Exiting the economic quagmire: a call to action

Pakistan finds itself ensnared in a period of stagnant growth. If the World Bank’s projection of GDP growth for the next two years is correct, the average growth over four years (FY23-FY26) at 1.7 percent is to be the lowest four years of growth in the history of the country since 1950. If realized, this dismal forecast would mark a nadir in Pakistan’s economic trajectory.

Unemployment and soaring inflation have inflicted profound hardships, with the mere contemplation of further years of economic stagnation instilling dread in many. Moreover, even sustaining a growth rate of 2-3 percent without substantive reforms and (or) restructuring appears untenable.

Unlike previous crises of 2008, 1998, and 1973, the current economic downturn surpasses in severity, with consecutive years of record-low growth — it was negative last year, and this year’s forecast is below 2 percent. The fleeting euphoria of achieving stabilization merely postpones an impending catastrophe.

The socio-economic repercussions of this protracted ordeal are dire: dwindling job opportunities, declining real incomes, and a widening poverty chasm amidst a shrinking middle class. Meanwhile, the youthful demographic dividend remains underutilised.

Businesses hesitate to invest domestically, opting to channel resources abroad, while skilled labor seeks greener pastures. Private investment, imperative for sectoral revitalization, languishes amid government proclivities toward state-led initiatives.

The country badly needs private investment to pour into productive sectors. However, the state is eyeing G-to-G investment either as equity or borrowing. One, the proclaimed numbers of tens of billions of investments each from friendly countries are perhaps nothing more than hollow statements. And whatever form comes in will have strings attached and may not be directed towards productive sectors with highest opportunities for Pakistan, but rather towards sectors such as mining and quarrying where returns will be accrued by the investing nations in the long run.

Private investment cannot be made in greenhouses. It requires an overall ecosystem and environment conducive for growth and investment. That requires political stability, which is missing in Pakistan.

Any island in isolation is not enough to revive. Hence, relying mainly on SIFC to revive investment is not wise. The seriousness and focus on private sector-led investment is missing. In one news, there are celebration of importing bunch of cows which private sector is doing for many years, and SME investors usually import 100-200 cows. What message are we sending to big investors when such news is celebrated at a state level?

In another news, informed “analysts” are talking about bold plan of billions of dollar investment in semiconductor industry. It is a highly specialized and sophisticated industry which is dominated by a very few countries (Taiwan, the USA, China, South Korea, and Japan) in the world. With Pakistan struggling to be competitive in automobile manufacturing industry for past four decades and incentivizing assembling smartphones through import substituting policies, who on earth would invest on cutting edge semiconductor industry in Pakistan?

The above examples narrate the seriousness and focus on investment. If it’s an attempt to create a feel-good factor, perhaps the ruling class need to revisit the strategy. The ground reality is much worse than what can be corrected through a feel-good factor alone. The goals should be realistic and achievable.

The country needs big investments in sectors where the economy has a competitive and comparative advantage. And should move away from sectors where resources are deployed inefficiently. With the pain of low growth and high inflation already inflicting, some are arguing that creative destruction is the policy to have where the government should stop supporting industries in infancy for decades and let the capital flow into sectors suited in Pakistan economic setup.

Relying solely on initiatives such as SIFC to stimulate investment is shortsighted. Political instability further undermines investor confidence, necessitating a holistic environment conducive to growth.

Celebrating trivial achievements such as cattle imports or ambitious yet impractical ventures into high-tech industries underscores a lack of focus on pragmatic, sector-specific investment strategies. The pursuit of a feel-good narrative must yield to grounded, achievable goals.

Pakistan must leverage its competitive advantages, divesting from inefficient sectors and embracing creative destruction to facilitate capital inflow where it can flourish. A collective resolve among local investors and policymakers is imperative to overhaul the economic framework.

The current predicament serves as a clarion call for political stability and inclusive economic reform. Failure to heed this call risks perpetuating the cycle of low growth and entrapment in a debt quagmire.

Pakistan stands at a crossroads: it can either succumb to inertia or embrace transformative change. The time for action is now, lest the shackles of economic malaise tighten further, condemning future generations to a cycle of stagnation and indebtedness.

Copyright Business Recorder, 2024