Lin­ger­ing econ­omy

Pakistan Observer - - OPINION - Ab­dul Ghani Cho­han Email:

ECO­NOMIC Growth in Pak­istan ex­pected 5.5% for the fis­cal year 2016-17 failed to achieve in­stead Pak­istan Eco­nomic Ser­vey few days back showed just 4.5% for this year . What are some rea­sons for this mod­er­ate im­prove­ment and how could it un­lock its po­ten­tial to grow even faster in the fu­ture so that more of its peo­ple can ben­e­fit from and con­trib­ute to greater pros­per­ity? There has been an im­prove­ment in Pak­istan’s eco­nomic en­vi­ron­ment due to lower do­mes­tic and ex­ter­nal risks. For­eign ex­change re­serves have in­creased to an ap­pro­pri­ate level given the size of Pak­istan’s im­ports.

Pak­ista­nis work­ing abroad sent home about $19.5 bil­lion in FY2015/ 16 which con­trib­uted to fi­nanc­ing the trade deficit. Gov­ern­ment ef­forts to sta­bi­lize the econ­omy have been greatly aided by the de­cline in in­ter­na­tional oil prices which has sig­nif­i­cantly re­duced the im­port bill. Fis­cal pol­icy has also be­come more pru­dent, although fur­ther ef­forts will be needed to safe­guard the hard-earned sta­bil­ity. The pos­i­tive eco­nomic en­vi­ron­ment pro­vides Pak­istan with an op­por­tu­nity to ad­dress struc­tural bot­tle necks that are hold­ing Pak­istan back from re­al­iz­ing its im­mense po­ten­tial, which is bol­stered by a large, young and grow­ing pop­u­la­tion. How­ever, the coun­try’s de­vel­op­ment out­comes have not kept up with its in­come growth and sig­nif­i­cant pub­lic and pri­vate in­vest­ments are crit­i­cal to re­al­ize the as­pi­ra­tions of its pop­u­la­tion and im­prove the coun­try’s com­pet­i­tive­ness.

The share of in­vest­ment to GDP re­mains min­i­mal at 15.21%, about half of the South Asian av­er­age at 30% and one of the low­est in the world. This means not that enough in­fra­struc­ture is be­ing built, peo­ple don’t have ac­cess to suf­fi­cient lev­els of en­ergy and wa­ter, the qual­ity of schools and hos­pi­tals are not op­ti­mal. More wor­ry­ingly, pri­vate in­vest­ment as a share of GDP has been de­clin­ing and stood at less than 10% in FY2016/17. Sev­eral fac­tors are con­tribut­ing to this low in­vest­ment level. Low do­mes­tic sav­ings, be­low 10% of GDP for the past five years, do not sup­port higher in­vest­ment lev­els. The gov­ern­ment’s lim­ited re­sources, partly caused by low tax col­lec­tion, re­strict its abil­ity to in­vest­ment in pub­lic projects.

To make up for this re­sources gap, the gov­ern­ment bor­rows from com­mer­cial banks, lim­it­ing fi­nanc­ing for the pri­vate sec­tor to in­vest in projects that cre­ate jobs. The fi­nan­cial sec­tor has lim­ited long term fi­nanc­ing, which con­straints do­mes­tic fi­nanc­ing for large in­vest­ment projects. This low sav­ing-low in­vest­ment trap has re­duced 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 ex­plain Pak­istan’s de­clin­ing po­ten­tial and ac­tual eco­nomic growth over the past decades.

One of Pak­istan’s big­gest as­sets is its large and young la­bor force. But this young pop­u­la­tion will con­trib­ute to higher and sus­tain­able growth only if it’s healthy and well ed­u­cated. Post 18th Con­sti­tu­tional Amend­ment and the 7th NFC award, these func­tions are de­volved to the prov­inces. It will be im­por­tant for the fed­eral gov­ern­ment and prov­inces to con­tinue work­ing to­gether to im­prove the de­cen­tral­iza­tion frame­work and en­sure im­proved ser­vice de­liv­ery to achieve de­sired out­comes. Given the short­age of do­mes­tic sav­ings, there is an ur­gent need to at­tract for­eign re­sources to meet Pak­istan’s in­vest­ment needs.

The gov­ern­ment is im­ple­ment­ing a num­ber of re­forms to im­prove the in­vest­ment cli­mate and di­ver­sify the in­vest­ment port­fo­lio. These in­clude ef­forts to re­vive the pri­va­ti­za­tion ef­forts, which will in­crease ef­fi­ciency in man­age­ment, im­prove ser­vices de­liv­ery and make space for pri­vate par­tic­i­pa­tion. Sig­nif­i­cant ef­forts are un­der­way to im­prove the ac­cess to and qual­ity of elec­tric­ity, and sim­pli­fy­ing and mak­ing the tax regime more trans­par­ent. It will be im­por­tant to ac­cel­er­ate these and other re­forms for growth to cre­ate jobs, pro­vide bet­ter ser­vices to the pub­lic and ul­ti­mately re­duce ex­treme poverty and boost shared pros­per­ity in Pak­istan. — The writer is free­lance colum­nist based in Is­lam­abad.

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