Competitiveness & Budget

By
Dr Kamal Monnoo
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73
184

Budget is to be announced on June 3rd, 2016, and the pre-budget rhetoric we hear from the Finance Minister is that Pakistani economy is doing well and since his recipes are working, he plans to do more of the same. This in itself is a very dangerous trend because if you convince yourself on something even if it is wrong, you end up under a compulsion to persevere, only if to pander to your misplaced conception, in the process continuing to repeat the same mistakes! And this is exactly the self-trap Mr. Dar may be falling into, because the reality is that Pakistan’s economic engine is broke. The likes of IMF, World Bank etc may toe-chain our motorcar for short intervals or foreign boons in shape of aid, remittances, low oil prices, etc may push it for a few more meters, but unless the engine itself is fixed and starts to run again it (economy) is going nowhere! Pak economy today has simply lost its competitiveness. Meaning it is not economically viable or internationally competitive to produce anything here: agriculture or manufacturing.

 

The farmers are struggling because given the cost of their inputs, whatever they produce, can be imported at much cheaper rates and that too of a superior quality. For example, in wheat the international field/farm prices come out almost 40% cheaper than the home support price (i.e. roughly 800/40 kg as against 1300 locally), Rice around 30-35%, Sugarcane about 45% (including yield advantage) and Cotton between 10-15% (after accounting for staple & recovery differences in imported cotton). In fact there is serious concern that owing to a loss making season last year the farmers this year were quite reluctant to grow cotton and we may very well see another serious reduction in crop size – this time due to a reduced cultivated acreage – on what can easily be termed Pakistan’s most lucrative crop. Skewed agriculture policies coupled with highly questionable seed supplies saw Punjab’s cotton crop drop by nearly one third in 2015-16, also losing the quality level traditionally associated with it. On the other hand, India, which till 2002-03 was producing less cotton than Pakistan has not only upped quality but is also on course to surpass an annual production of 38 million bales, nearly 3 times our size. The loss of agriculture competitiveness doesn’t end here: Across the border the Indian farmer produces horticulture at nearly 50% the cost of its counterpart in Pakistan and seasonal fruits on average leave 30% cheaper coming out from the orchards. Similarly, our industrial competitiveness is faring no better. Textiles, the only stand alone internationally competitive industry that Pakistan has produced is struggling and losing export sales @ nearly 15% per annum. And this not because textile entrepreneurs have suddenly lost their way in management, but the decline is largely courtesy the government. In a post 2008 global environment where governments are actively supporting home manufacturing to drive growth and job creation, we on the contrary are busy killing our local industry through a series of on-going follies: unrealistic energy tariffs: high duties and taxes; excessive bureaucratic oversight and red tape; lack of long overdue labour and investment reforms; too many and at places needless compliances; absence of standards’ harmonisation; unchecked corruption; compromised regulating bodies; draconian revenue collection laws; ill conceived trade agreements; the list is endless.

If this budget is to be meaningful then any delusions about “all is good” have to be done away with. Agreed that the government’s defence of its economic performance carries some weight but the trouble with its arguments is that it looks at gains selectively when they need to be assessed on an aggregate basis. For example, it claims that LSM (Large Scale Manufacturing) sector recorded a healthy (period on period) growth of 6.75 percent in March 2016 and 4.70 percent during the nine months (July 15 to March 16), and if this trend continues the GDP growth in 2016-17 may surpass 5%. Major gains coming from: Automobiles sector grew by 23.43%, Fertiliser by 15.92%, Cement by 10.41%, Caustic Soda by 26.85%, and Air-conditioners by 18.40%. However, the problems it fails to see are: First, the composition of our present LSM growth thrives at the expense of the SME (small and medium sized enterprises) sector – the real engine of employment generation and equitable distribution – and second, that almost all the above LSM operations are currently flourishing either on rent-seeking or due to cartelisation. None of these has the ability to complete internationally, is unable to export on its own merit unless subsidised by the government (electronics, motorcycles and automobiles are predominantly import and assembly operations), and will fall like a house of cards the moment competition from abroad is allowed to freely enter.

 

So, how to fix Pakistan’s competitiveness? To start with any facilitation, subsidy or relief, where required, should be given in a manner that ultimately reaches the end consumer. For example, in case of agriculture the farmer should be directly engaged to bring his cost of production down by providing inputs at lower costs through direct grants. No point in setting artificial support prices that in the overall context tend to be inflationary, revenue drainers, favour the middle-men, leave a lot of gray operating areas for rent-seekers and in effect hurt competitiveness.  Second, our power policy is deeply flawed. New plants and enhanced capacity (with or without CPEC) is very welcome, but what we really need to ensure is that power is produced at internationally competitive rates. No point producing power, which either down the road will just not be affordable or simply render the national industry unviable. For example, new coal deals are being negotiated by countries @ 5 US cents per unit whereas we are guaranteeing 8-9 cents to our Chinese and Middle Eastern investors and likewise new solar deals are being struck @ 4 cents per unit while we know that we set up the Jinnah Solar Park @ 12 cents. Further, 3 years have gone by and reforms in the power sector are still missing? Open secret that if reforms today are undertaken without simultaneously improving corporate governance in state’s power sector, government producers will simply go out of business. And who is paying for this? Answer: ‘Competitiveness’. Third, the government public fuel pricing strategy has been imprudent. We must remember that for most Asian persons, oil windfall never appeared. Governments cleverly used the advantage to provide cheap energy to its industry, in-turn promoting industrial competitiveness, exports and employment generation. Example: Bangladesh. Out here, we again lost the plot (to gain cheap political mileage), and instead smoked the advantage away by providing cheap petrol to motorcycles and automobiles.

 

Fourth, this current suicidal revenue collection drive has to be corrected. The government boasts of raising tax revenues by more than 40% in recent year and now wants to set the bar higher by another 20%. What it fails to mention is that almost all of this has come through double taxation and primarily from further burdening existing tax payers, thereby sucking the liquidity out of legitimate businesses; in the process pushing them to the brink of closure – by all estimates more than 5 million people suddenly find themselves jobless over the last 3 years. Also, this has caused FBR image to fall to new lows where people either prefer to work outside the documented domain or simply not work – The pointless amnesty scheme failed miserably since there is a trust deficit and an erosion of moral authority in a culture that allows a single bureaucracy functionary access to a cash amount of as much as 700 million rupees! This madness has to stop and the entire tax/revenue structure has to be revamped. Last but not least, fifth, we must realize that high debt and it’s poorly prioritised spending invariably hurts competitiveness. It not only crowds out the private sector, but also diverts the capital to inefficient hands and distorts market equilibrium – the less said about our mounting debt in the last 3 years the better.

 

One can only hope that the finance minister recognises this is in perhaps his last budgetary opportunity to ring any real changes, because the next in all likelihood will be an election time budget when typically populism takes precedence over reforms. If he can single-mindedly focus on ‘competitiveness’, then everything else will automatically follow. The tragedy is that given the current history of myopic policy display, expectations for the 3rd remain quite depressed!

 

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