Daily Times

The newly elected Prime Minister Shehbaz Sharif has decided to constitute a National Economic Advisory Council (NEAC) and soon call a summit of the business leaders to firm up recommendations to deal with the financial crisis. This is indeed a step in the right direction. Such interactions between the government and the business community are direly missing in the policymaking process in the country. A regular, periodic interaction between the policymakers and the businesspeople must be made a permanent feature if the country is to be pulled out of the economic crisis and put on a sustainable growth trajectory. We expect that the premium business chambers like LCCI and trade bodies will be amply represented on the new Council for a lasting resolution of our economic issues.

Before we move towards solutions, we need to look at how Pakistan is doing at the moment. There has been a steep decline in Pakistan’s economic environment owing to increasing domestic and external risks. The economy is in dire straits. Foreign exchange reserves are depleting and are not enough to cover two months of exports given the size of the nation’s imports. The exports have shot up in recent months, but are much below our true potential and are not sufficient to pay burgeoning import bills.

Hence, we have a growing trade deficit that may likely reach the historic high at the end of this financial year. The current account deficit is also widening and eating into paltry currency reserves. The lack of dynamism in exports is largely covered by remittances sent home by Pakistanis living and working abroad – but only partially. The effort to stabilize the economy has been hit hard by resurging global commodity and energy prices because of Covid-related supply disruptions, and the Russia-Ukraine military conflict. Sustained inflation has hit common people and businesses alike. The domestic political instability is not helping the economy in any way and the government has no space left to reduce the pain being felt by citizens due to the growing fiscal deficit as the gap between its income and expenditure continues to widen each day.

How should we proceed under these circumstances? The immediate task for the present government should be to develop a Charter of Economy as was proposed by Shehbaz Sharif to the previous government as the Leader of the Opposition. Political consensus is important for continuity of economic policies and crucial for development to create jobs and alleviate poverty. I am very hopeful that political parties will agree to build a consensus on a broader economic framework for the sake of the country and its people. Once this is done, we can move towards devising short to long term policies and plans for next 10 years and give a legal cover to their implementation.

Pakistan desperately needs to invest a lot to address the challenges facing its economy, remove multiple structural bottlenecks that are holding the country back from realizing its immense economic potential, as well as to improve competitiveness of businesses and exports. At present, the share of investment to GDP remains minimal, less than half of the South Asian average at 30 per cent and one of the lowest in the world. It means we are not developing enough social and economic infrastructures to provide people access to sufficient levels of energy, drinking water, education, and healthcare. More importantly, private investment as a share of GDP is declining because several factors are contributing to this low investment level.

More investment requires more resources. Thus, the government needs to mobilize more revenues for critical investments. The government’s limited resources restrict its ability to invest in public projects. To make up for this resource gap, the government must borrow from banks, limiting financing for the private sector to invest in industrial projects to create jobs. A very low domestic savings rate means that the government must borrow from foreign bilateral and multilateral creditors, increasing the burden of debt on future generations. This low saving-low investment trap is affecting Pakistan’s growth potential. The steady fall in the economy’s growth potential is particularly concerning because it suggests that the country is gradually eroding its wealth over time. Declining labor productivity as well as low capital accumulation explains Pakistan’s declining potential and actual economic growth over the past decades.

Improving the business environment through privatization and ‘doing business’ reforms are crucial to attract domestic and foreign direct investment in the industry. Without implementing reforms to improve the investment climate and diversify the investment portfolio, it will be foolish to think of overcoming our economic troubles as private investment is important to accelerate growth to create jobs, provide better services to the public, and, last but not the least, to boost exports to address external sector vulnerabilities.

The government should also develop an international trade framework that complements both exports and imports. We cannot boost exports without raw material and capital goods imports. By suppressing imports to reduce trade deficit or reduce burden on the external sector is not a good policy as it always leads to compression in exports. The purpose of the trade policy framework should be to increase domestic productivity for producing exportable surplus, diversify export product range and markets if we want to say goodbye to our periodic ‘boom and bust’ economic cycles every few years. For improving trade competitiveness, Pakistan should encourage regional trade both on its east and west. The business and trade policies should be chalked out in such a manner that they provide an enabling environment to the local industry to become part of the global value chain.

There is also a dire need to revisit Pakistan’s energy mix by generating a major part of electricity from coal and renewable energy sources so that the reliance on costly imported fuel may be minimized and energy made affordable for the businesses. The neighbouring India has made huge investments in coal and renewable energy and it plans to significantly reduce its energy price over the next few years. We need to prepare for that too by investing in cheaper energy generation.

Prime Minister Shehbaz Sharif has taken charge at a critical juncture in the country’s history. The nation has many expectations from him. Only an economically strong Pakistan can handle international pressures. Pakistan is a resource-rich country and does not need any external financial help if we correct our policies. We have resources to become an economic giant but need to set a policy direction and focus on that. Pakistan has gone through the ‘boom and bust’ cycles – an import-driven boom, balance of payments crisis, IMF bailout, stabilization, a period of growth and then back to a crisis – many times before. If we don’t take corrective measures and make effective and long term policies the next time will be no different.

(The writer is a prominent businessman and the current President of the Lahore Chamber of Commerce and Industry.)