Why is the economy not responding?

  • All that is not working

Nearly eight months down the road one is beginning to wonder that while the government is well meaning, its heart and mind are in the right place, its economic team is not only experienced and has has reasonably good credentials, but also seems correct in its policy direction, so why then is the Pak economy not responding. Could it be that the policymakers say one thing while they do another or is it that they are failing in combining to deliver the promised ‘change’ management — Just repeating the mistakes of the past? Answer: A mix of both. Let’s try and analyse some important areas where the government may be going wrong with its economic policies.


A major failure of the previous government was it’s over reliance on State-to-State investments and in the process failing to spur investment both from the private-sector (domestic and foreign) investors who in principle invest on merit or on the very ability of an economy to yield fair and sustainable returns. While state-to-state investments may occasionally have a case based on the sheer magnitude of a project or in targeting a special sector that the government prioritises but is unable to penetrate on its own or to simply serve as a confidence catalyst in order to kick-start a retarded investment climate, by and large such investments tend to be counterproductive as majority tend to be based on factors other than pure economic principles. Naturally the unnatural patronage and extra ordinary concessions that invariably accompany such projects result in promoting rent seeking in an economy, thereby not only distorting the market itself, but also owing to net losses over the long-run, result in large unserviceable debts for the recipient state. We have witnessed this in recent years from the CPEC related projects and similarly the case of such proposals now coming in from Saudi Arabia is no different! Also, ironically in our case, these state-to-state investments have even failed to serve as a catalyst: FDI last month was clocked at a paltry $132 million – lowest in recent memory – and LSM on latest figures shrunk by more than 10pc (double digit) speaking volumes of the shaken confidence of the domestic investor. Rather than just celebrating these big-ticket investments running into billions of dollars – that perhaps even exceed the economy’s current capacity to absorb such large capital inflows — this government will be well advised to instead focus on real sustainable investments that directly lock into domestic manufacturing in a way that boosts exports and generates employment. We only have to look as far as Bangladesh to realise how they have cleverly encouraged smaller inflows and only those investments that have synergies with their larger vision of making Bangladesh as a supply-chain powerhouse of the world. In contrast, Bangladesh’s FDI from $700 million in 2009, has merely gone up to $2.58 billion in 2018, but almost all of it has gone into manufacturing that helps Bangladesh bolster its ever rising export – the rule of thumb is that every such $1 investment results in a minimum increase of $3 in annual exports.

Footprint of the government

And it is this very mindset of distrust on its private sector displayed by successive Pakistani governments that keeps on pushing capital in the public sector domain. It is no real secret by now that the public sector around the globe tends to be an inefficient user of capital, the more you expand it the more you lose. Now given the ‘change’, as being claimed, one would have liked to see policies aimed at reducing the footprint of the government in the economy in order to undo one of the principal follies of the previous government. However, this PTI government seems to be falling in the same trap of expanding the governmental pot by announcing to undertake building unnecessary projects like the five million houses at a cost of Rs1.50 million each, etc, and by also resorting to borrowing excessively — 2.24 trillion rupees in its first five months in order to keep the financing tap open for un-sustainable operations. Little wonder that the private sector still feels compelled to remain in its shell while the public sector (the SOEs) continue to compound losses. New champions-of-losers have emerged in the shape of Discos that now lead the pack (eclipsing past villains, such as PSL and PIA) in terms of state entities posting losses (almost Rs1.3 trillion per annum) – Circular Debt today is almost touching Rs1.2 trillion, up nearly 40pc from six months back. Missing are the long-touted reforms to open up the power sector, perhaps the only solution to ultimately scale down the inefficiencies and corruption in WAPDA. In addition, any tangible short-term solutions are still absent.


No arguments that focusing on increasing exports is the right thing to do, but the trouble is that in today’s competitive world, increasing exports is a science and from what one has seen so far the policymakers appear clueless. The concerned either don’t have the requisite experience in the field or just don’t understand the nuances of the modern day export industry. A simplistic route by way of devaluing the currency will just not do and this is becoming quite obvious by now. Post devaluation, the country’s exports posted a mere 2.24pc increase over the seven months from July ’18 to January ’19, and in fact decreased 1.78pc in January’19 over December ’18. The thing is that when we closely study the global export miracles over the last five decades, we learn that sustainable increase in exports primarily comes through a stable currency and not the other way round. Without going into the details of its reasoning for now, in our case also the absence of any meaningful growth in exports by rupee’s devaluation was only the writing on the wall.

Ease of doing business

For meaningful investment to happen and for businesses to flourish, ease of doing business is an index which nearly all-aspiring countries take very seriously these days. Despite a lot of election time rhetoric, unfortunately the PTI’s government in its short tenure thus far has not inspired any confidence in this sphere. Interest rate has climbed into double digits at 10.25pc, meaning the effective borrowing rate for the SMEs being close 17pc; no one window compliance windows established so far, implying businesses still have to grapple with multiple governmental agencies, which some count at being in excess of 50 (including federal, provincial and municipal); and last but not least, still missing are any real reforms aimed at: a) distancing the tax payer from the tax collector; b) reducing excessive and often counter-productive governmental oversight on businesses; c) tangibly reducing bureaucratic red tape in routine operational requirements, and d) rebalancing the skewed business laws that give unnecessarily wide powers to the regulator – in short, all talk and no real action so far to help ease doing business in Pakistan. In fact on the contrary doing business in Pakistan has become more difficult over the last nine months. A massively devalued rupee has compromised on the connectivity of the Pakistanis per say with the outside world – a natural side effect of any devaluation drive – with added capital pressures on any new plant investments for capacity addition, up-gradation for value addition or for balancing and modernisation.

Losing out on winners in the economy

From what one understands and what was recently also explained by a provincial minister that the government is looking to shift investment away from the real estate sector in order to stop avenues for parking un-taxed money and to see to it that this money instead gets diverted to more productive sectors, because in his opinion the real estate in Pakistan has become too expensive. The whole notion strikes as being rather very odd, because not only a number of other sectors stand tagged to real estate development, but also one fails to understand that how come if a certain type of capital is unwanted in one sector it be kosher or productive in another and then who ascertains the right price point: market forces or the government? The trouble is that given a recessionary trend both at home and in the international markets, this is not a time to experiment. Just retain your winners whether they are in the shape of real estate or the stock exchange or beauty parlors or food retail outlets – the mantra for now should be to keep the economy ticking. The revenue collection can come through indirect measures at least till the markets improve: Meaning, taxing consumption (especially high end) and milking the petroleum sales – petrol prices in Pakistan are still the cheapest in South Asia. The key to economic management is not only a holistic approach but to also ensure that policies from all ministries work in tandem to deliver the desired outcome. You can have brilliant department managers but unless they gel in a uniform way the results are not forthcoming. One could be wrong, but to an outsider intra economic team gelling seems to be missing, almost as if one member would like to see the other fail.