How to revive economy?

Pakistan’s economy is currently facing multi-dimensional economic challenges that include slower economic growth, rising unemployment and poverty, large fiscal deficit, growing public and external debts. These challenges are not the makings of the last three years, but these have worsened over the last 13 years (2008-21).

Managing the economy with weak and frivolous economic teams by successive governments on the one hand and perpetually pursuing IMF-driven demand management policy (i.e. anti-growth or austerity policy) and by remaining in the IMF fold on the other hand have not only damaged the short-run growth prospects but even chocked the medium-to-long-term economic recovery. In a country of over 200 million people, a growth rate of 3-4 percent has become a new normal.

In the words of the former Managing Director of the IMF, Christine Lagarde, “the longer demand weakness lasts, the more it threatens to harm long-term growth as firms reduce production capacity and unemployed workers are leaving the labour force and critical skills are eroding. Weak demand also depresses trade, which adds to disappointing productivity growth”. There cannot be a better way to explain the current state of Pakistan’s economy than as described by Lagarde.

Pakistan has been under the IMF programme during most of the last 13 years (2008-21). Such a prolonged period of austerity or anti-growth policy has severely damaged Pakistan’s growth prospects, both in the short and medium-to-long terms. Joe Biden, the President of the United States, has recently said that “trickledown economics has never worked;” in a similar vein, let me state that the IMF policy of “Stabilization first and growth later” has also never worked in developing countries. It is in this perspective that the present government, after remaining 32 months in power and changing four Finance Ministers, has realized the importance of economic growth. Its fourth Finance Minister has clearly stated that during the remaining tenure of the current government, achieving 5 to 6 percent growth will be the government’s priority.

This article is aimed at providing suggestions/recommendations to help the government revive the economy and achieve 5 to 6 percent or even 7 percent growth on a sustained basis. Can this be achieved under an IMF programme? The answer is obviously ‘no’ because the IMF policies are anti-growth. Then, what should be done?

The IMF programme had got suspended in Pakistan after the onslaught of Coronavirus in late February 2020. With the suspension of the IMF programme came the suspension of hara-kiri attached with the programme in the form of raising the prices of electricity and gas, interest rate, and devaluation of rupee. Interest rate was brought down from 13.25 percent to 7.0 percent in a few months’ time; the exchange rate exhibited a modicum of stability and, in fact, appreciated after the suspension of the IMF programme; gas and electricity tariffs remained unchanged during the suspension. Such a suspension of the IMF programme on account of Covid-19 brought tremendous positivity to Pakistan’s economy. It boosted the confidence of the private sector as they knew that utilities’ prices will remain unchanged, interest rate started declining and the government came forward to support businesses/industries and the poor segments of the country in a grand manner.

All these measures restored the confidence of the market as well as of the private sector; the air of uncertainty was removed. Private sector moved forward, the credit off-take started rising, industrial activity was on the move, exports started gaining momentum and the overall economy gained traction. All these were happening because of the suspension of the IMF programme.

At the back of these developments, Pakistan has been witnessing a surge in Covid-19 cases for the last two months. Business activities are being affected. The first thing that the government can do is to request the IMF for further suspension of the IMF programme for a year and take this as an opportunity to revive the economy. Alternatively, Pakistan should renegotiate with the IMF and insist that there will be no more hike in the tariffs of electricity and gas as well as tax target for the FBR will be based on the ground realities of the economy. Pakistan should concentrate on wide-ranging reforms in power sector (raising electricity prices is no reform; it is tantamount to maintain status quo), tax system and tax administration reform, and reform in agriculture and industries. Reforms in the State Bank of Pakistan (SBP) law in the name of giving more autonomy as proposed by the IMF is like creating a state within the state, and therefore, must not be accepted.

Secondly, the government must hold hands of businesses at all levels—small, medium and large. This is not the time to increase the cost of doing business by raising utility prices, interest rates and devaluing currency. Furthermore, the SBP must consider reducing policy rate to 5 percent from the current level of 7.0 percent in two/three monetary policy meetings, that is, by December 2021. It is abundantly clear that by raising discount rate we cannot reduce inflation in Pakistan.

