Nearly 8 months down the road one is beginning to wonder that when the government is well-meaning, its heart and mind are in the right place, its economic team is not only experienced and has had reasonably good credentials, but also seems correct in its policy direction, so why then is the Pak economy not responding. Could it be that the policymakers say one thing while doing another or is it that they are failing in combining to deliver the promised ‘Change’ management - Just repeating the mistakes of the past? Answer: A mix of both. Let’s try and analyse some important areas where the government may be going wrong with its economic policies.

Investment

A major failure of the previous government was it’s over-reliance on State-to-State investments and in the process failing to spur investment both from the private sector (domestic and foreign) investors who in principle invest on merit or on the very ability of an economy to yield fair and sustainable returns. While state-to-state investments may occasionally have a case based on the sheer magnitude of a project or in targeting a special sector that the government prioritises but is unable to penetrate on its own or to simply serve as a confidence catalyst in order to kick-start a retarded investment climate, by and large, such investments tend to be counterproductive as majority tend to be based on factors other than pure economic principles. Naturally the unnatural patronage and extraordinary concessions that invariably accompany such projects result in promoting rent-seeking in an economy, thereby not only distorting the market itself but also owing to net losses over the long-run, result in large unserviceable debts for the recipient state. We have witnessed this in recent years from the CPEC related projects and similarly, the case of such proposals now coming in from Saudi Arabia is no different! Also, ironically in our case, these state-to-state investments have even failed to serve as a catalyst: FDI last month was clocked at a paltry $132 million – lowest in recent memory – and LSM on latest figures shrunk by more than 10% (double digit) speaking volumes of the shaken confidence of the domestic investor. Rather than just celebrating these big-ticket investments running into billions of dollars – that perhaps even exceed the economy’s current capacity to absorb such large capital inflows - this government will be well advised to instead focus on real sustainable investments that directly lock into domestic manufacturing in a way that boosts exports and generates employment. We only have to look as far as Bangladesh to realise how they have cleverly encouraged smaller inflows and only those investments that have synergies with their larger vision of making Bangladesh as a supply-chain powerhouse of the world. In contrast, Bangladesh’s FDI from $700 million in 2009, has merely gone up to $2.58 billion in 2018, but almost all of it has gone into manufacturing that helps Bangladesh bolster its ever-rising export – the thumb rule is that every such $1 investment results in a minimum increase of $3 in annual exports.

The footprint of the Government

And it is this very mindset of distrust on its private sector displayed by successive Pakistani governments that keeps on pushing capital in the public sector domain – No real secret by now, that the public sector around the globe tends to be an inefficient user of capital, the more you expand it the more you lose. Now given the ‘Change’, as being claimed, one would have liked to see policies aimed at reducing the footprint of the government in the economy in order to undo one of the principal follies of the previous government. However, this PTI government seems to be falling in the same trap of expanding the governmental pot by announcing to undertake to build unnecessary projects like the 5 million houses at a cost of Rs1.50 million each, etc., and by also resorting to borrowing excessively - 2.24 trillion rupees in its first 5 months in order to keep the financing tap open for un-sustainable operations. Little wonder that the private sector still feels compelled to remain in its shell while the public sector (the- SOEs) continue to compound losses - New champions-of-losers have emerged in the shape of Discos that now lead the pack (eclipsing past villains, such as PSL & PIA) in terms of state entities posting losses (almost 1.3 trillion per annum) – Circular Debt today is almost touching 1.2 trillion, up nearly 40% from 6 months back. Missing are the long-touted reforms to open up the power sector, perhaps the only solution to ultimately scale down the inefficiencies and corruption in WAPDA. In addition, any tangible short-term solutions are still absent. These may be painful but necessary and in essence require the bull to be taken by its horns: Meaning, a mix of transferring some of the burden to the consumers; undoing legal protection to WAPDA’s functionaries; immediately allowing direct-distribution to the private sector producers allowing them a paid sharing on distribution networks; revisiting all IPP agreements; allowing the provinces a direct stake via tariff in controlling line losses and theft; and by simply taking over some of the heavy loss-making operations and putting them instead under private management controls. Again, going by Bangladesh’s example, it today only subsidises power to its exporting industries and too partially while compensating them through other ways like outright export-subsidies ranging from 5-20%, depending upon the product categories. In the meantime, they have increased their power tariff by nearly 50% in the last 3 years – from $6cents in 2015 to $9cents/kwh 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 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 posted a mere 2.24% increase over the 7 months from July ’18 to January ’19, and in fact decreased 1.78% in January’19 over December ’18. The thing is that when we closely study the global export miracles over the last 5 decades, we learn that a 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, in our case also the absence of any meaningful growth in exports by Rupee’s devaluation was only writing on the wall.

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 only about 10% (not 32%), that is to just arrest the on-going decline in exports. However, to seek a substantial export growth a more precise strategy is needed that not only clearly identifies the strong areas and then backs it with direct support in capacity building and shoring up 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 15%, 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 what new products to launch, what specific subsidy is required and where, what should be the price points, and which markets to attack. Ironically, an export specialist seems to be missing both in the TDAP and the Commerce Ministry. It may be late in the day now, but even determining prudent currency parities these days is no longer a very complex or a secret science. For example, using the ‘interest rate parity to trade forex’ method, it appears that the Pak Rupee comes to be today undervalued by about 10%. Based on this one can safely recommend that essentially, from now on the Pak government needs to defend its currency and endeavour to keep it stable for as long as it possibly can. When China joined the WTO in 1989, in a similar way, its currency at the time was considered to be undervalued by as much as 40%, a level that is then maintained for almost two and a half decades and look what it did to its exports.

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 into double digits at 10.25%, meaning the effective borrowing rate for the SMEs being close 17%; no one window compliance windows established so far, 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 last but not least, still missing are any real reforms aimed at: a) distancing the taxpayer 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. In fact, on the contrary, doing business in Pakistan has become more difficult over the last 9 months. A massively devalued Rupee has compromised on the connectivity of the Pakistanis per se 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 modernisation.

And as if this was not enough, everyday public cum media outbursts of government office bearers on some sort of self-styled accountability and an institutional witch hunt unleashed on recent global investments by all leading business groups has simply left the entrepreneur scared. 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 rather very odd, because not only a number of other sectors stand tagged to real estate development, but also one fails to understand that how come if a certain type of capital is unwanted in one sector it be kosher or productive in another and then who ascertains the right price point: 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 parlours or food retail outlets – the mantra, for now, should be to keep the economy ticking. The revenue collection can come through indirect measures at least till the markets improve: Meaning, taxing consumption (especially high end) and milking 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. One could be wrong, but to an outsider intra-economic team gelling seems to be missing, almost as if one member would like to see the other fail - Time for the Captain to take the matters in his own hands and start chairing the ECC meetings!