While issues of sovereign debt default and stagnating growth dominate international economic headlines, our concerns in Pakistan are more related to increasing poverty, high youth unemployment, and stagnating economy. Falling investment and the inability of government policies to attract and facilitate both domestic and foreign investors is alarming. Considering our struggle with extremism and terrorism, low growth rate, and the large army of educated youth joining the unemployed every year is a toxic mixture. Thus the significance of stimulating private sector investment, creating jobs and lowering poverty, cannot be emphasised enough.
As things stand, foreign investors are unlikely to seriously consider Pakistan till the domestic sector is seen investing and expanding. Therefore, official policies must end the domestic private sector’s shyness and its unfair marginalisation. But before any such measures are taken, it is of vital importance to sort out issues without which progress is not possible. There are at least four major hindrances to potential investors.
First, energy independence is critical in the medium term and management of electricity and gas load shedding in the short term. Without adequate energy, it is apparent that our production efficiency has been severely compromised. It is almost impossible for the full utilisation of existing manufacturing capacity. While the Faisalabad textile cluster is getting three to four days gas and other industrial clusters face similar bottlenecks, there can be no question of further capacity building till this matter is solved.
It does not help that despite repeated assurances, we have yet to see any credible steps on part of the government to improve its management of the power sector, a discouraging signal for domestic and foreign investors studying opportunities arising from Pakistan’s excellent demographics and markets. Despite our generation capacity of 22-23,000MW, we continue to produce only between 12-14,000 MW electricity. The cost of production is not recoverable from customers leading to the circular-debt issue that continues to remains unresolved. Also, numerous institutions and regions do not pay their bills and become a tremendous strain on energy finances. While it is physically impossible to collect bills in parts of FATA, it is incomprehensible why Karachi and parts of Sindh, Balochistan and southern Punjab are riddled with non-payment problems. These unnecessary leakages and theft must stop.
Also it is clear that power is becoming extremely expensive and we need to induct fifteen times cheaper hydel power over the next five to 10 years to get a competitive advantage for our industry and agriculture. Things have come to a point that the country’s economic managers must frame targeted energy policies to remove bottlenecks that discourage investment. The ministry of natural resources should also address the issue of declining natural gas output very seriously. Improper management has resulted in production falling well behind rising demand. This demand gap must be bridged by ensuring adequate supply lines. The Iran-Pakistan pipeline, (even though extremely expensive) is behind schedule. While these supply lines are built, dormant fields should be tapped to meet medium term demand.
Second, the time has come for the government to correct its image of poor governance and corruption. It must take steps that will reflect serious political resolve and send right signals to investors. The Karachi mayhem is worse than the war on terror. If we cannot have peace in Karachi that is the commercial and financial hub of the country we can kiss any investment goodbye. Maintaining order in our major urban areas is critical for our survival.
Further deregulation and liberalisation of the economy is a must, accompanied with a clamp down on corruption. Aim should be to strengthen the role of the market in pricing and allocation decisions. Deregulating decision-making to the markets will reduce the government’s over imposing presence that often comes across as anti-private sector. The finance minister, a privatisation expert, has even stopped talking about privatisation in an era where loss-making public sector enterprises are frittering away our budgetary resources that could have been better spent on direly needed social sectors.
The next most important factor for investment is infrastructural up gradation. It has become all too apparent in recent years that the government simply does not have enough fiscal space to address infrastructural needs. The development budget is invariably diverted to fund non-development expenditure, and capital requirements for dams, logistics, special economic zones, health care, education and urban and rural infrastructure are overlooked as a matter of routine. East Asia and India present a good example of public-private partnerships (PPP) for such infrastructure development. We cannot afford to fall too far behind contemporary emerging economies, who provide much better infrastructure facilities compared to us. We should aim for around three per cent of GDP as expenditures under PPP.
Finally, our monetary outlook is not conducive to private investment. The interest rate regime, among the most hawkish in the world, has proved counter productive. Inflation has not been arrested and growth remains chronically low. The low growth rate has pushed up our debt servicing burden. Also, our debt has grown to frightening proportions, having more than doubled since ’07. This requires that we become extremely cautious on the expenditure side and contain the fiscal deficit to a targeted four per cent while relaxing the monetary side. We need to inject sufficient liquidity to bring interest rates into single digits over the next fiscal year. This will help to kick start the dormant economy, spur investment, boost output and generate employment. Inflation, which is currently driven by oil and commodity prices, will come down only when global prices for commodities will stabilise and come down. There are already signs that energy prices may remain stable for the next six months.
With proper vision and leadership, we can move in the same league of economies as Brazil, India, China, Russia, etc. In 2006 a leading investment bank in the world had said, ‘Dump India buy Pakistan.’ Despite terrorism, Fiscal year 2007 was our best year as far as foreign and domestic investment was concerned. We got over $8 billion of foreign investment and signed the biggest investment MOU for a five billion refinery investment at khalifa point in that year. We can still do it, provided we get our act together and remain connected with the world.
The writer is a former finance minister