Tackling economic issues
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.