The Economy of Pakistan

By: Osama Rizvi

A Blueprint for Much-needed Reforms

With a $313bn economy (as per the latest 2018 figures released by the State Bank of Pakistan), Pakistan is a country that has undergone a panoply of changes during the recent years. The year 2016 was the annus mirabilis as the stock market yielded a mouth-watering return of 46 percent. Besides this, it also got included in the MSCI Emerging Market Index from Frontier’s Market – in the longer run, it didn’t prove much useful, though. The then ruling party, i.e. PML-N, was taken aback. What followed was the classic interplay of political and economic factors culminating into the arrest of former Prime Minister of Pakistan, Nawaz Sharif, and his daughter, Maryam Nawaz. 

The attention then turned towards the General Election 2018; speculations regarding its timely and transparent execution abounded. However, all the rumours and misperceptions were quashed by the second consecutive, successful transition of democracy in the history of Pakistan. Positive news! The political dust settled and a new government successfully installed was supposed to be the paraphernalia for stability. But the above narrative precludes the policy lacunae and pecuniary ills that the new government inherited from the previous one: country’s forex reserves are perilously low (not enough to cover even two months of imports), debt and liabilities are record high and budget deficit has swelled to around $42 billion. The new government is mulling over the options to avoid going to the lender of the last resort, i.e. International Monetary Fund (IMF), especially after getting a lucrative from Saudi Arabia. Estimates of the money required to tackle the looming fiscal crisis are as high as $12bn with an additional $8 bn for debt servicing by the end of the ongoing financial year (till June 2019). We will discuss the issue of seeking a bailout later in the article.

Standing at what can be called the starting point; there is many a thing to accomplish. One thing that needs to be taken into account first of all is that economic reforms are not possible without changes in the political configuration of a country. Promoted by James Robinson and Daron Acemoglu’s seminal book ‘Why Nations Fail’, the “institutional theory” states that there are two types of systems: one is inclusive; which entails distribution of power among a wide range of stakeholders; and two, extractive, the antithesis. Inclusive political institutions breed inclusive economic institutions, imitating a virtuous cycle; whereas extractive political institutions kick-start a self-sustaining vicious cycle that jeopardizes even a country’s very existence. While economic growth under an extractive system is possible; however, but by its very definition, it is not sustainable because there has to be the creation of some wealth that can be extracted.

Now that we have a context of what happened and what should follow, let us turn to some of the current ills our economy suffers from and what the government has been doing to tackle them.

On 18th September 2018, the incumbent Finance Minister, Asad Umar, presented a ‘mini-budget’ – an extra budget by the government, usually needed to address some specific problems warranting special attention. Following are a few highlights from the mini-budget:

Read More: Economy of Pakistan and The delusion of growth

• Budget deficit to be contained to 5.1 percent, down from earlier target of 6 percent for Fy19.
• Federal development programme cut by almost Rs250 billion to Rs725 billion, with federal PSDP being target of most of the cuts.
• Withdrawal of restriction on purchase of new motor vehicles by non-tax filers.
• Withdrawal of requirement of being a tax filer to purchase immovable property valuing above Rs5 million.
• Increase in excise duties on cigarettes and expensive cell phones. On the flip side, measures to curb illegal/smuggled cigarettes would be ensured.
• Reduction in collection target of Petroleum Development Levy (PDL) by Rs100 billion.
• Tax exemption on salaried class with taxable income of less than Rs1.2 million to be maintained while upward revision was made for individuals earning taxable income of more than Rs2.4 million.
• Regulatory Duties to be reduced on inputs (82 items) used by zero-rated five export sectors (including textile).
• Additional revenue measures of Rs182 billion, including curbing tax evasion, increasing withholding tax, Regulatory Duty (RD) and Customs Duty (CD).
• Increase in federal excise duty (FED) on imported luxury vehicles of 1800cc or more from 10 to 20 percent.
• Withholding tax on banking transactions for non-tax filers to be increased to 0.6 percent from earlier 0.4 percent.
• Construction of nearly 18,000 houses for poor segment of society with immediate release of Rs4.5 billion in first phase.
• A 10 percent increase in minimum pension of EOBI pensioners, who qualify for the lowest category of pensioners.
• Expansion of Insaf Sehat Card facility to Fata and Islamabad Capital Territory
• Tax relief granted by the PML-N government to the salaried persons earning more than Rs200,000 per month; tax rates still lower than those of the last year.
• Tax rate in highest income tax slab rose from 15pc to 30pc.

