After the unexpected IMF (International Monetary Fund) bailout, the economy is in search of regaining lost confidence. For that stability in the system is the key.
The powers that be now wish to establish SIFC (Special Investment Facilitation Council) and SWF (Sovereign Wealth Fund). The model may work for big ticket mining projects such as Reko Diq and possible privatization of PSEs (public sector enterprises), although the formation of SFW may not be in conformity with IMF’s (International Monetary Fund’s) benchmark for the SOE law.
However, in the space of agriculture, ICT and other sectors, the only viable model could be private sector driven. And for that macroeconomic stability, inclusiveness and economic competitiveness are the key factors. However, SIFC is based on cherry picking- as was the case in CPEC (China Pakistan Economic Corridor), not enough to have sustainable economic growth and upward social mobility.
The private sector has been waiting for real reforms for the past few decades. There was some hope in the early 2000s when the deregulation of banking, telecom and energy reaped some dividends; but the party was short lived. The real estate and trading boom followed, which had unleashed domestic demand and in the absence of industrial competitiveness and taxation reforms, the twin deficit problem had only worsened.
The next growth stunt was CPEC where the focus was on the infrastructure projects. Some of them were great contributions to the nation such as Thar Coal while some did not make any economic sense such as Lahore Orange line project. Then the next lifeline was due to better management of Covid economically and the windfall due to falling global prices, which gave impetus to growth.
All these have culminated in a supposedly mega crisis. Today, the issue is growing external liabilities where import dependent domestic boom, CPEC liabilities, and globally commodity prices boom unraveling after Covid all have had a role to play. The can has been kicked down the road due to the surprising IMF programme.
The fiscal imbalances have grown to the level now where the private sector’s space is hugely constrained and public sector’s inefficiencies are translating into multi-decade high interest rates and skyrocketing energy prices.
The manufacturing sector, especially export-oriented units, cannot compete with the bearing of public sector inefficiencies.
The problem is that SIFC or sort are not the answer to these. One silver ling is that this may be able to help resolve the lopsided fiscal federalism which has been created after the half-cooked 18th amendment and 7th NFC award. This may help in privatization of state-owned enterprises such as DISCOs – however, nothing of the sort is visible in the discussion, so far.
All it seems to facilitate is investment from Middle Eastern counties – mainly government to government projects, as was the case in CPEC. Some say that the private entities from Middle Eastern companies are interested in some projects.
But that may be like Chinese private companies investing under the CPEC where the push was from the Chinese government to invest, and sovereign guarantees were offered by the government of Pakistan to comfort them. A similar mechanism may follow here.
In the midst, the private sector is dealing with loads of new taxes, including super tax and implied wealth tax. The formal sector struggles to survive. The salaried class continues to deal with erosion of disposable income through unprecedented inflation and growing taxes while the informal business community keeps on enjoying the inherent impunity.
None of the big private players have shown any confidence in the new mechanism. There is no change in the zest of educating the working class to leave the country for a better future. And without correcting these, the country cannot move up the ladder of growth.
The key is to stop the outflow of capital – human and financial, from the country. The key is to attract foreign investment led by the private sector. However, the way dividends and royalties of existing foreign investors are stuck, no one is willing to invest anymore.
If history is anything to go by, the success of projects in Pakistan are those which are led by the private sector. It was Syed Baber Ali who brought companies such as Nestle and Tetra Pak to Pakistan. In auto sector, the most successful company Toyota has a vibrant local company Indus as a partner when others failed, even when the sector received duty protection and the support. And there are many other examples.
The local group’s leanings can give the right impetus to the foreign player while technology transfer and capital injection by foreign partners brings right synergies.
However, selling companies to foreign government owned companies is not that great. One example is PTCL that has lost its market dominance and profitability after the acquisition of Etisalat while companies such as Mobilink thrived.
Thus, SIFC and SWF are good steps in their own space; these are not the answers to the economic woes the country is facing. The key push may come in mining where the real juice of supposedly $6.1 trillion reserves is in Thar Coal where the ball is already rolling.
The investment by the Saudis and others in agriculture are mainly for their own food security and may help in fetching export dollars for Pakistan and technology transfer. However, the risk of the world’s fifth largest population’s own food security needs to be kept in mind.
The refinery project is not that exciting. This may be able to save some dollars of refining cost (as crude must be imported); but its viability is questionable given the refining glut in the Middle East and global shift towards renewable energy sources. No wonder the project is in the pipeline since the Musharraf time, and nothing is on that front so far.
The real gain from any authority or a technocrat government would be to reduce the size of the government, as some have rightly pointed out that two-third of federal and provincial government employees are redundant.
The key is to right-size the government, have the taxation reforms, reduce the inefficiencies in the energy and other sectors to pave way for the private sector to capitalize on the country’s real potential. Short of that, any formula is short lived, and the lifelines are diminishing.
Copyright Business Recorder, 2023