Impediments to growth

Addressing the Institute of Business Administration, Advisor to the Prime Minister on Finance, Dr Hafeez Sheikh, identified three challenges to the economy that are impeding growth: human development, reaching world markets and proper government policymaking. These challenges have unfortunately been apparent for decades and in spite of pledges to resolve these longstanding issues, no government, military or civilian, has made any appreciable inroads into resolving them.

The human development issue relates to education and Prime Minister Imran Khan has repeatedly pledged to focus on this deficient sector; however, the pledge remains unfulfilled because of the government's overarching objective to reduce the budget deficit in the first quarter (July-September) through: (i) disbursement of only 8.8 percent of the budgeted outlay to the federal Public Sector Development Programme; and (ii) requiring a provincial surplus of 202 billion rupees (contributed by all four provinces) leading to a containment of provincial outlay on education.

The Pakistani exports, the most desired form of earning foreign exchange apart from remittances and tourism, are not rising because the country continues to export its surplus (rice, raw cotton, textiles) instead of developing a production base focused on exports. In addition, government policy in general, and that of the current economic team leaders in particular accounts for an environment that is not conducive to increasing exports in spite of a continued undervalued rupee that, economic theory dictates, would raise exports as they become cheaper internationally. China as a case in point was accused by previous United States administrations of keeping its currency undervalued as a means to increase its export competitiveness in the world market and consequently they focused on yuan's appreciation; in contrast, the Trump administration is engaged in negotiating tariff and non-tariff barriers to trade with China.

The Pakistani rupee is undervalued to the tune of 5.5 percent as per SBP data which should have encouraged our exports, however, this rate implies higher rupee cost of imported raw materials and semi-finished products that is also contributing to input costs higher than the world market average. Utility tariffs, particularly the power sector tariffs, are yet another constraint on the exporters facing fierce competition internationally. These factors account for a minimal rise in exports, to the tune of 300 to 400 million dollars, with the bulk of this raise attributed to higher rice exports to China which is a one off raise.

SBP's discount rate of 13.25 percent is an impediment to productive sectors, including exporters who are facing capital borrowing costs that are rendering them uncompetitive in the world marketplace. Added to this is the refunds issue which the government is constrained to resolve due to its implications on the budget deficit - a constraint that would assume greater relevance as the budget deficit widens during the rest of the year.

The agreement signed by the government with the International Monetary Fund envisages a growth rate of 2.4 percent for the current year, a rate that was cited in the budget for 2019-20 even though Dr Sheikh has, in response to severe criticism, begun to project a growth rate of around 3 percent for the current year, an assessment that is neither backed by appropriate data nor backed by any credible rationale provided by him. And sadly, the low rate is projected for the entire IMF programme period with a scheduled end in September 2022.