Tack­ling eco­nomic is­sues

The Pak Banker - - FRONT PAGE -

There are con­fus­ing pat­terns in Pak­istan's eco­nomic growth. This is proved by the fact that along with ris­ing trade deficit,eco­nomic growth has av­er­aged around five per cent.At the same time, gross ex­ter­nal fi­nanc­ing re­quire­ments have steadily in­creased to a pro­jected $24.5 bil­lion for fis­cal year 201718 from $6.7n in 2011-12. Re­serves have grad­u­ally de­pleted and now stand to cover less than three months' worth of imports. The cur­rent macroe­co­nomic sce­nario also in­di­cates high risks. Dur­ing the past five years, Pak­istan's ex­ports of raw cot­ton, cot­ton fab­rics, cot­ton yarn and fab­rics, woollen car­pets and rugs, leather prod­ucts, and rice have all de­clined sig­nif­i­cantly. These com­prise more than half of the to­tal ex­port vol­ume.

On the other hand, man­u­fac­tured goods, chem­i­cals and food imports have steadily gone up. Per­haps the most strik­ing in­crease is ob­served in ma­chin­ery and trans­port equip­ment imports, which has dou­bled in vol­ume since 2011-2012.The key ar­gu­ment of­ten pre­sented to de­fend the trade deficit rests on the fact that it may, at present, gen­er­ate a cur­rent ac­count deficit but prom­ises to add to the in­dus­tries' pro­duc­tive ca­pac­ity and in­crease fu­ture ex­ports. Thus, the present trade-deficit will be re­versed when the econ­omy's out­put ca­pac­ity in­creases.How­ever, this ar­gu­ment rests on the rather strong as­sump­tion that the coun­try pos­sesses the abil­ity to ab­sorb its imports and pro­duce goods that are ex­port-ori­ented.

In this re­gard it may be re­mem­bered that Pak­istan's ex­port base is too nar­row to fully rec­on­cile the gains from im­port­ing the high­val­ued ma­chin­ery - in­deed, the ex­port base needs to be suf­fi­ciently diverse in both its prod­uct va­ri­ety and the abil­ity to pro­duce high value-added prod­ucts that can gen­er­ate cur­rent ac­count sur­pluses and sus­tain eco­nomic growth.This is fur­ther re­in­forced when look­ing at the type of goods that cur­rently com­prise the ma­jor bulk of the ex­ports and which in­cludes cot­ton, leather and rice. Apart from be­ing low-value added, these goods have faced in­creas­ing global com­pe­ti­tion from coun­tries and suf­fered due to a fall in in­ter­na­tional de­mand, es­pe­cially from Euro­pean coun­tries.

Ex­perts are of the opin­ion that on the pol­icy front, Pak­istan's econ­omy re­quires struc­tural trans­for­ma­tion, that is, a change in the pat­tern of what an econ­omy pro­duces, and in par­tic­u­lar, what it ex­ports.To do so, the in­dus­try has to move up the value chain and in­crease both the com­plex­ity and the di­ver­sity of its prod­ucts. This re­quires in­vest­ment to re­place out­dated tech­nol­ogy and boost labour pro­duc­tiv­ity, in­te­gra­tion into global-value chains as well as a con­tin­u­ous sup­ply of a high skilled labour force of which a pro­por­tion en­gages in re­search and de­vel­op­ment.In the re­cent decade, en­trepreneur­ship has also of­fered an al­ter­na­tive mech­a­nism which has un­lim­ited trans­for­ma­tional po­ten­tial but re­quires mo­bil­i­sa­tion and sta­ble govern­ment pol­icy.

How­ever, anun­favourable tax regime, the high cost of do­ing busi­ness, en­ergy con­straints, un­der­de­vel­oped fi­nan­cial mar­kets as well as weak in­fra­struc­ture are all pre­vent­ing Pak­istan from fully util­is­ing this ca­pac­ity. While CPEC should at­tend to the in­fras­truc­tural and en­ergy needs, pol­i­cy­mak­ers need to em­bark on stream­lin­ing and re­form­ing other bind­ing con­straints re­strict­ing the ex­port po­ten­tial. More­over, ex­am­ples of suc­cess­ful struc­tural re­form pro­grammes across coun­tries seem to have al­most al­ways ben­e­fited from some de­mand- side im­pe­tus. On this front, good macroe­co­nomic pol­icy such as pru­dent fis­cal pol­icy and ap­pro­pri­ately man­ag­ing ex­change rates and in­ter­est rates play a ma­jor role. Need­less to say, with­out ap­pro­pri­ate struc­tural re­forms, ex­change rate de­val­u­a­tion may only bring tem­po­rary re­lief, but at the same time, threaten sta­bil­ity via in­creased import prices and in­fla­tion­ary pres­sures. WWIf the de­pre­ci­a­tion is com­ple­mented by tar­geted struc­tural re­forms, a sus­tained pe­riod of strong growth is more likely to fol­low.

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