Prime Minister Imran Khan has entered the second round of his 5-year term with new momentum. A clear message was sent to the new economic team at the first meeting of the Economic Advisory Council (ACE). Only ready-to-use solutions are guaranteed. The Prime Minister’s message is clear and strong: he has had enough of stabilization measures, now is the time to focus not only on growth, but also on sustainable growth.
In the first half of the mandate, austerity policies were adopted. The program of the International Monetary Fund (IMF) has been anticipated. High inflation and low growth are difficult for the masses. The Pakistani people cannot afford to increase the burden of indirect taxes nor to absorb the inefficiencies of the system. This method simply cannot continue.
The focus must now be on economic growth. A short period of growth is not enough. The country’s long-term structural growth is in secular decline. The 5-year CAGR (compound annual growth rate) for the past ten years (2011-20) averaged 3.7%. The average CAGR was 4.8 percent over the previous ten years (2001-10) and 4.7 percent during 1991-2000. Growth of 4-5% for 2-3 years (as was the case in 2016-18) followed by an inevitable crisis is no longer desired.
The geometric mean of GDP growth must rise. The first question is how to reduce the budget deficit without imposing new taxes. The second question is how to reduce the circular debt without further increasing the electricity tariff. And finally, how to lift millions of households out of poverty.
The only solution to all problems is to stimulate economic growth. The debt burden will become unnecessary once the economy begins to grow on a sustainable basis. The budget deficit would automatically be brought under control because high economic growth would lead to higher growth in tax revenues. Energy consumption will increase with the dynamics of economic activity, which would partly solve the growing problem of capacity payment by lowering the capacity payment per unit of consumption.
The first thing to do is to convince the IMF of this strategy. The IMF wants the budget deficit to be brought under control and the circular debt to be repressed. The simplest solution for this is to impose new taxes and increase energy prices. However, this will further suppress the growth potential. As the ongoing wave of Covid-19 becomes dangerous in the region, the government should buy some more time from the IMF to work on an alternative plan.
Focus is needed to slowly climb the ladder. The first step should be to achieve four percent growth and slowly move to 5-6 percent by carefully assessing the external account situation. The only silver lining at the moment is the controlled external account. The current account has posted a billion dollar surplus over the past nine months at a time when manufacturing growth shows signs of recovering. The Roshan Digital Account (RDA) is a new avenue – a billion dollars has come in eight months and more.
The country’s reserves stand at $ 23.2 billion – on the verge of an all-time high. The term liabilities of the State Bank of Pakistan (SBP) have nearly halved (reduced by $ 3.7 billion) over the past two years. Reserves are expected to grow to $ 30 billion next year and to around $ 40 billion in the next few years. This is to create a buffer for cyclical actions. The government does not have a stamp to detonate all guns at this time.
The need is to work to unlock the formula for strong and sustainable growth. It seems that FM, cabinet or EAC did not have it ready. Every effort is needed to work on it. Lowering real interest rates further to negative is not a solution. The problem is access to credit. Private sector credit to GDP is 16 percent – about a third for India and Bangladesh. Space must be created by reducing the budget deficit, not by reducing interest rates. And this to lower rates itself – but it will take its time.
Any fall in interest rates can stimulate consumption; but would soon be followed by another balance of payments crisis. This could boost the construction sector – already growing. But housing finance is long term. If the rates go up in a few years, it will create a more serious crisis. The country cannot rely on construction for long-term sustainable growth. It’s a cyclical boom. Jobs are created when the home is built and a dead asset thereafter. It cannot be the engine of growth. However, it is an effective tool for triggering momentum.
The industrial sector should perform. It received a decent share of cheap funding for its expansion under the TERF program. Let’s see how many exports accumulate and how much import substitution takes place. The country needs a significant investment. Large groups are rich in cash. Lucky Group has recently invested in shares (150-200 million dollars) in the automotive sector and has already become the third player in the market and is making good profits.
A mega-project investment is in sight. Engro is in the advanced planning phase of an investment of approximately $ 1 billion in a polypropylene manufacturing plant. The board approved $ 31 million for bank feasibility. The last time such a large private investment (apart from PPIs) was in the 2000s, when two large fertilizer factories were set up, one by Engro and Fatima Group. The country needs more of such investment activity. Foreign investment is expected to pick up. Local groups should form joint ventures with global experts in the manufacturing sector. FDI must come to the country to finance future current account slippages.
The weakest link is agriculture. The country’s competitive advantage lies in agriculture. Unfortunately, the sector is underperforming. Yields are falling. Everyone is aware of the problem. These are the poor quality of seeds, adulterated pesticides and the lack of credit for small farmers, to name a few. Agriculture should be the top priority of the new FM. Foreign players are required to come and invest in seed technology. Precision farming techniques should be explored. New cultures should be experimented with.
Lately, the ICT sector is doing well. Exports are picking up despite the lack of government contribution. The need is to have better availability of human resources to exploit the potential. The quality of human resources in all sectors is low in Pakistan. The finish is poor. Massive investment is needed with patience to improve it. It is for the long term for which there will be no shortcuts.
Copyright recorder, 2021