Beyond stabilisation: challenges and opportunities

The IMF board has finally approved a $7 billion package, with the first tranche already disbursed. Economic stabilization appears to be secured. However, this is neither the first IMF programme nor likely the last. What differentiates this one is that it is starting at a time when the economy has already stabilized, unlike previous instances where the IMF stepped in during full-blown crises.

Strong fiscal and monetary tightening, along with efforts to curb the growth of energy circular debt by significantly raising tariffs, has already put the economy on the IMF’s typical path. Now, the Fund’s role is mainly to provide reassurance, monitoring the continuation of macro-prudential policies to ensure other avenues of financing become available. However, this oversight may not address the chronic structural issues plaguing the economy.

The fear of default has subsided. Fiscal balance is on the path to correction, the current account is expected to turn into a surplus, inflation has dropped to single digits, and interest rates are expected to follow. The currency is likely to remain stable. Excessive taxation, coupled with falling commodity prices, supports the target of achieving a primary fiscal surplus.

All of this is positive news. Yet, the question remains: are these necessary conditions enough to steer the economy toward sustainable growth, especially when the average growth rate is declining while the young population continues to grow? Can the economy surpass 2-3 percent growth during the 37-month IMF program?

It seems unlikely. The overall business environment remains far from conducive. While the business community is optimistic, buoyed by assurances from influential circles that interest rates shall drop to single digits, the currency may appreciate slightly, and power tariffs will decrease significantly, many remain hesitant to invest.

Businesses are content with better returns on their existing assets, but they are not considering building new ones given current taxation levels and energy prices. Some argue that political instability is a major obstacle. Large corporations are also concerned about the sanctity of contracts, especially in light of the coercive renegotiation of Independent Power Producers (IPPs).

“The outcome in terms of changing contractual conditions would be the same, whether the negotiation is coercive or cooperative. However, the advantage of cooperative negotiation could be a commitment to future investment, such as buying a DISCO (distribution company),” an IPP representative noted. “Coercive measures, on the other hand, discourage the very investment the country desperately needs.”

Thus, investment remains hard to come by, making growth revival even more challenging.

In the past two decades, economic growth has heavily relied on government development spending (both provincial and federal) and a boom in real estate. These factors used to generate domestic demand and growth, which in turn led to higher imports. However, fiscal tightening is now restricting government spending, while taxation measures are making real estate less attractive. Additionally, the country cannot afford to rely on import-led growth any longer.

Although moving away from these inefficient growth models is a step in the right direction, the challenge lies in finding alternate avenues for economic activity and job creation. If domestic investors are reluctant, why would foreign investors take a risk on Pakistan?

The ultimate goal of economic stability is to foster growth and employment. The country must find a new growth model. However, it remains unclear what Pakistan’s competitive advantage is. We do not know which industry will become the next champion, nor do we know how to develop it.

There are many promises about agriculture and mining becoming engines of growth. However, the reality is far from rosy. Farmers are struggling. The removal of support prices has temporarily lowered bread (roti) prices, but next year may bring serious challenges in wheat supply. Rising sugar stocks and falling prices are also threatening the sustainability of the sugarcane crop.

Some might argue that this is an example of creative destruction—a necessary process of reallocating resources from uncompetitive businesses to more productive ones, thereby creating opportunities for new entrants and innovative business models. However, embracing creative destruction will require courage and vision from policymakers. The risks of embarking on such a course are high, but the potential rewards—such as a more competitive industrial sector, greater innovation, and higher long-term growth—make it a risk worth taking.

Copyright Business Recorder, 2024