Grim industrial slowdown
Shahid Sattar and Hira Tanveer
September 18, 2019
Pakistan has been trapped in a stagnant growth dilemma for decades. We have not been able to achieve adequate GDP growth rates for any extended period of time. During the early 2000s, growth rate did increase to 7 percent but it wasn’t sustainable as the basic fundamentals of the economy had not been focused. Economic growth is the result of increase in the capacity of an economy to produce goods and services, which cannot be achieved without improving economic productivity which depend on policy adequacy. The concept of economic productivity essentiality for economic growth has been expounded multiple times by the eminent Economist Dr Nadeem Haque especially in “The framework for economic growth (https://www.theigc.org/wp-content/uploads/2016/08/Planning-Commission-2011-Final-Report.pdf)”.
According to the framework, country’s productive capacity is significantly based on two factors that are education and level of economic collaboration. Firstly, education determines the magnitude of the ability of population to benefit from global advancement and knowledge. Globally, technical development is increasing the rate of marginal productivity, making it easier to produce more goods and services of superior quality at a faster pace. Acquiring these modern skills is a pre-requisite for producing internationally competitive goods and services. Secondly, economic collaboration determines the ability of people to do things together in an organized manner and excelling to achieve international competitiveness in order to earn profits all over the world.
Unfortunately, Pakistan is lagging behind on both these counts. Our education system is not according to the contemporary needs of the era as well as poor economic organisation and collaboration both at the government and the private sector level hinder growth.
Long-term economic crisis in the form of stagnant economic growth, declining exports, worsening Balance of Payments (BoP), increasing unemployment rate and limited GDP growth rate, all require long-term policy framework focused on sustainable economic recovery. The aim should be to graduate from low-income country to a middle-income country and actualizing the potential of our economy which we has not achieved yet. Shortsighted economic policies have only exacerbated the problem rather than providing a solution. Performing below our economic potential has led us to a situation where we are not producing enough to meet our needs and hence importing a huge volume of products, additionally, we are also unable to manufacture internationally competitive goods for export and therefore earning adequate foreign exchange for our financial needs. As a result of outflow of money for imports and not enough earnings from exports, we have been forced to largely rely on foreign borrowings creating a massive burden of foreign debt accumulation. The major portion of our fiscal space goes into making foreign debt payments and interests, leaving little for national development spending.
Policymaking in Pakistan is weak and its implementation is even weaker with no mechanism of policy outcome evaluation. Furthermore, economically unessential and irrelevant mega projects are initiated by the successive governments skipping simply comprehended and basic analytical tools like cost-benefit analysis and choosing the best alternative on that basis. These projects come with little economic returns rather they need to be subsidized for their functioning. For example, popular projects
like metro bus and orange line train bear no economic return and carry a huge infrastructure expenditure and a continuing unaffordable subsidy.
Additionally, the energy crisis after 2007, caused a major economic slowdown with industrial sector suffering the most, creating unemployment, fall in exports and lower aggregate supply. Now that electricity shortfall has been bridged with additional capacity added to the system. Pakistan is set for gas crisis, 10 years ago there were 22 gas exploration companies working in Pakistan, now they there are only 3 left. International companies are not ready to enter Pakistan due to bureaucratic hurdles and red tape. Government rather than promoting domestic energy resources exploration is establishing 5 additional RLNG terminals. The question is: are there enough RLNG buyers? RLNG is supplied at subsidised rates to major industries and fertiliser sector who are biggest consumers of this imported gas. Government is all set to further increase its financial burden through short-sighted quick fix policy.
Deep structural changes are required for long-term economic recovery that will take us from average GDP growth rate of 4 to 5 percent to a sustained growth rate of 7 to 8% extended over two decades. We need to modernize our governance system, including bureaucracy and judiciary to bring efficiency and justice in the system. These institutions still represent colonial mindsets of 19th century. Streamlining our working ethics with how modern economies operate their business in the time of globalization and technical innovation is crucial for any kind of economic development.
A shift from government regulated markets to free markets mechanism is vital to achieve competitiveness where sole market forces define prices. Our successive governments have largely interfered in free markets and they still believe in regulating markets through setting price floors and ceilings, subsidising group of large industries, directly buying agricultural produce from farmers and building infrastructures at government level. Such operational capacity of government is not likely to deliver in 2019. For instance, long government intervention in energy market has resulted in extremely high and unnecessary IPP tariffs and a cycle of circular debts in the energy sector, which has now necessitated government to offer lower tariffs to exporting sector in a bid to maintain their competitiveness. Another example is the uncompetitive sugar industry that requires subsidies to export the excess and ill-advised surplus.
There is a need to leave markets to operate on their own to promote competition, develop sustainable businesses and corporate firms that can survive on their own without any privileged compensations from the government. Only these CSR compliant firms will be able to produce economically viable and technically advanced products with foreign demand necessary to increase our export volume.
In the last past, whenever viability of exporting sector was restored and it started to take off, inconsistent economic policies dragged them down, not letting exporting industry rise in the country (Ladder and the snake, https://fp.brecorder.com/2019/05/20190522477836/). Lack of an appropriate enabling environment for domestic industry, inappropriate exchange rate policy and the rising debt repayment obligations precipitated falling exports, sustainable Balance of Payments and pressure on the exchange rate.
In this day and age, the recent Kashmir crisis with India is enough to illustrate the importance of linkage between national integrity and economic security. Economic prosperity and stability determine national security and voice of a nation in the world community. Pakistan’s genuine concerns on Kashmir have been muted in the International media due to low standing of Pakistan owing to economic predicaments, political instability and other issues of national security that the country is facing.
In an effort to come out of economic instability, debt trap and BoP crisis, Pakistan urgently requires long-term economic policy for the exporting sector and import substitution that is strictly implemented ensuring continuity of regionally competitive cost structure especially energy rates and adequate
financial facilities. Interest rates should be in line with world market to promote private investment. Pakistan needs consistent policies focusing on increased productivity that fosters sustainable and long-lasting economic growth, imperative to become a middle- income country and fulfilling Pakistan’s potential.