Continued…

Footprint of the Government – This stems from an inherent mindset of distrust on the private sector displayed by successive Pakistani governments that keeps on pushing capital in the public sector domain – No marks for guessing that the public sector essentially is a less efficient user of capital than the private sector. Meaning, the more one expands the public sector at the expense of the private sector, the more one loses. Naturally one liked to believe that in a ‘Change’ agenda, this PTI led government would be looking to reduce governmental footprint in the economy. Ironically, the contrary seems to be the case - Announcements such as 5 million houses at a cost of Rs1.50 million each; continued borrowings to fund inefficient state owned operations (2.24 trillion rupees merely in its first 5 months); increasing the size of the government instead of reducing it; etc., all point to business as usual for the state sector. Ten months in the government and so far one does know of any real plan to fix the loss making SOEs (State Owned Enterprises) where losses today by some estimates are touching near rupees 1.6 trillion annually. And over these last 10 months it seems that new champions-of-losers have emerged in the shape of Discos (almost 1.1 trillion per annum with the circular debt in itself touching the 1.2 trillion mark) that now lead the pack (eclipsing past villains, such as PSL & PIA). Missing are not only the much touted urgent measures to weed out operational cum management inefficiencies and corruption from the loss making giant WAPDA, but also there are no signs of any long-term reforms plan whereby to open up the power sector per se. Simply transferring the burden to the consumers is the easy way out and does not solve anything. To move towards market principles and transparency a host of legislative changes will need to be adopted, starting with some initial steps like: Doing away with the unnecessary legal protection extended to WAPDA’s functionaries; immediately allowing direct-distribution to the private sector producers by giving them access to distribution networks against a paid-sharing formula; revisiting all IPP agreements; allowing the provinces a direct stake via tariff (as in India) to help control line losses and theft; and by simply taking over some of the heavy loss making operations and putting them instead under private-public management controls. Again, going by Bangladesh’s example, it today only subsidizes power to its exporting industries and that too partially. If some part of exports needs additional support, then it is compensated through other ways like outright export-subsidies ranging from 5-20%, depending upon the specific product category. The idea is to not allow losses to pile up in their power companies even if it means increasing the general tariff in accordance with market realities. Power rates in Bangladesh have risen by as much as nearly 50% over the last 3 years, i.e. from $6cents in 2015 to $9cents/kWh as of today.

Exports - No arguments that focusing on increasing exports is the right thing to do, but the trouble is that in today’s competitive world, increasing exports is a science and from what one has seen so far the policymakers appear clueless. The concerned either don’t have the requisite experience in the field or just don’t understand the nuances of the modern day export industry. A simplistic route by way of devaluing the currency will just not do and this is becoming quite obvious by now. Post devaluation, Country’s exports have posted a mere 1.64% increase over the 9 months from July ’18 to March ’19; in fact exports decreased 1.78% in January’19 over December ’18 and April ’19 over March ‘19. The thing is that when we closely study the global export miracles over the last 5 decades, we learn that sustainable increase in exports primarily comes through a stable currency and not the other way round. Without going into the details of its reasoning for now, it was always a kind of writing on the wall that we too will get no real or meaningful increase in our exports by devaluing the Pak Rupee. With no real accumulated export surplus in hand and an industry eroded by the damaging policies of Mr. Dar, at best the need was for a devaluation of no more than 10%, but certainly not 32% - this too to absorb the inflation of the Dar period and with it to just arrest the on-going decline in exports at the time. However, to seek a substantial export growth a more precise strategy is needed that not only explicitly identifies the growth areas and then backs it with direct support for capacity building and shoring up of competitiveness to beat the competition. For example, despite the 32% devaluation, whereas, we saw quite a number of categories lose volumes the Ready Made Garments category instead posted a robust gain of nearly 29%, clearly identifying where Pakistani exports carry a future potential. Similarly, in today’s data rich world via IT, we can easily determine which categories to support, where to focus on skill development, how and where to tweak existing FTAs, precisely which new products to launch, what specific subsidies to provide and to whom, what global price points to adopt for our products, and which markets to target. Ironically, an export specialist seems to be missing both in the TDAP and the Commerce Ministry.

