Economy at crossroads - I

As appropriately indicated in the Economic Reform Package announced on January 23, 2019 Pakistan's economy is at the crossroads for a 'change' in policy paradigm. In the recently enacted Economic Package, a direction towards increase in domestic savings and investment, industrialization, import substitution and employment has been envisioned. This writer fully endorses this approach. People may have varied views on it and the expected and estimated outcome that will emerge from it. However, in this writer's view, correctness of this approach cannot be appropriately determined unless there is primary understanding of certain fundamental economic directions Pakistan had adopted in 'post-1990' period that is termed as era of 'Deregulation of Economy' which was presumably made to give adequate space to the private sector.
On the basis of review of certain economic policies adopted since 1992, this writer has reached to the conclusion that now, in 2019, time is ripe to review many vital economic policies adopted in the past. It is not a matter of choice. We have very few and limited options. We cannot ignore that as at June 30, 2018 we had a current account deficit of USD 39 billion with an economy size of under USD 350 billion. Certain conclusions, and resultantly, decisions derived therefrom would have to be made inevitably and any procrastination on the matter of reforming the policies adopted prior to June 30, 2018 will be suicidal for the national economy.
There is a need to review certain ground realities of our economy with appropriate understanding of relevant facts instead of generally used rhetoric in the media as well as some unreliable data in the economy.
Discussions in the following paragraphs deal with four independent but indirectly related aspects of the economy being (i) banking; (ii) foreign exchange regulation; (iii) foreign direct investment; and (iv) fiscal (tax and tariff) policies. All these relevant segments of the economy have undergone a major transition (generally termed as 'deregulation' or 'reforms') in the 1990s. The results of these changes have matured over time in almost thirty years and now in 2019, with a new government in power, it is the appropriate time to have a catharsis of the obtaining situation in order to decide the future course of action. In summary, as will be described in detail in the following paragraphs, desired results commensurate with socio-economic environment have not been achieved adopted between 1990 to 2018.
Pakistan, India, China, Bangladesh and many other developing countries started the policy of liberalization or deregulation of economy in early 1990s. This was a natural process after almost fifty years of the end of the Second World War and fall of controlled economic regime in the then USSR. In almost all the developing countries that inherited a colonial structure from their former imperial masters, generally referred to as 'British Raj', inevitable changes were made in the policy framework with respect to banking, foreign exchange, foreign direct investment and tax and tariff systems. It is also important to note that during this period the mantra of the WTO was also vigorously adopted by most of the developing world especially Pakistan, without realizing that protective regimes continued, as desired, in some sectors in the US and the EU if it suited their domestic needs. This is a separate but related debate.
If we compare the differences in approach and the results achieved then following features emerge as pertinent points to ponder in determining the future direction of our economy:
• Banking
China and India refrained from complete 'privatization' of commercial banking sector and major commercial banks remained in the control and management of government. In other words, in both the countries around over 80 percent of private sector credit availability is managed by the Government. In Pakistan, except for 'one' major bank, namely National Bank of Pakistan, the entire banking sector was privatised. The private sector credit availability was designed to be determined by market forces without any intervention of the Government;
• Foreign Exchange
In China and India, foreign exchange movements without central banks' specific approval were not allowed for 'individuals' whereas relaxations were provided for 'companies' in this field. In Pakistan, under the Protection of Economic Reform Act, 1992 read with the Foreign Currency Accounts (Protection) Ordinance, 2001 complete relaxation was provided to 'individuals' only. 'Companies', though being relatively better documented were discriminated and were not allowed to avail the benefit of deregulated regime;
• Foreign Ownership
One hundred percent ownership in Chinese and Indian companies was not allowed in almost all sectors of their economy. Even in the areas where foreign investment without specific approval was permitted, foreign shareholding was generally limited to less than 50 percent. In Pakistan, 100 percent foreign ownership was allowed in almost all the sectors except few services.
• Tax and Tariff
In Pakistan, there was almost complete compliance to the WTO prescription reducing duties even on finished goods. In other countries this policy was restrictively applied. In Pakistan's case cascading in duty structure for raw materials, intermediaries and finished goods was not adopted in an equitable manner in all cases, which was detrimental to local manufacturing industry.
There cannot be any definitive view on the appropriateness of the policies adopted by Pakistan in the 1990s as the circumstances prevalent, at that time, were different and people who took those decisions may have had their own reasons for their actions. However without prejudice to the same, in almost all the sectors, constructive pro-Pakistan results were not there which should have been in line with objectives of sustainable economic development of Pakistan, even if the actions taken were deemed to be appropriate at that time.
In this perspective, the purpose of the catharsis in this article is to ascertain the accuracy of results of the adopted policies in the present state of the economy and if required, undertake corrective steps suited to our national economic requirements. In the author's view, the 'Economic Package' is and the upcoming budget 2019-2020 should be reflective of that approach. The purpose of this article is not to criticize the past but to seek guidance for the future course of action in a correct and well informed manner.
• Banking
The subject of a completely privatized banking sector in a developing country is a difficult sphere for any developmental economist, however, there is no definite answer to this question. It is an undeniable fact that Chinese and Indian banks are beset, at present, with huge challenges because of accumulation of irrecoverable debts and a large junk of bad debts on this account will ultimately be borne by the national exchequer. As against that, there is no such challenge in Pakistan.
On the other hand, it is also a fact that Indian and Chinese banks have channelized personal savings in more productive manner than Pakistan. Nevertheless there can be long list of arguments on this subject. In the 'Economic Package' announced on January 23, 2019 special concessions have been allowed for the banks, through tax regimes for loans to small and medium sector industrial units. This action clearly reflects the acceptability of an unwelcome reality that notwithstanding the advantages acquired through privatisation, the banking sector has not been able to achieve the desired role of channelizing savings in accordance with larger economic interest, especially financing of the manufacturing sector on medium and long-term basis.
The other reason behind lack of credit availability is constant fiscal deficit of the governments that became a risk-free borrower in the form of sovereign debt, to meet their financial needs. This vicious circle has kept the privatised banks away from private sector lending for some obvious commercial reasons.
(To be continued tomorrow)