-sufficiency, especially in the industrial and technology space, is developed and its implementation supervised from the federal government level. The long-term horizon of implementing such a road map also means that the population has to be equipped with the required skills and managerial capabilities to handle an industrial/technological economy. And that means appropriate large-scale education of our young generation – education that is geared towards acquiring the knowledge and skills needed for such an economy.

The following chart provides a simplified sample of broad self-sufficiency canvass that can be used to start discussions regarding re-industrialisation of the economy based on Pakistan’s existing resource base. One area deliberately left out in this discussion is information technology which is a whole subject to be tackled on its on an exclusive basis.

(The writer is former managing director of Pakistan Stock Exchange)

(This news/article originally appeared in Business Recorder on October 17th, 2019)

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