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Economy - What is wrong!

20 January, 2011

By Dr Kamal Monnoo


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All too frequently Pakistan’s industrial centres are plagued by long power outages and longer and continuous (five days a week at present) gas cuts. Factories stop running; workers (estimated 60 percent of the country’s workforce is paid on a daily output basis) get jobless; and life even in the posh food streets of Lahore splutters to a halt as the restaurants’ stoves go cold. Back in the 60s and the early 70s many had thought that ours, then a fast developing country, would serve as a role model of the region, where an obsolete India and an unmotivated China would struggle, as Pakistan would keep marching ahead with its high growth rate and rapidly increasing industrial productivity.

Ironically, half a century down the road and in the advent of a new millennium, the reverse happens to be true. In spite of possessing a huge potential and one of the finest economic brains in the world, the Pakistani economy is now straining and often failing to keep up with any of the targets associated with it, be they be of growth or revenue collection or fiscal deficit. Inflation is rising: The budget is repeatedly in deficit; the currency is falling (has approximately lost 35 percent in the last three years); and its people, always struggling to meet their kitchen expenses, have become devoid of any real propensity to ‘save’. The household savings rate, next to Bhutan, is the lowest amongst SAARC nations.

The economy seems to be at a crossroads where decisive action is called for, but is unlikely to be taken by the present managers. In addition, as a misfiring economy, the list of problems includes official corruption, unrestrained land grabs, gross nepotism in key appointments, environmental damage and, as ever, a lack of political transparency. Little change in policy is expected, not even in personnel; at best, there could be a polite game of musical chairs at the top. Earlier, hopes that a cohort of reform-minded, democratically elected leaders might learn from the mistakes of the previous, autocratic decision makers have now been dashed - more and more, a case of old wine in a new bottle!

The list of poorly governed state-owned iconic institutions grows longer by the day: From the Steel Mills to the national airline to the State Oil company (once a strong Fortune 500 corporation) to the monopolistic Railways - across the border, the Indian Railways not only makes a healthy profit, but also provides one of the cheapest facilities for cargo as well as passenger services - to the national insurance corporation, the deeds of which can easily put the now infamous AIG to shame. Instead of any meaningful endeavours on the part of the government to resurrect these institutions and make them play their due role in kick-starting the recovery process, the easy or perhaps dubious option of privatisation is being advocated.

Meanwhile, the government is blowing its budget. The fiscal deficit is running amok, and it is feared that unless arrested quickly, it is likely to touch the 8-9 percent mark. And all this is still not stopping the government from borrowing from the central bank, which at the end of the day is left with little option, but to run its printing press overtime - a phenomenon that in turn is putting serious pressure on the value of the Pak Rupee, which sceptics say may erode to 100 a dollar before the end of the year.

The country now also runs big trade and current account deficits, as it relies too heavily on exporting low-value stuff and is a net importer of oil and luxury items. These deficits are invariably adding to inflation, which even by conservative estimates is close to 15 percent (excluding food items) and is likely to exacerbate. The government has pledged to change all this and improve all these gloomy figures within the remaining two years of its tenure, but the big question is: What is it that it intends doing or rather what is it that it can really do to pull out the economy from this quagmire?

For starters, upon viewing the present global economic scenario one feels that a change in the mindset of both the guiding intellectuals and the decision makers is now overdue. The mad pursuit on the part of Pakistan of pushing too strongly on free-market policies needs to markedly slow down, at least for the time being. One has to take into account how the rest of the world has begun to depart from the idealised ways of neoclassical economic theories. Also, the foolish oscillation from one extreme to the other on the direction of foreign donor elements should stop and a middle course has to be steered. Inflation, especially in low monetised developing economies like ours, cannot simply be tamed through monetary tightening. China and India have in recent months set examples on how to control inflation using additional measures relating to structural corrections. India, for example, is aggressively tackling its food inflation issues by resolving the issues of land restrictions, archaic retail networks and bad infrastructure. As a quick fix, the Indian government has recently announced the scrapping of import taxes on essentials, banning their exports, ordering low-priced sales at government-run shops and using the long arm of the law to break cartels, black marketeering and hoarding.

With global commodity prices booming and cotton being the best performer of 2010, Pakistan happens to be sitting on an opportunity of a lifetime. The Prime Minister is right in declaring 2011 as the Year of Exports. If somehow he can put his words into action by resolving the power and energy issues of the industry, the rest will take care of itself. Only three years back, the country recorded an export landmark $17 billion in textiles alone at a time when cotton prices were around Rs3,500. Today, with cotton (local and international) prices already reaching a high of Rs10,500 and a world market in the grip of a high cotton textiles’ demand cycle, one can well calculate the scope of textile exports. Add to this, the ever-increasing home remittances and the economy looks to be in a good position to even post a current account surplus provided a lid can be maintained on the imports (currently around $37 billion). Oil (fuel and edible), forming the largest chunk of imports, needs to be hedged immediately to avoid a repeat of the 2007-08 disaster.

Finally, given the low economic base and an exploding population, we simply cannot afford to not grow at a healthy pace. While a growth of 3.60 percent is hailed as a miraculous feat for Germany, for Pakistan anything less than 7 percent is inadequate. In fact most economists believe that if it takes any longer to achieve this minimally required target, the benchmark may need to be revised higher in order to play catch-up. However, given the present state of shoddy governance this seems to be a tall order. We must remember that chasing growth rates of 7 percent or higher without commensurate structural changes will only generate an even gloomier outlook.

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