Economy in 2018

 The way forward!

We can debate about the state of Pakistan’s economy, glass half full or half empty, but without being too critical the following would be my seven recommendations to the economic managers for 2018.

1. Focus on falling exports: Like it or not, the textile sector still directly or indirectly drives about two thirds of the national exports and the export performance of this sector is in a free fall. Given Pakistan’s widening current account deficit and with pressure on foreign exchange outflows likely to further increase in the coming months – external debt repayments, firming up oil prices, rising imports and fast increasing profit/dividends repatriation — boosting or at least stabilising exports will be critical in 2017. The main issue that confronts our manufacturing is that of competitiveness (difference of about 10pc with regional competitors) and there are only two quick-fix solutions: a) devalue currency by about 10pc, or b) provide incentives in shape of outright rebates through the banking channel (not FBR) and abolish non-applicable surcharges from the power bills of the industry. The writer recommends 5-7pc gradual currency devaluation; 3-5pc additional export rebate directly payable by the central bank into exporters’ accounts; and abolishing of all line-loss surcharges being unfairly charged to the industry. Given that going forward, it will in any case be difficult to sustain pressure on international parity of the Pak rupee, now would be a good time for the government to act. Not only will this be a small cost to pay to retain home grown foreign exchange inflows, but also save us a great deal of future pain on account of capacity closures and unemployment – markets once lost can be difficult to recover.
2. Re-strategise taxation: Revenue collection drives in Pakistan are going in the wrong direction, since the current compliance culture cum environment favours the un-documented sector over existing or honest taxpayers. For taxation measures to flourish they need to incentivise people into becoming tax-filers and not otherwise. Good moves would be to lower taxation slabs per se and ring the much-awaited reforms in the FBR itself. Reforms that distance the tax collector from the taxpayer and replace coercive tax collection endeavors with ones that are based on realistic targets and primarily focus on enhancing the national tax base. Last but not least, the sales tax or the GST (general sales tax) also needs amending. India recently re-packaged its GST with a much lower slab and one that simplified the previous cluttered state and federal tax system with a clear aim to create a common market across the country. We perhaps need to undertake a similar exercise, albeit based on our ground realities.
3. Re-think emerging energy mix: With CPEC (China Pakistan Economic Corridor) taking root and nearly $35 billion to be invested in the energy sector, the main thrust at present is on coal generation. While increasing the share of coal generation mix from its current level in Pakistan is not entirely a bad idea, we need to however keep an eye on where our coal’s share is going to end up in the overall energy generation mix, i.e. once investments in the energy sector under CPEC get completed. At the current pace, by 2025 the coal’s share could be as high as 55-60pc, which would be undesirable not only from an environment perspective but also financially. Given that our indigenous coal is still to be mined to its touted potential, an over dependence on imported coal will be foolhardy. The CPEC energy funds should be re-allocated with revised priorities favouring Hydel, renewables and nuclear options.
4. Focus on investment and creating jobs: Again learning from our neighbour, the Indian government recently announced sweeping changes to throw open its economy to investment. The new rules spell out a plan to develop more business friendly policies with a clear objective to spur job creation. The idea is to remove all difficulties in doing business in India and to ensure that Indian manufacturing not only sustains itself but also expands to capture a wider global share. Pakistan falls in the bottom quarter of the world with regards to ‘ease of doing business’ and perhaps 2018 can be the year where the government unleashes a new plan to resurrect a struggling industrial environment.

Last but not least, the sales tax or the GST (general sales tax) also needs amending. India recently re-packaged its GST with a much lower slab and one that simplified the previous cluttered state and federal tax system with a clear aim to create a common market across the country. We perhaps need to undertake a similar exercise, albeit based on our ground realities

1. Re-negotiate adverse trade deals: Our trade deals with some of our main trading partners like China, Indonesia, Malaysia, Turkey and Thailand need to be re-negotiated. In a changed global trading environment more and more countries are having a re-think on how and with whom to trade. While increased trade is welcome, it should not be at the cost of home industry and with huge cum consistent trade deficits. The earlier we re-visit all our unfavorable trade agreements, the better.
2. Re-prioritise government spending: To support growth, economic policy must review the political economy. It shows most obviously in tax policy, but equally in expenditure priorities. While development budget increased in 2017 over 2016, questions remain about project selection, transparent procurement, and effective project management. Allocation on the other hand on some key sectors remains dismally low, such as education, health and water management sectors. Overall investment in people per se is well below par and it will be good to see the government shift its focus to mainly social development sectors in 2018.
3. Transform at least one PSE into a winner: The hallmark of success for any government in economic governance is that public sector enterprises (PSE) under its tenure perform well. PML-N was selected for its business prowess, but sadly the performance of state enterprises under it has instead slumped. This does not come as a surprise since the government has failed to provide an apex management structure or assemble a competent team, because its focus has merely been on disinvestment. Nearly all emerging and successful economies owe much of their success in their sheer ability to combine private sector entrepreneurial juices with the might of state’s resources in churning out global corporate winners. Examples being: China, Brazil, Russia, India, UAE, etc. Airline is one industry where most leading airlines today are beneficiaries of this model. To give confidence to the nation and its people, if the government can resolve to turn around at least one big state enterprise in 2018, it will go on to set the pace for others to follow. My pick would be PIA!