A lot needs to be done
Thanks the lobbying by the business community led by APTMA and a perceived reduction in inflation, the State Bank has cut the key policy rate from 12 percent to 10.5 percent. A section of the business community has called it the first step towards the revival of industry in Pakistan. It is often maintained that what is needed for new industrial activity and stimulus growth to generate employment is to bring the rate down to 7.5 percent. This still looks like a pie in the sky.
While cutting the policy rate is welcome it remains to be seen whether the SBP will be able to retain it at its new level, let alone further reduce it. The deceleration in inflation has been caused by uncertain factors rather than any perceived strength of the economy. The increase in production for instance is mainly due to an unanticipated fall in international oil prices in May and June and a major reduction in the administered prices of gas in early July. What is needed for industrial activity to pick up is to ensure the regular supply of electricity and gas. There is no sign yet of the government being able to do this.
Despite the importance of the measure taken by the SBP, the policy rate factor is by no means the only one responsible for slow growth and downturn in investment. Besides the looming energy crisis, weak fiscal fundamentals remain the major reasons behind high inflation and low growth. Failure to improve governance is another hurdle. Fiscal discipline requires the government to restrict its borrowings which it has so far failed to do despite legal restrictions. A high incidence of corruption also acts as a deterrent for foreign investment. The tax-to-GDP ratio has registered an increase during the current financial year but the overall ratio still remains abysmally low. This underlines the need for agricultural incomes to be brought under the net and to duly tax whatever other privileged sections of earners still enjoy exemptions. The hidden cost of business in Pakistan which is said to be one of the highest in the world for industry needs to be reduced.
Non economic factors that bring down growth include unwise political decisions that have delayed the resolution of disputes with the US and continue to retard the development of Pakistan-India economic ties. The unending confrontation between the judiciary and the government creates uncertainty and inhibits the investors. The government, military and judiciary have to work together to create the stability needed for growth.