Rethinking economic equations
Dr Kamal Monnoo
Amid all the wild swings in Pakistan’s economic policymaking over almost the past three years, one thing has remained constant, repeated experimentation where none was needed. A cursory look at the economic history of nations that have made big over the last half century and the important and lucid commonality that literally stares one in the face is that almost all made it big on the back of exports.
Not going too far back, take the example of Bangladesh—our very own flesh and blood till 1971—the underlying reason for why they have left us behind in recent years is exports: Bangladesh’s almost $45 billion as compared to ours only $25 billion. This single minded commitment of the Bangladeshis to connect into the developed world by becoming its preferred apparel supply-chain has in-turn helped them contain their population growth (only 165 million people as compared to our 230 million, whereas, we were the minority half, back in 1971); a refocused emphasis on education and skill development; micro-finance; women empowerment and with a per capita income today that is almost double that of ours.
And for us, despite the clear writing on the wall, we have still not been able to put our heart and soul in adopting the true spirit of an exporting culture or in fact declaring a kind of ‘export emergency’ in the country. Instead, finance ministers are changed repeatedly, new teams of economic advisors are inter-changed every couple of years and foreign experts are parachuted in regularly to run key financial institutions,; all ironically all with just one singular vision: Fiscal deficit. On working to the dictates of the IMF (International Monetary Fund) regardless of whether or not they suit the domestic ground realities.
Still, Pakistanis are a resilient lot and tend to rise against all odds. However, of late, just when one thought the Pak economy was again about to turn a corner, after a testing struggle of economic contraction as a result of both, governmental policies and a global Covid pandemic, in walks yet another IMF programme-resumption, one that regrettably aims at once again erode whatever little that had been achieved over the last few months. Not surprisingly, nothing new in this programme either, as like its previous blueprints, this one also looks to raise taxes, tariffs and utility and input prices, thereby retarding growth, stoking inflation and damaging competitiveness (essentially for exports).
As for our economic managers, they seem all set to walk into another period of pain, the brunt of which is invariably borne by the people (through inflation and unemployment) and manufacturing businesses (through outright closures). The particular disappointment though in the recipe being handed down is that in today’s environment, it just does not fit and naturally the advised IMF policy measures come across as being rather baffling.
The changed reality is that the quick outbreak of the global pandemic has all of a sudden forced the economists to have an altered view about the very economics of government debt per se. Gone are the days—at least for now—on the single-minded focus on fiscal deficit. Of late the echo on national debt and respective required thresholds as a percentage of GDP is all but dead. Even the latest narrative of the international financial institutions (such as the IMF) stands completely changed or just plays a totally different tune.
Only last month, talking to the G20, the much renowned former IMF chief economist, Olivier Blanchard, talked about a “shift in fiscal paradigm.” And this new paradigm suggests two things: One, that public debt is not a major problem anymore and two, that a government’s borrowing for the right purposes is actually now the responsible thing to do. We have of late seen massive accumulation of debt and quantitative easing dole outs by the developed economies that in fact are being lauded today as the right things to do. So, why then play with a separate deck of cards when it comes to countries like Pakistan? Well, something for our government to ponder upon.
The other glaring area where the economic managers seem to be getting it wrong is in finding the equilibrium of competitiveness that will allow our exports to grow. Pakistan’s is a complex work environment with excessive departmental oversight and where doing business is not easy by any stretch of imagination. So, naturally this has its own implications mainly that unless returns/profits are comparatively higher and return on investment quicker than average world economies, the investor is reluctant to invest.
This is the main reason that we have seen FDI (foreign Direct Investment), especially in the manufacturing sector that primarily creates jobs, almost dry up since June last year. Although this writer was against the Rupee devaluation initially undertaken—perhaps about 15-17 percent more than what was necessary at the time—the thing is that over time, markets and businesses automatically start adjusting themselves to the operational ground realities and this is exactly what happened here in Pakistan as well. Subsequent knee-jerk changes tend to become counterproductive. Going by the data of the previous one year, the abrupt devaluation finally started manifesting itself, even if only in the short-term, in competitive pricing of Pakistani products abroad, something that resulted in a surge of national exports and LSM (Large Scale Manufacturing) numbers from September 2020 onwards.
From an economy’s perspective it could be fair to state that industries and businesses started working on the resultant equilibrium of costs and revenues—despite one of the highest interest rates in the region—giving Pakistan an advantage over its main competitors. For the government to capitalise on this temporary advantage it was imperative that it kept input prices in check to ensure that these short-term gains are turned into a sustainable operating model. To be able achieve this, what was essentially needed to be factored was that a breathing space is allowed for at least two years where domestic manufacturing could work on creating its own entrepreneurial efficiencies and productivity enhancements.
Pakistan generally operates at around 7 percent higher inflation rate than its end markets and to keep the growth momentum, this differential either needs to be covered through currency devaluation or by lowering cost of capital and increasing productivity; naturally the latter is preferred. Sadly, of late the policy direction seems headed in the opposite direction with a brewing perception on continuity of the current high interest rates regime while the likelihood of burdening the cost of production with increased taxes and energy tariffs.
Also, with a strengthening PKR, albeit on the back of borrowing, the trend is not helping, in fact making matters worse by moving away from the desired competitiveness equilibrium (temporarily achieved towards the end of 2020) in the process making it increasingly elusive. Little wonder then, that any gains made over the last six months are eroding quickly.
To conclude, given what we have learned and where we are, it is clear that the Pak government should be investing and focusing heavily in the nation’s future and it is okay to for the time being to set input costs at levels that allow us to retain the competitive equilibrium necessary for growth (especially exports), even if we have to temporarily borrow to ensure this. With a new finance minister, young and fresh, one hopes that he will have a proactive and long-term approach in re-thinking our presently flawed economic equations.