We can see that the above points have an overall positive outlook. While lamenting the cuts in government spending for Public Sector Development Program, we should also acknowledge and appreciate the imposition of taxes and duties on luxury items and increase in the pension of the EOBI pensioners. The most important point is the one related to bringing the budget deficit down to 5.1 percent. Insaf Sehat Card programme will also see extensions into areas like FATA (erstwhile), another commendable step.

Keeping the mini-budget aside, one can safely say that the overall approach of the current government seems a benign mix of economic approaches of John Maynard Keynes and Milton Friedman. While the government has took the initiative to form an institution on Singaporean model – a different sort of privatization – it has, at the same time, shown concern for the destitute by increasing pensions and promising to build houses for the poor segment of the society.

Capital Markets

Stock market represents the business confidence as well as the future prospects, and also mirrors the current economic picture of a country. As mentioned in the beginning, Pakistan Stock Exchange (PSX) gave an extraordinary return of 46 percent in 2016, becoming one of the best performing markets in the world. But, ever since the Panamagate, the market has shed almost 15,000 points from its peak of 53,000 points. In December 2017, it touched the 37,000 mark and in October the index even fell by 4.3 percent to close at 39,226 points, falling below 40000, first time since December last.

On June 14th, 2016, the market changed its status from Frontier Market (FM) to Emerging Market (EM).

Among the political soap opera and balance of payment crisis was the inclusion of Pakistan into the grey list of the Financial Action Task Force (FATF). The decision is still pending while Pakistan is trying to improve its image and rating among the officials of the Paris-based body. The next decision will be announced in September 2019, where we will be either get excluded from the list or will be enlisted on the infamous Black List.

PSX now hovers around 40,000 points. The investors are waiting to get a hold of the new government’s policies.

IMF

The International Monetary Fund (IMF), often referred to as the lender of the last resort, was created at the Bretton Woods Conference in 1945 primarily by the ideas of Lord Keynes. The IMF aims to maintain a stable global economy; and to help countries achieve sustainable economic growth. But, the Fund has done everything but this! As Joseph Stiglitz, a Nobel laureate economist, says in his book ‘Globalization and its Discontents’, “Keynes would be rolling over his grave were he to see what has happened to his child [IMF].” The Fund’s ideological triumvirate – privatization, deregulation and austerity measures – has done more harm than good to the world. From the Chilean Project to Bolivia’s shock therapy and from Indonesia to Thailand (during the Asian financial crisis in 1997) all have suffered from the Fund’s parochial policies.

Coming back to Pakistan, there is no blinking at the fact that at this juncture, the country needs to avoid buying into the IMF’s advice as it can further exacerbate the current economic predicament. We need pro-poor policies and strong regulations to rein in corruption. Speculation is worst for the country at the moment and extra liberalization breeds this; hence, we should avoid going to the IMF.

As the government has decided to seek an IMF’s bailout, it is highly likely that it will come with devaluation of rupee and budgetary cuts – a recessionary monetary policy. However, Pakistan is in a pressing need of the opposite—an expansionary fiscal and monetary policy.

Economy with A Narrow Base

Among other issues that our country faces is the very nature of its economy. While the factory of the world is shifting its methods of production at a dizzying speed; accompanied by technological changes and awe-inspiring leaps in artificial intelligence (AI), we have still not managed to change much. Take, for example, Sweden, where homes are being heated with the help of energy given off by data centers – Stockholm, the Swedish capital, recently started an initiative, Stockholm Data Parks, for their vision of “a data center industry where no heat is wasted.” Under the initiative, renewable energy will power data centres, and heat produced will be sold to district heating company Fortum Värme. There are self-healing glasses in the market and electric and autonomous vehicles are also on the horizon. China and India are leading the movement for solar energy. There is a whole narrative of what is called the ‘knowledge economy’— a term coined by Peter Drucker in his book “The Effective Executive: The Definitive Guide to Getting the Right Things Done”. It is an economy where attention is given to building human capital and intangible assets like intelligence, which lead to innovations.

Unfortunately, it seems we are still obsessed with systems from the past. The stereotypical demand of certain skills namely engineering, business administration and medicine, is the main cause of creating saturation in the job market. Besides, it also prevents many intelligent minds that might make uncanny policymakers, international experts and scientists to progress here. Rather they prefer leaving the country and adding to the brain drain. The Ministry of Overseas Pakistanis and Human Resource Development states that over the last five years, around 2.765 million individuals have left the country. It is instructive to highlight the importance of human capital at this point. When youngsters do not find the ground to practice what they have learned, it disturbs the demographical and structural pattern of the economy as well.

