Economy: some home truths

Pakistan has seemingly overcome its energy crisis as generation has increased from 22, 812 megawatts in 2013 to 29, 573 megawatts in 2018. In addition, energy projects with a cumulative capacity of 17,045 megawatts are in the pipeline, as part of the China-Pakistan Economic Corridor.
The sector's rate of the recovery of costs through billing has also improved to 91.2% between 2014 and 2018, from 85.6% between 2009 and 2013. The system's reliance on expensive fuels has also declined as oil consumption in the power sector declined to 33% in 2018 from 43% in 2014, for example, as oil is replaced by gas, and as the use of renewable energy powering the system has increased to 2% from nearly zero (there has been a similar increase in the use of nuclear energy).
While the energy sector is one of the major contributors of greenhouse gas emissions within Pakistan, the country accounts for just about 0.8% of global emissions - and cleaner domestic energy production is being actively encouraged. The State Bank of Pakistan has in the meanwhile introduced a refinancing scheme for renewable energy in 2016, for example, which seeks to promote the better utilization of alternative energy sources like solar, wind, and biogas.
The central bank has also approved funding for 18 renewable energy projects with a cumulative generation capacity of 618 megawatts. Commercial banks have also contributed, through investment in sustainable agriculture and solar power infrastructure. Tax exemptions are also being granted to promote renewable energy consumption.
One would, therefore, expect that with power outages out of the way and economy being hindered by energy crisis seemingly coming to an end, manufacturing and agriculture wouldresumetheir respective normal pace of development and the GDP would expand rapidly.
But the State Bank of Pakistan in the outgoing week projected economic growth rate to slow down to 4-4.5% in the current fiscal year from 5.8% a year ago. The current account is still precariously positioned with exports continuing to stagnate and import growth taking its own time to decelerate. And FBR could collect only Rs. 2.07tr in taxes in July-June FY 19 showing a massive shortfall of Rs. 187bn against the target.
The SBP has in the meanwhile increased interest rates by 25bps to 10.25% as inflation hit the highest in four and a half years at 7.2% while additional burden is being added to the mountain of debt with China agreeing to provide $2.5bn in loans to boost forex reserves and the government has launched five-year dollar-denominated Diaspora bonds at an interest rate of 6.75%.
Looming large on the economic horizon is the increasing demand of oil. Pakistan can meet only 15% of its oil demand with domestic sources, and importing the rest would weigh on the federal budget. If new sources are not discovered, reserves will become stressed. One way for Pakistan to help ensure access to cheap gas resources in Central Asia would be to actively help restore peace in neighbouring Afghanistan. And of course, more foreign direct investment in exploration is necessary.
The World Economic Forum (WEF) that concluded recently at Davos estimates that Pakistan's land and water resources provide livelihoods for more than 40% of the country's labour force, through agriculture, forestry, and fishing. These resources are now facing serious, man-made environmental risks. According to the Global Climate Risk Index published by the non-profit organization Germanwatch in 2018, Pakistan ranked 7th among countries most affected by extreme weather events between 1997 and 2016 - with 0.33 deaths per 100,000 inhabitants, and losses equivalent to nearly 0.7% of the country's GDP.
WEF believes country's economic progress will be seriously impacted, if adequate response measures are not taken. Extreme weather events are only increasing in severity; in 2011, five years-worth of rainfall fell in just four weeks in the province of Sindh. Meanwhile, environmental challenges include high temperatures, water scarcity, and air pollution - potentially affecting the agriculture sector. It has been estimated that with every 1°C rise in temperature, agriculture GDP will decline by 5.1%. Higher night temperatures reduce grain yields, as do sudden air temperature increases in early spring when wheat and other winter crops are at a reproductive stage. Land desertification due to soil erosion, wind erosion, water salinity, loss of biodiversity, and poverty are all leaving agricultural land barren.
Pakistan's forest cover is decreasing by nearly 1.7% every year, and the country lost about one-third of its forest cover between 1990 and 2010. In terms of water resources, Pakistan has gone from a water surplus to being water stressed country, and soon may face water scarcity. According to non-profit organization, WaterAid's assessment in 2018 Pakistan is among the top 10 countries with the lowest levels of access to clean water close to peoples' homes, and about 21.6 million people go without. The challenges of resource depletion and stresses call for more effective governance.
And according to Sustainable Development Policy Institute's Environmental Barometer, 40% of respondents from Khyber Pakhtunkhwa province believe that their government has taken some measures to tackle these challenges, followed by 28% in Punjab, 26% in Sindh, and just 20% in Balochistan. The Pakistan Climate Change Act 2017 has provided an institutional setup for implementing the country's National Climate Change Policy 2012, and it is expected that water conservation programmes will be expanded to reduce wasteful irrigation practices - which may in turn help sustain the benefits of investment made as part of the China-Pakistan Economic Corridor.
Job creation being especially crucial for developing countries such as Pakistan, where population growth continually adds to the army of unemployed joblessness has continued to increase despite the current economic recovery.
Between the 1990s and 2016, Pakistan implemented major structural economic changes. The agriculture-related share of GDP declined to 20% from 25% during the period, and manufacturing's share dropped to 13% from 17%; meanwhile that of mining and quarrying increased to 2.9% from 0.7%, and wholesale and retail trade rose to about 19% from 16%. Still, no major shift in terms of employment contribution has been made by any major sector of economy; the distribution of employment among agriculture, industry, and services has not changed significantly in the past 10 years, reflecting a lack of genuine structural transformation from a traditional, agriculture-based economy to one based on modern industry - at least, when it comes to job creation.
The agriculture sector continues to absorb the majority of the labour force, though its share has declined over time. Meanwhile, the share of employment based in services continues to increase, while that of industry has remained flat. This highlights one of the structural weaknesses of Pakistan's economic transformation: In WEF's assessment Pakistan's economy has been moving from agriculture-based to services-based, without first consolidating its industrial sector.
This is likely one of the reasons for so much of the potentially active labour force remaining unemployed (Pakistan's unemployment rate was 6.1% as of April 2018, according to International Monetary Fund data). Manufacturing has the capacity to provide jobs for people with a broad range of skills, and can therefore potentially absorb greater numbers of workers than the service sector. The bypassing and neglect of manufacturing therefore created less room for job creation on the one hand, and weakened industrial foundations of the economy on the other.
Much needs to be done yet in order to secure the future of the textile sector, for example, related to consistency and cost of energy supply, and developing the skills needed for innovation. Most importantly, the future of the manufacturing sectors depends on how efficiently Pakistan can move towards export promotion-led growth and development.
WEF suggests that a well-organized plan for product diversification could contribute to future growth, but that requires a massive paradigm shift in terms of policy-making. The focus must be on small and medium-sized enterprises, as they have the greatest potential for job creation.