Economic outlook

We were beginning to enjoy a welcome party-like atmosphere, created by slight economic recovery and promising improvement in some high-frequency domestic demand indicators. However, rising external deficits and inflation have somewhat overshadowed this premature jubilation.

Borrowing loans and deferring energy payments to prop up reserves, however necessary in the eyes of policymakers, as a signal to calm disruption in the market is not a financially viable option as in the end, these liabilities need to be paid back with interest.

In the immediate, what we need is a sharper focus on undertaking appropriate policy calibration to ensure resilience in economic pickup, keep inflation expectations anchored and curtail the continuous rise in the trade and current account deficits.

The economy remains hostage to unsustainable episodic growth – a predicament we must recognise and think wisely about to overcome. Pakistan can no longer afford to not shift from its fire-fighting economic management to doing seismic structural changes. This alone is the way to national economic prosperity – anything short will keep us in the precarious condition of perpetual boom and bust cycles, hurting the nation. We are in a phase where the risk of doing too-little-too-slow far exceeds the risk of doing too-much-too-fast.

We can re-imagine the way we introduce policy and structural reforms. Economic reforms anchored in the best international practices or some standard indices of competitiveness have not worked so far. Such an approach has distorted our priorities, at times laying an impossibly-difficult-to-implement reform agenda.

We must be able to define the objectives of such reforms and determine a path to achieve them in our given context. In this way, we don’t have to rely on outside help, but follow a more endogenous stance.

Turning to growth for long-term economic wellbeing is a noble thought. However, for it to be sustainable, it has to be underpinned by the creation of a well-regulated market economy where state institutions effectively regulate, the executive drafts economic policy and is responsible for governance, and a vibrant private sector is in charge of business operations. Our mental model of growth thus becomes one of investment and productivity, driven by all economic agents participating in different economic activities.

A key constraint to the development of competitive markets in Pakistan has been the large and ever-expanding government footprint. A good starting point is to undertake a major divestment effort – outright sale, management contracts, global depository receipts, initial public offerings and secondary public offerings.

Divestment can have a quadruple effect: ease short-term financing issues; create space for the private sector; increase choices of investment on the stock exchange; and, most of all, signal to the world our seriousness for business more than for borrowing.

Reconfiguring Pakistan’s energy sector can secure our future. Our end game should be an energy market where energy trades like a commodity and competition and efficiency drive down the unit price – something the country has successfully done in the telecommunications sector. We must be tempted to declare ‘an energy urgency’ to expedite policy objectives in months – and not years – through divestment; power market liberalisation to enable a multi-buyer multi-seller model; supplying electricity on a pre-payment basis; strengthening a demand-supply management system; and boosting power demand to lower tariffs.

Similarly, in the gas sector, divestment by outsourcing retail management can help manage unaccounted-for gas losses and control pilferage. The country can move to a single consumer tariff, based on a weighted average cost of gas, build the north-south gas pipeline, let the private sector put RLNG terminals and storage units, and remove impediments to accelerated natural gas drilling activities. To prepare the two Sui companies for divestment, we must think about doing away with the return-on-assets model.

The agriculture sector needs price discovery to be left to the market with the government gradually exiting wheat and sugar markets. Waste of perishable items, estimated at almost one-third of the overall produce, needs a gigantic effort of logistic modernisation. Productivity increase is possible by mandating the registration of firms supplying seeds through the Seed Act and ensuring that they appropriately label their products to cover the information gap. A complete overhaul of the registration process can speed up the approval process of new varieties and reduce the government’s footprint. Pricing irrigation water appropriately can incentivise an efficient cropping pattern.

Skewed investment incentives focused on real-estate for decades have taken away the zeal of people to find productive avenues of investment including stock markets and small businesses, besides making land unaffordable. On a longer horizon, it robs people of their inherent ability to research, invent and innovate. We can move to a framework of incentivising productive investments – labour-intensive enterprises.

The current distress of the external sector is primarily due to our reliance on a narrow range of commodity exports – this must change. Boosting exports is also about raising productivity of Pakistani firms. Strategies to upgrade productivity – fostering competition and innovation – can maximise the country’s export potential. Entry and exist barriers have a negative impact on our businesses.

Policymakers should also adopt risk-based assessment models; high-risk businesses should be categorised for relevant regulations and medium and low-risk businesses be left to self-declaration for compliance-related issues. The idea is to undertake sweeping reforms doing away with a large part of business regulations as complementary regulatory reforms such as regulatory guillotine take time to gain traction.

Some of the ideas elaborated above have been considered over time. Unfortunately, the scale and quality of a coordinated plan needed to produce worthwhile outcomes remains unsatisfactory. We remain far from shaping a well-functioning market economy in which efficiency leads to a tamed long-term inflationary environment and consumers have an array of choices. An impediment for productivity-led growth is also about writing the story of Pakistan’s technology catch-up, which we will leave for another day.

Our choice is clear. It’s either a stale, tired and slow economic policy reform, with its outdated reliance on real-estate, borrowed resources, rationed invention, and opposition to disruption or a fresh alternative, determined to upscale the agriculture and industrial sectors, increase productivity and wages, and let Pakistanis find their own way to prosperity.

The writer is former advisor, Ministry of Finance, Government of Pakistan.

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