PTI’s second innings: overcast conditions?

Prime minister Imran Khan has started the second innings of his 5-year term with a new zest. A clear message has been sent to the new economic team in the first meeting of Economic Advisory Council (EAC). Only out of the box solutions are warranted. PM’s message is clear and loud – he has had enough of the stabilization measures, now is the time to focus not only on growth but sustainable growth.

In the first half of the term, the austerity policies have been adopted. The International Monetary Fund (IMF) programme was frontloaded. High inflation and low growth are tough for the masses. People of Pakistan cannot afford more burden of indirect taxes nor do they have the capacity to absorb the inefficiencies of the system. This method simply cannot continue.

The focus should now be on economic growth. Short stint of growth is not enough. The country’s long-term structural growth is on a secular decline. Last ten years’ (2011-20) 5-year CAGR (compound annual growth rate) averaged at 3.7 percent. CAGR average was 4.8 percent in the previous ten years (2001-10) and 4.7 percent during 1991-2000. A growth of 4-5 percent for 2-3 years (like the case was during 2016-18) that is followed by an inevitable crisis is no longer desired.

The geometric mean of GDP growth must lift up. The first question is how to bring down the fiscal deficit without imposing new taxes. The second question is how to curb the circular debt without increasing the electricity tariff further. And lastly, how to raise millions of households out of poverty.

The one-stop solution to all the woes is to lift economic growth. The debt burden will become irrelevant once the economy starts growing on a sustainable basis. The fiscal deficit would automatically come under control as high economic growth would lead to higher growth in tax revenues. The energy consumption shall grow with increased economic activity momentum and that would partially solve the growing capacity payment problem by lowering the capacity payment per unit of consumption.

First thing is to convince the IMF on this strategy. The IMF wants the fiscal deficit to come under control and circular debt to be curbed. For that the easier solution is to impose new taxes and to increase the energy tariffs. However, that will suppress the growth potential further. As Covid-19’s ongoing wave is becoming dangerous in the region, the government should buy some more time from the IMF to work on an alternate plan.

The focus is required to move up the ladder slowly. The first step should be to reach four percent growth and slowly to move up to 5-6 percent by carefully evaluating the external account situation. The only silver lining right now is controlled external account. Current account is showing a surplus of one billion dollars in the last nine months at a time when the manufacturing growth is showing some signs of recovery. Roshan Digital Account (RDA) is a new avenue – one billion dollars came in eight months and counting.

The country’s reserves are up to $23.2 billion – about to reach an all- time high. The forward liabilities of State Bank of Pakistan (SBP) are almost halved (reduced by $3.7 billion) in the last two years. The reserves shall move to $30 billion in the next year and $40 billion or so in the next few years. That is to create a buffer for cyclical stocks. The government does not have buffer to go all guns blazing right now.

The need is to work on unlocking the formula of high and sustainable growth. It seems that FM, cabinet or EAC do not have it ready. All the efforts are required to work on it. Lowering real interest rates further in negative is not a solution. The problem is access to credit. The private sector credit to GDP is at 16 percent – around a one-third for India and Bangladesh. The space is to be created by lowering fiscal deficit, not interest rates. And that to bring down rates itself – but will take its sweet time.

Any interest rate decline can lift consumption drive; but soon would be followed by another balance of payment crisis. This may boost construction sector – already growing. But housing finance is for long term. If rates move up in a few years, this will create a bigger crisis. The country cannot rely on construction for long-term sustainable growth. It is a cyclical boom. The jobs are created at the time of housing construction and a dead asset thereafter. It cannot be the engine of growth. Though, it is an effective tool to set off momentum.

The industrial sector should perform. It has received a decent chunk of cheap financing for expansion under the TERF scheme. Let’s see how much exports buildup takes place and how much import substitution takes place. The country needs big ticket investment. Big groups are cash rich. Lucky Group did an all-equity investment ($150-200mn) in automobile sector recently and has already become third biggest player in the market and is making good profits.

One mega project investment is in sight. Engro is in advanced planning stages of circa billion-dollar investment in polypropylene manufacturing facility. The board has approved $31 million for a bankable feasibility. Last time such scale private investment (apart from IPPs) came in 2000s when two big fertilizer plants were installed one each by Engro and Fatima Group. The country needs more of such investment activity. The foreign investment should pump in. The local groups need to do joint ventures with global experts in manufacturing. FDI has to come in the country to finance future current account slippages.

The weakest link is agriculture. The competitive advantage of the country is in agriculture. Unfortunately, the sector is underperforming. The yields are falling. The problem is known to all. It is poor seed quality, adulterated pesticides, and unavailability of credit to 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 are required to be explored. New crops should be experimented with.

Lately, the ICT sector is doing good. Exports are picking up despite no contribution from the government. The need is to have better human resource availability to tap the potential. Human resource quality in any sector is low in Pakistan. The workmanship is poor. A massive investment is required with patience to improve it. That is for the long haul for which there will be no shortcuts.

Copyright Business Recorder, 2021