Ease of Doing Business - For meaningful investment to happen and for businesses to flourish, ease of doing business is an index, which nearly all-aspiring countries take very seriously these days. Despite a lot of election time rhetoric, unfortunately the PTI’s government in its short tenure thus far has not inspired any confidence in this sphere. Interest rate has climbed, now into double digits at 10.25%, meaning the effective borrowing rate for the SMEs being close to 17%. No matter what the government says, a simplistic link of such high interest rates to inflation does not make too much sense in the case of Pakistan - The key elements in our CPI Basket that measures inflation hardly have any correlation to the central bank’s discount rate (34% Food Items, 24% House Rent & 15% Fuel & Transport). Further, to ease operations, we still have no announcements on the one-window compliance facility, implying businesses still have to grapple with multiple governmental agencies, which some count at being in excess of 50 (including federal, provincial and municipal) and for that matter none either on any operational reforms aimed at: a) distancing the tax payer from the tax collector; b) reducing excessive and often counter-productive governmental oversight on businesses; c) tangibly reducing bureaucratic red tape in routine operational requirements, and d) rebalancing the skewed business laws that give unnecessarily wide powers to the regulator – in short, all talk and no real action so far to help ease doing business in Pakistan. On the contrary doing business in Pakistan has become more difficult over the last 10 months, a notion perhaps further confirmed by the untimely resignation of the Chairman, Board of Investment. Further, a massively devalued Rupee has compromised on the connectivity of the Pakistanis per say with the outside world – a natural side effect of any devaluation drive – with added capital pressures on any new plant investments for capacity addition, up–gradation for value addition or for balancing and modernization. Any further devaluation will simply isolate Pakistan further. If the government is still serious about arresting the present economic decline, it needs to defend its currency and not allow the Rupee to sink further, because regardless of all the jargon about market forces/supply & demand, the reality is that in non-tradable currencies, such as the PkR, respective governments do have a distinct role to play in determining their global parity. To create a business friendly environment, calm and confidence will need to be restored and the constant outbursts on accountability, with-hunts and clampdowns will have to come to an end. While the Indians take pride in their corporations to successfully put India’s footprint on the corporate map of the world, the Pakistani businessmen are instead being hounded for making any such efforts!

Losing out on Winners in the economy - From what one understands and what was recently also explained by a provincial minister that the government is looking to shift investment away from the real estate sector in order to stop avenues for parking un-taxed money and to see to it that this money instead gets diverted to more productive sectors, because in his opinion the real estate in Pakistan has become too expensive. The whole notion strikes as being very odd, because not only a number of other sectors stand tagged to real estate development, but also one fails to understand that how unwanted capital in one sector can become kosher or productive in another? And then, who ascertains the right price points of real estate or any product for the matter: market forces or the government? The trouble is that given a recessionary trend both at home and in the international markets, this is not a time to experiment. Just retain your winners whether they are in the shape of real estate or the stock exchange or beauty parlors or food retail outlets – the mantra for now should be to keep the economy ticking. The revenue collection for the time being can mostly come through indirect measures, at least till the markets improve: Meaning, by taxing perceived consumption (especially high end) through a fixed mechanism (like a pre-determined turnover tax regardless of profitability) rather than monitoring daily sales and additionally by continuing to milk the petroleum sales – Petrol prices in Pakistan are still the cheapest in South Asia.

The key to economic management is not only a holistic approach but to also ensure that policies from all ministries work in tandem to deliver the desired outcome. You can have brilliant department managers but unless they gel in a uniform way the results are not forthcoming. When one analyses things closely one finds out that over the last 15 years the Pakistani economy has either de-industrialized, in the process losing some of its traditionally strong sectors of production in the SME (small and medium sized enterprises) domain OR it has simply shifted to industries that either encourage import based consumption through policy breaks (a legacy of Shaukat Aziz with examples being those of the automobile industry, motorcycles assembly, home appliance assembly, etc.) or due to corruption and weakening of oversight institutions (CCP, SECP, EDB, etc.), our industries today have been reduced (from being icons once) to ones that primarily thrive on rent seeking (IPPs, Fertilizer, Sugar, Banking, etc.), thereby negating the very advantage Pakistan once enjoyed in these sectors. Automobile or motorcycle assembly, for example, has been a futile cum costly exercise, as it mainly operates on long standing subsidies allowed through import duty breaks. Sadly, in all these years they have done scant little in achieving the desired deletion targets. In contrast, all over the world, such assembly plants are installed with permissions based on strict targets on exports and on achieving almost full indigenous manufacturing in the stipulated period. As an example, the Czech Republic produces as many as 1.50 million cars per annum and its next door neighbor, Slovakia, produces another 1.3 million cars per year, but more than 90% of these cars in both cases are meant for exports. In addition, between 80/90% deletion has already been achieved for foreign vehicles such as Volkswagen, Audi, Hyundai, BMW, Land Rover, and others. On the contrary, in Pakistan, these subsidized import oriented industries not only add to a huge import bill, but also stoke many other issues such as negatively affecting the delicate trade-off between public and private transport preferences; environment and pollution; safety; distorted urbanization; and last but not least, enhanced household petrol consumption that otherwise could have been avoided - Oil imports as we know constitute the largest chunk of our imports. So the challenge is not just to re-start the process of industrialization in the country, but (through visionary policymaking) to redraw the future industrial map in a way that a) places reliance on home grown industrial solutions in a competitive manner; b) encourages exports and replaces imports; and c) promotes the SME sector - the engine of growth and employment generation in any economy. Back in the 90s working with Dr. Bentzien of Belika, I was intrigued to find that how successive German governments consciously channel its funding to ensure a minimum level (as high as) of 10% for start-ups every year and to retain an industrial share of around 30% for the Mittelstadt in its manufacturing – Mittelstadt’s, as we know is primarily the family owned SME sector of Germany and its real engine of growth, employment generation and exports since the 1950s – No wonder they succeed since the planning is so clear and precise. Needless to say for us to embark on this clichéd new beginning, the journey will be slow, tedious and a delicately timed process that entails due transition to a new vision. Also, it will take some doing!