Global economic prospects and Pakistan

The United Nations Department of Economic and Social Affairs (UN DESA), along with some other related departments of the United Nations (UN) recently launched their flagship report 'World Economic Situation and Prospects 2020'. According to the Secretary-General of United Nations, António Guterres, the report "warns that economic risks remain strong, aggravated by deepening political polarization and increasing scepticism about the benefits of multilateralism. These risks could inflict severe and long-lasting damage on development prospects. They also threaten to encourage a further rise in inward-looking policies, at a point when global cooperation is paramount."

Moreover, the report explores implications of climate change and global warming, and recommends moving towards a cleaner mix of energy. In this regard, the Secretary-General emphasizes that "to live in shared prosperity within the capacity of our planet to support us, we must move away from carbon and resource-intensive industries, materials and value chains. We must instead prioritize sustainable consumption and production - a way of life that enables economic growth, while ensuring planetary protection."

South Asia, according to the report, showed weak growth at 3.3 percent during 2019, where growth rate in India slowed down to 5.5 percent (from 6.8 percent in 2018), while in Pakistan growth remained paltry at 3.3 percent in both 2018 and 2019. Having said that during the same time period, Bangladesh posted a very strong growth, whereby it stood at 7.9 percent in 2018, and 8.1 percent in 2019, primarily on the back of strong export returns in overall textiles and garment industry, and within it apparel and knitwear.

Indeed, there are lessons for Pakistan to learn from Bangladesh to boost its own textiles industry, and channel it to strengthen its position of export earnings. Enhancement in exports is indeed important for the much-needed build-up of foreign exchange reserves. Employing high policy rate to boost them somewhat through risky portfolio investment is not a good strategy. A tight monetary policy stance for so long has badly hurt growth and produced little or no results in terms of lowering food inflation. Narrowing down of current account deficit through rising exports will also help keep the currency appreciate in a sustainably and more reliable way than through portfolio investment or 'hot money', and would also create room for investors to make imports.

With regard to South Asia overall, the report highlights that "economic growth took a hit in much of South Asia in 2019 as the impact of the global economic slowdown was compounded by country-specific crises. The countries of South Asia have faced a combination of rising food prices, oil price fluctuations and domestic constraints; however, inflation figures and the associated monetary policy responses have been divergent across the region. Thanks to slow growth in both fuel and food prices, inflationary pressures have eased somewhat in many parts of the region, with rates dropping below target levels in India and Sri Lanka."

Here, specifically with regard to Pakistan, it is pointed out "the State Bank of Pakistan is balancing a stronger commitment to inflation targeting with a managed depreciation of the currency, but this is complicated by increases in energy tariffs that have been imposed as part of the fiscal reform package. While the tightened monetary policy in Pakistan is expected to help move inflation towards target levels in the years to come, the country's inflation remains extremely vulnerable to fuel price fluctuations and weather conditions, as is the case for most countries in the region. A good harvest and resulting moderate food price inflation will be of critical importance for the region's poor, whose household budgets are strongly linked to food prices."

The observation is a partly worrying because Pakistan is a developing country where inflation is at least equally a fiscal/governance-related phenomenon and not just monetary.

The other missing link in the Report, is to draw due attention to the lack of focus of policy to improve the institutional capacity of the country, and not just structural changes in certain areas of monetary and fiscal/governance-related policy. Without institutional improvement the overall right kind of environment could not be provided that a) reduces information asymmetries; and b) lower transaction costs, which remain important pillars in boosting aggregate supply in the economy, on the back of reduced cost of doing business, and reaching better price signals in real and financial markets.

Within the real sector of the economy, and specifically the labour market of Pakistan, the report highlights that among lower-middle income countries, Pakistan had the highest gender pay gaps - "typically estimated as the percentage difference in pay between men and women" - in most recent years, at 36.3 percent (hourly-wages basis) and 43.8 percent (monthly-earnings basis). This indicates the high pay inequality in Pakistan between men and women, unlike a very low level of Bangladesh (in the same group), which stood at -4.7 percent (hourly-wages basis; indicating a rather pay bias against men) and 2.2 percent (monthly-earnings basis). Moreover, another aspect highlighted about the labour market by the report is that "in South Asia, a third of the youth in Afghanistan, Bangladesh, Pakistan and Sri Lanka are not in education, employment or training (NEET), and in India the rate is over 40 percent."

With regard to the need to moving towards cleaner mix of energy, the report points out that globally "coal remains the world's largest source of power, accounting for 38 per cent of the global electricity supply in 2018. Global coal-fired capacity has nearly doubled since 2000, despite an acceleration in the pace of decommissioning and the cancellation of 1,034 planned or announced projects since 2015. Several countries are still involved in the construction of new coal-fired power plants which have a life expectancy of up to 75 years (Rode, Fischbeck and Páez, 2017). This demonstrates a persistent lack of recognition of the urgency of transitioning towards clean energy, encouraging financial investment in plants that are likely to become stranded long before the end of their technical life."

Moreover, it indicates that Pakistan stood at eighth position among the countries in terms of "proposed and new coal plants in 2019" where this figure stood at 660 coal plants. One wonders then the policy loophole in the environment policy of Pakistan, both traditionally and currently in the shape of 'Clean and Green Pakistan', when the growth in coal power plants is not placed on any meaningful diminishing path, and when there is so little focus on improving railways to move considerably towards a more environment-friendly transportation.

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)

He tweets @omerjaved7