Thirdly, agriculture has remained neglected by successive governments for nearly 13 years. Pakistan used to produce cotton in the range of 13-14 million bales until 2014-15. The production of cotton has nosedived to 6-7 million bales now. What went wrong in cotton production? The government must find the answer and take necessary corrective measures during the next fiscal year (2021-22).

Fourthly, wheat production in Pakistan had been stagnating at 25 million tons from 2010-11 until this year (according to the government, the country has witnessed record production of 27.3 million tons this year) but its population has been growing each year. Resultantly, the per capita availability of wheat per annum has declined from 145 kg to 120kg in 2019-20. The country’s wheat production has failed to maintain the pace of its population growth rate. Pakistan is fast heading towards acquiring the status of a permanent wheat importing country and accordingly creating for itself a food security issue. Pakistan has entered into the second phase of the China-Pakistan Economic Corridor (CPEC) in which agriculture is a priority area. Pakistan must learn to enhance wheat and cotton production from China under the CPEC.

Fifthly, the small and medium enterprises (SMEs), construction, tourism and IT sectors have strong potential to revive economy and create enormous job opportunities, because all these sectors are highly labour-intensive with high employment elasticity. These sectors are severely credit constrained. These sectors should be provided credit directly through banking channels or through the well-reputed NGOs. The government, on its part, must improve their physical infrastructure for which budgetary allocation must be ensured.

Sixthly, livestock and dairy sector accounts for 60.5 percent in agriculture and contributes 11.7 percent to GDP. This sector is almost equal to the large-scale manufacturing sector. Pakistan produces almost 62 million tons of milk in a year. More than 8 million rural population derive their livelihoods from this sector. This is a highly labour-intensive sector and has enormous potential for creating jobs. The road to poverty alleviation in the rural area passes through livestock and dairy sector but it has remained neglected in Pakistan. The government may involve private sector in the development of this sector for production of milk and dairy products to meet growing domestic as well as foreign demand.

Seventhly, in the second phase of the CPEC, besides agriculture, industrialization through the Special Economic Zones (SEZs) is yet another priority area where progress is much to be desired. The government must use CPEC as a vehicle for reviving economic activity with a view to achieving 6 to 7 percent growth in the next four to five years. Let us resolve that during the fiscal year 2021-22 at least one SEZ will become functional.

Eighthly, Karachi being the growth and revenue engine of Pakistan will play a pivotal role in reviving economic activity in the country and sustaining 5-7 percent growth on a sustained basis. “Give me peace and stability in Karachi and I will give you the revenue,” this is a historic quote of a former Chairman of the FBR to a former Prime Minister of Pakistan in the mid-1990s. Peace and stability in Karachi along with improved infrastructure and cleanliness of the city will go a long way in sustaining higher economic growth. The situation in Karachi must be handled with political foresight inclusiveness, equal opportunities and local government empowerments.

Summing UP: In order to revive economic activity and to achieve a growth rate of 5-6 or even 7 percent in the next four to five years on a sustained basis, Pakistan needs to do the following: i) either suspend the IMF programme for a year or renegotiate the most cruel programme ever given to Pakistan; ii) no more hike in utility prices (gas and electricity), in fact, there is a need to reduce the price of electricity as Pakistan has excess capacity; iii) use both fiscal and monetary policy to revive economic activity; iv) reduce discount rate or policy rate to 5 percent in the next 2/3 monetary policy meetings; v) major emphasis be given to agriculture and seeking Chinese assistance under the second phase of the CPEC; vii) SMEs, livestock and dairy sector, construction, tourism and IT sectors should form the priority areas along with agriculture; viii) undertake wide-ranging reforms in agriculture, industry, energy, taxation, and governance; and ix) peace and stability and better infrastructure in Karachi are vital for economic recovery.

Copyright Business Recorder, 2021