Almost 2 million people are being added to the Pakistani workforce every year, but the addition of jobs has not been in tandem to that.

Digital Innovation and Competitiveness

The issues further slip into the realm of digital innovation. The Global Information Technology Report 2016, which measures the extent to which a country can take advantage of the digital revolution, places Pakistan at 110th position out of 139 countries. Focus on robotics and AI is almost absent. There is a strong need for an economic vision and building a narrative.

Change, of course, will not come overnight. Research and development (R&D) is one of the areas that can result into a sustainable wave of change for the longer term. We should start investing in R&D at the earliest. According to the Global Innovation Index, Pakistan ranks 119 out of 128 countries, one of the least innovative, and the share of R&D in our budget is a meager 0.29 percent – lesser than what UNESCO has recommended. There is a fad of publishing research papers but only few are at par with international standards.

To see the focus of our country on research, consider the fact that Pakistan is not even in the top 30 countries in World Culture Score Index according to which India is the leading country in reading – no doubt business community talks of a second Silicon Valley to be founded in India.

There is a need to open more sectors of the economy and make a smooth transition to a knowledge economy. Focus on R&D, the methodologies and policies in academia and rewriting the curriculum as per the needs of today’s job market should be the top priority of our policymakers.

The world is changing at a dizzying speed. According to a report “The Future of Jobs” published by the World Economic Forum, almost 65 percent of students entering their primary school, when qualified, will confront jobs that didn’t even exist today! If we want to utilize the bulge of our youth by putting them to work, we need to consider broadening the employment base and including the aforesaid sectors in it.

This writer noted in another of his articles: “It is important to build a narrative that accentuates the significance of adapting to the fast-moving world. We do not want to be left behind while we are capable of competing. While the world rushes towards a knowledge economy, we remain infatuated with the sights and sounds of factory and labour. Reliance on only these is not only dangerous for posterity, but also tantamount to taking a step back while the world moves ahead.”

Sustainaned Economic Growth

While the incumbent government works on ways to steer the country on a stable economic path by getting help from abroad (IMF, KSA and China), we must also get our own house in order, that is, to make conditions in Pakistan conducive to economic growth. We need to work on what is “sequencing” and “pacing”. Growth rates only won’t help. Trickle-down economics has not been very successful.

What do we need? Pro-poor policies, which are supported by an independent and strong regulatory framework supervised by an impartial institutional structure. While projects like China-Pakistan Economic Corridor (CPEC) are beneficial to boosting not only our national economy but also to the image-building of our country, i.e. the soft power, the question is how do we manage it? In his book “Globalization and Its Discontents (Revised after Trump),” Joseph Stiglitz has beautifully explained that how a grand and useful concept like ‘Globalization’ went astray. He has warned, however, that it was not the globalization itself but the ulterior motives of those very few that unfortunately enjoy much autonomy and influence at the global stage that led to its decline which culminated in the 1999 Seattle Protests.

CPEC is the biggest FDI for Pakistan ever since its inception. What we need to do is to consider the question: Are we taking the right steps? Are there any safety nets in Pakistan that might be put to use once the temporary job losses from CPEC, if and when, ensue? The status of safety nets can be understood by a recent case involving private banks which raised the pension from a miniscule Rs. 1,300 to Rs. 8,000 only after the Supreme Court of Pakistan reprimanded bank managements and ordered them to do so. Many of the much-touted housing schemes remain rotting inside government dossiers, never seeing the dawn of the practical world.

Pakistan needs to improve its Ease of Doing Business. We rank 147th on the EODB Index. If we want our country to become an investment destination, making our business environment friendly to foreign as well as local investors is indispensable.

Take another instance of KASB Bank which was sold for only Rs. 1000! Cybernaut Investment Group of China had offered $100 million for the same bank. Incidents such as these lead to a decline in investor confidence.

For better privatization process, a strong institutional framework is necessary. In the absence of anti-trust laws and competition policies, the process can have opposite facts. What happened in Russia’s “loans for shares” programme is a very good example where public companies got loans from private banks with their shares as collateral. The companies, then, would intentionally default handing over their control to the owners of the banks. The Asian Development Bank recently cancelled a loan for restructuring and privatization of a state-owned enterprise of Pakistan.

Rate of savings has to be improved too. Savings encourage investments which entail entrepreneurship.

Let us conclude with a hope that the new government will usher into an era of economic reforms that are beneficial not to a certain class only but the whole Pakistan. There is still time, and the economic problems the country faces at present are surmountable. The only thing we need is an indomitable political will, driven by pure intentions.