When it comes to economic performance, there have been some surprising but nevertheless welcome announcements of late: We hear that the economy has recovered and is growing close to 4 percent, with the GDP growth target set for next year at 4.80 percent! Well, positive economic news, any which way it comes, should not only be cherished, but also spread since markets invariably respond to perceptions. Half the trick lies in building investors’ confidence—Round 1 goes to Mr Shaukat Tarin. Now, the Budget 2021-22 is due in June and the discussions loom around what should be one’s budgetary recommendations to the governments? Simple answer: If the momentum is indeed on your side, then please do not change anything; just maintain business as usual or as they say, more of the same. However, having said this, it is quite possible that the new finance minister deep down may feel that the current success in effect is owed to his predecessors and he also needs to do something on his own accord to make a mark or stamp his contribution. And in such a case, if he is unable to contain this natural temptation, then perhaps the following simple actions may help:
Low hanging fruits—1) If he can somehow reduce the losses of the State-owned Enterprises by even 25 percent, it will add almost 500 billion in fiscal space that with productive spending could alone end up in-turn adding nearly another 1-1.50 percent to the GDP growth. Remember, the re-trending in export growth mainly comes on the back of a stable currency-parity over the last 9/10 months and regionally realistic utility inputs to the industry. 2) The IPPs still seem to be the single largest sector taking the economy down by creating a deficit hole in the shape of circular debt that is getting larger by each passing day. Despite tall claims by the government of striking a deal with these IPPs to voluntarily arrive at a formula that reduces governmental liability on capacity payments and dollar benchmarked return returns, nothing substantial has changed. Like it or not the entire sector should be given a haircut that leads to its self-sustainability or at least in significantly reducing the exchequer’s burden.
3) In comparison to the region, interest rates in Pakistan still remain on the higher side. It is by now clear that supply chain disruptions and bottlenecks tend to be the real driver of inflation in Pakistan. So, it will be prudent to reduce State Bank’s base rate by another 200 basis points in order to drive supply flow to not only bridge the supply-demand gap in order to tame inflation, but to also spur economic growth in general. 4) The current currency parity finally seems to have hit the equilibrium that balances external trade. It will be advisable to try and maintain it within a +/- 5 percent range. 5) A renewed focus on exports is necessary, as the latest challenge to national exports has emerged through an unprecedented rise in foreign freight rates (6 to 7 times), reduced vessel callings at Karachi and Bin Qasim Ports, and much longer transit times. Again, it would be sensible on the government’s part to refrain from direct support programmes, as these invariably prove to be either counter productive or end up in the wrong hands.
6) The TERF long term financing scheme proved to be a huge success where more than 400 billion rupees stand disbursed strictly against investment in new machinery only. Now imagine the compound effect this will unleash on employment and poverty reduction, once all this machinery gets fully operational. Already, the growth being witnessed in the LSM sector can be largely attributed to the BMR and new investments under TERF. As the previous scheme expired as on March 31, 2021, a fresh one in its place should be announced with an even larger outlay, because the entrepreneurial appetite for investment in new machinery is still very much alive. 7) The new SEZs under the auspices of CPEC are now being established, but regrettably, are quite expensive (in real estate and development charges terms) to invest in, thereby proving to be out of the range for the SME sector. The government needs to ensure that the SME sector is somehow ensured access to these planned SEZs.
Concerns—1) The amnesty in real estate is proving to be a whitening scheme and attracting large ill-gotten wealth amassed through illegitimate means. Also, it is driving up real estate prices unrealistically, which not only comes at the expense of the common man’s right to access to a roof, but also tends to be an impediment that retards investment in other sectors. This should immediately be withdrawn. 2) Restriction on travel has in many ways proved to be a boon for the government. Not only has it saved almost $5 billion in out-going travelling, accommodation and student fee expenses, but has also at the same time ensured that remittances (now touching $29 billion) are transferred back home through banking channels instead of being physically carried by returning NRPs for one reason or another. This surplus we know for sure is not a long-term phenomenon and the advantage can start tapering down sooner than we realise. 3) Agriculture is performing under par and needs urgent government support. Except for maize, nearly all cash crops in Pakistan lost in output in 2020-21. As an example, cotton almost lost 50 percent output. 4) Last but not least, the lack of harmonisation in industrial laws and product standardisation across the country is compromising efficiencies and cost reductions that could be harnessed through economies of scale. The eighteenth amendment makes it difficult for the centre to act arbitrarily in the matter and the sooner a solution to this is found by involving all the provinces the better and quicker it will serve the public interest.