Faltering Economy

Where are we going wrong?

Confidence in Prime Minister Nawaz Sharif and his team is waning, three years after he swept to power in a landslide election. Business executives and entrepreneurs in Lahore and Karachi grumble about the lack of big reforms and almost everyone these days’ wonders aloud whether Mr. Sharif will even survive this term, let alone win the next one. Now this may be a bit premature given the next election is in 2018, but the shift in his fortune since 2013 is striking. Economically, owing to some favourable global developments – mainly a crash in prices of oil and most edible commodities, and a low interest rate cycle – Mr. Sharif until recently had a decent run. Under his watch, the government recommitted to keep fiscal deficit under control; the IMF fiscal support package continued un-interrupted thereby signaling its confidence in his government’s handling of the economy; other leading world financing institutions such as the World Bank and the Asian Development Bank also gave their nod for continuous engagement; inflation declined to its lowest level in more than two decades; and the largely elusive foreign investment suddenly hit a bright spot with China promising to invest up to $46 billion under the China Pakistan Economic Corridor (CPEC). The prime minister’s other notable achievements being accelerating the rollout of infrastructure and a behind the scenes correction of Pakistan’s excessive subsidy system. Regrettably, all these feel good factors suddenly seem to have disappeared, as Pakistan’s economy – now often appearing rudderless – seems headed in a nosedive. Exports are crumbling, domestic manufacturing is in complete disarray, unemployment, inequality and poverty numbers are up, corruption and nepotism are on the rise, national borrowings and the rate at which they have been obtained are assuming scary proportions, government spending stands exposed as being wrongly prioritised, non-transparent and largely unsustainable, crony capitalism is rampant, and last but not least, myopic policies by the finance ministry have driven the life out of legit markets, in-turn hastening their replacement with undocumented operations. So where is the government going wrong?

Pakistan’s main problems relate to competitiveness and ease of doing business and this government is failing in addressing them effectively. We must understand that economic management is a phenomenon that is neither static nor does it function in isolation. Meaning, economic decision-making is an on-going process that requires constant adjustments in order to succeed amidst a globally competitive environment, because even if our policy decisions are good our competitor’s may be better! Modern day business has become a science. Like the predatory birds, astute economic mangers have a nose that can smell a kill well in advance in order to optimise opportunity arising from competition’s demise. In this very context, take the case of Pakistani textile exports: While our economic managers may be thinking that they have solved the problem by resorting back to a zero-rated regime and promising to release withheld capital of exporters, but in reality they have only addressed a fraction of the problem in ensuring a level playing field. In regional & global comparisons our textile manufacturing still remains overburdened from excessive and high taxation; needless governmental oversight; high input costs in labor and raw materials (especially power); and flawed policies that destroy the natural market equilibrium.

Our competition is well aware of our weaknesses and already gearing up to capitalise on them. For example, India last week approved a INR 60 billion special package for its textiles & apparel sector to create 10 million new jobs in 3 years, to attract new domestic and international investment of up to $11 billion, and to generate more than $30 billion in value added & garment exports with a clear aim to overtake Bangladesh and Vietnam in garment exports and to gobble up Pakistan’s meager global share of its different value added products. The measures approved include additional incentives for duty drawback scheme of garments, flexibility in labor laws to increase productivity, and tax and production advantages for job creation. We are still to respond even though it is an open secret that if Pakistan’s textile exports get dismantled, its entire economy gets dismantled!

Further, fixing competitiveness and ease of doing business requires a holistic approach. With the government sleeping over any meaningful labor and investment reforms over the last 3 years, foreign & domestic industrial investment (minus CPEC) is at it’s lowest in the last 10 years. While the foreign investors may have some peculiar concerns of their own, for the locals the trouble is that the government has been eating up most of the credit capital to fund its mostly ill conceived and wrongly prioritised projects. This naturally comes at the expense of the private sector; especially the SME (small and medium size enterprises) sector. Global experiences (including from developed nations like Germany & Central Europe) tell us that if SME sector falters in an economy, so do employment generation and equitable distribution. Pakistan with the highest mix of employable youth under 30 needs at least 3 million jobs every year, which is clearly not happening. As if this is not enough of a challenge in its own right, the government continues to commit hara-kiri by rapidly assuming high and expensive portions of debt! In March 2015 the total debt liability in Rupee terms stood at 19 trillion (foreign debt: Rs6.4 trillion and domestic debt a little over 12 trillion) & Debt to GDP ratio at 66.40%. We paid $6.80 billion in debt servicing in FY15 ($5.9 billion in principal and $915 million in interest payments). Meaning, 47% of country’s revenues were consumed in debt servicing, but regardless the borrowing binge continued and by September 2015, the external debt climbed to $66.50 billion or a little over Rs7 trillion – a jump of nearly 10% in 6 months. On the competitiveness side the issue is that high national debt invariably affects operational feasibilities and today this very element is manifesting itself in government’s inability to prudently rationalise Pak Rupee’s conversion parity, thereby putting our exports at a distinct disadvantage.

Finally, tax collection drives have been nothing but botched up efforts: pointless amnesty schemes, directionless incentives lacking any sort of ingenuity in simply placing additional burden on existing taxpayers. The focus on reforms and any role of behavioral economics in revenue collection has been minimal. Result: Undocumented sector thriving at the expense of its documented counterpart. Ironically, the current budget and the finance bill are so poorly thought through that they will only exacerbate this problem.

But more damagingly, this government also now faces a different kind of restraint, as it suffers from a receding moral authority in shoring up national tax revenues! Litmus test of good economic governance always lies in the desire of people to invest their savings and to look for career opportunities at home. The very fact that Pakistanis are wanting to move abroad and that during last year alone, about 1 million Pakistanis left the country to find better work opportunities in foreign lands, goes on to show this government’s failure to inspire public confidence in Pakistani economy.