We have read a lot of positive and negative commentaries on the recently announced Budget 2018-19, and even views to an extent that it should not have been announced in the first place, since PML(N), being on its way out lacks legitimacy and should have respected the mandate of the incoming government to provide the future course of action. Perhaps a fair observation, but then budget announcements in Pakistan have of late lost any real financial relevance. Not only because these announcements are barely respected during the course of the financial year, but also primarily due to the fact that over the years the budget itself has become a rather dull cum boring bureaucratic affair to somehow annually balance the national books. Almost none of the people preparing the budget have to walk the talk or have the real time practical experience or exposure to innovate, think out of the box or to take a bankable risk in order to arrest the continuous economic slide! Be very sure that Pakistan’s real problems are neither reflected in the budgetary numbers nor in respective routine annual allocations and if the new government - regardless of who forms it - wants to make a genuine difference, it should plan on instead concentrating on some of the real underlying issues/challenges confronting the Pak economy - the job is not going to be easy. Well, here is my list of the five main problems currently facing the Pak economy (in the order of preference):
First, De-industrialisation – Pakistan’s manufacturing sector for quite some time now has been grappling with the impact of high cost of production and unfriendly government policies towards industry, resulting not only in closure of the installed manufacturing, but also in failing to attract fresh investment to create new jobs. Adding new factories and manufacturing has simply been unviable of late. If you take the impact of CPEC out of the equation – CPEC investments are in any case beginning to slow down now - consumer confidence has plummeted, construction per se has slowed, many factories have shut down and unemployment has gone up. According to the latest National Human Development Report, released only recently by the institution, youth unemployment in Pakistan surged to 9.1% in 2015 from 6.5% in 2007. The report added that the International Labor Organisation (ILO) put the unemployment figure for the 15-24 age group at 10.8%. Clearly adequate creation of new jobs in Pakistan is absent. Any growth that has taken place has largely been jobless. Also, we see that there is a complete absence of any “Make in Pakistan” initiative to lift the share of manufacturing in the Pak economy, which instead of going up has on the contrary been coming down. From being close to 19% of the GDP in 2005, it today stands at under 18%, with its direct contribution declining by as much as negative 27% in 2016 - naturally therefore failing to generate the 20 million jobs that Pakistan needs every year from now on if it is to reduce unemployment in its young population that is still growing exponentially. Needless to say that imports tend to be the sourcing preference as manufacturing locally becomes increasingly difficult. Pakistan’s labor laws are restrictive, imposing all kinds of red tape on factories of more than 100 workers, which discourages businesses from thinking big. Add to this one of the highest cost of energy in the region and manufacturing operations simply struggle to remain competitive.
Second, Defending the value of the Pak Rupee – It is imperative that the Rupee is not allowed to devalue beyond a certain point, as in such a case the repercussions on the long-term sustainability of development and growth can be disastrous. The new government will do well to understand this quickly by not only looking around to learn from the pain of our like-to-like developing economies which have recently suffered on account of erosion of respective national currencies, but also by understanding that unless Pakistan takes its own specific measures to safeguard its Rupee’s value, it will simply be sucked into the present global cycle being driven by the strengthening of currencies of the developed countries thereby in turn eroding the capital of the developing economies – In short, the rich gain stock while the poor lose it! Capacity to maintain currency parity of most emerging markets is still quite limited and the flows of money displaced from the developed world are enough to swamp them and later to tip them over into crisis when they are unable to repay their debts. Meaning, a crisis that in essence is generated from strengthening of world’s leading reserve currencies! Little wonder, that despite a protectionist wave in the West, according to the IMF the global debt issuance in US Dollars and Euros has in fact been rising, and now with the resurgence of the dollar and the Euro, the likes of Argentina, Egypt and Turkey find themselves in a spin, as there seems to be a run on their national currencies.
Third, Increasing Exports – While this one has more or less become a generic recipe of every economist, the reality still remains that owing to a significant dip in home manufacturing, the country has failed to generate any export surplus in the last ten years and this sheer dearth of goods to export is now taking its toll. Its origins of course are directly tied in with the first point above. Also, economic history tells us that there is no empirical correlation between currency devaluations and sustainable increase in national exports. From the present position, a turnaround in Pak exports will be a slow and tedious task requiring a holistic approach that entails revisiting all elements starting from the elementary ‘ease of doing business’ to the more complex part of renegotiating relationships with our existing trading partners.
Fourth, Increasing Tax Base – If Pakistan is to become prosperous then everyone has to pay taxes; therefore, meaningful tax reforms are required. This outgoing government ha laid down a good framework for some desirable cum prudent tax reforms (tax slabs, incidence on different sectors, necessity of a tax number in key transactions, etc.) and the in-coming set-up (if different) should not dismantle it, just because, it was given by the previous government. Further, while the tax amnesty may not net more than an outright one-time amount of $2-3 billion (at best), it is important to remember that its real fruits lie in generation of future sustainable revenues, which will begin to be realised once all the Whiteners come into the tax net.
Finally, Fifth: Privatizing the State owned Enterprises or giving them on 10/20 years Management Lease – Pakistan’s second largest expenditure is incurred on meeting the losses from the Public Sector Enterprises like PIA, the Pakistan Steel Mills, power sector and Pakistan Railways. Either there should be a clear roadmap to privatize them or an innovative out of box solution should be evolved to turn them around. In wake of constant political challenges to sell them, perhaps a good compromise would be to give them out on a 10-20 years management lease. A strategy that has already been previously tested in Pakistan during Zia’s time, which not only partially achieved its objectives of curtailing institutional losses, but also ultimately paved the way for example of disbanding the State Cement Corporation, leading to the privatization of the cement industry in Pakistan.
The writer is an entrepreneur and economic analyst.