The Pak Banker

Tackling economic issues

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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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