Pakistan's economic system is stable and the country's $300 billion economy in current dollar terms and $1 trillion economy in Purchasing Power Parity terms is growing under the impact of the sizeable purchasing power of a huge middle class (roughly 50 percent of the population), a very large urban population (60-65 percent of the population) and a self-sufficient agricultural economy.
Rector Lahore School of Economics (LSE) Dr Shahid Amjad Chaudry said this on Wednesday while speaking at the opening session of the two-day 13th International Conference on Management of the Pakistan Economy organised by Lahore School of Economics with the theme of "Igniting technology led growth in Pakistan : Role of monetary, fiscal and investment policies."
Dr Shahid questioned the audience should we carry on doing what we are doing currently, especially with the arrival of the Chinese Pakistan Economic Corridor (CPEC) foreign investment of about US $50 billion? The answer, as most observers would agree, is that we must, and can do better. A good starting point is to focus technology. He said we have mastered and excelled in all technologies that we have considered essential. Yet in the other 90 percent of the economy, our technology is 50-80 years behind the times.
The conference is aimed at exploring the reality of Pakistan's macro-economic frame-work which has been badly battered by the security situation and economic mismanagement and learn from the experience of other countries. Pakistan has focused on basic, fiscal deficit reduction, free trade and globalisation through free trade agreements and tariff reduction and left it to the market to take care of the rest.
"We are discovering as Trump's America has done that macro-economic stability and free trade are not enough to ensure equitable and high productivity growth for all sectors of the economy productivity in the productive sector," Shahid said. While sharing his experience as Pakistan's Advisor on finance, revenue, planning, economic affairs and statistics in the caretaker government of 2013 he said that in April 2013 Pakistan was facing a very severe foreign exchange crises and Pakistan's international reserves had been run down to negligible levels to about 4 to 5 billion dollars. Both the World Bank and ADB had stopped new adjustment lending to Pakistan and as a result Pakistan was making a net transfer of about $2 billion to these institutions.
Giving full credit to the Government of Pakistan's finance team led by Finance Minister Ishaq Dar, which subsequently held detailed negotiations with the IMF and subsequently signed the IMF 2013-16 EFF Programme, he said it was important to note that the present Government implemented this program.
Dr Rashid Amjad, Professor of Economics and Director, Graduate Institute of Development Studies, Lahore School of Economics emphasised the need to analyse the macro-micro interaction in the economy to fully understand the dynamics of growth and recommended that such an analysis is necessary to frame appropriate policies. Over the last 15 years, poverty has decreased significantly as remittances have increased.
In his paper Dr Naved Hamid Professor, Lahore School of Economics discussed recent exchange rate management in Pakistan and drew attention to the change in government priorities since 2013, which has switched focus from stabilising the real exchange rate to the stabilising the nominal exchange rate.
He showed his reservation that reversal in policy has had an adverse impact on exports and manufacturing; while non-oil imports have expanded significantly. A balance of payment crisis at this point could bring the present economic expansion to a halt.
Dr Matthew McCartney Director of South Asian Studies and Associate Professor in the Political Economy and Human Development of India, University of Oxford, UK talked on the 'middle income trap' under which growth and development indicators stagnate. He used the example of Bangladesh, where exports seem to be stuck in a low cost, low productivity cycle. He challenged the orthodox view of encouraging growth via competition and technology adoption.
For a developing country he said technological transfers may perpetuate dependence on imports and may inadvertently, transfer resources back to developed countries in the form of patents and royalty payments. He argued that attempts to boost productivity would be met with limited success unless they are supplemented with old-fashioned efforts to induce structure change, breaking away from the dependence on agriculture and low-tech manufacturing.
Shabbar Zaidi CA and senior partner, A F Ferguson and Co, Karachi talked in detail about the role of fiscal policy in Pakistan is largely of a revenue collection measure only. He said it is currently being used as protective tool for traders through the 'Presumptive Taxation Regime', where the burden of indirect tax falls on the consumer. A presumptive tax regime, perpetual amnesty and non-availability of asset database have resulted in a tax regime that provides competitive advantage to a large undocumented segment of the economy that lies outside the fiscal regime and has lead to growth that excludes a large proportion of people.
Dr Inayat Mangla Professor of Finance, LSE and Dr Kalim Haider senior Economist, Monetary Policy Department, State Bank of Pakistan used quarterly data to explore the role that monetary policy can have in the presence of macro-level uncertainties such as volatile capital flows, falling remittances and declining exports.
They also said that rising federal interest rates combined with low growth, for instance, can lead to grater pressure on the external accounts and uncertainty for the monetary policy of Pakistan. Findings from an econometric analysis of data from 1991-2016 suggests that real interest rates and real exchange rates increase in response to international demand shocks. However, external demand does not significantly impact inflation or domestic growth in Pakistan. They emphasised that monetary and fiscal policy co-ordination is essential for the country to fully capitalise the benefits of positive shocks in the external economy.
Dr Nasir Iqbal Director of Research, Benazir Income Support Programme draw attention towards the fiscal deficit target set under Vision 2025 and discuss if this arbitrary target is a sustainable in the macroeconomic and institutional environment in Pakistan. He used data from 1972 to 2016 to understand the relationship between government deficit and economic performance in Pakistan and find a threshold level of 5.57 percent of GDP for Pakistan.
Dr Ahmed Khalid Professor of Economics, University of Brunei Darussalam discussed the importance of financial integration and stability for sustainable economic growth. He used data on key financial and real sector indicators from 130 countries in the Asia Pacific over 1989-2013 to establish the link between finance and sustainable growth. Results show a positive and significant relationship between financial integration, foreign direct investment and economic growth for this sample.
Dr Sirimal Abeyratne drew attention towards the rapid expansion in network trade based on the formation of regional supply chains in South Asia. These supply chains focus on trade in parts ad components and are highly sensitive to trade barriers. In spite of its entry into regional and bilateral trade agreements; Sri Lanka has not integrated into regional supply chains and this may explain why the trade performance has remained limited. Presently, non-tariff barriers make it easier for traders to trade outside of South Asia than within the region. His findings recommend a more co-ordinated regional effort that facilitates trade to achieve regional growth.
Dr Ghulam Saghir Assistant Professor, University of Punjab, Lahore presented research carried out by Dr Jamshed Uppal Associate Professor of Finance, Catholic University of America on External Debt Management and Capital Flows. There is, however, a general downward trend since Jan 2012 to the accompaniment of improvements in the credit ratings and decrease in the CDS spreads. Therefore, the key to further driving the yields lower may be in ameliorating domestic economic, political and security conditions. These key factors may be even more pertinent in light of changing global financial environment and financing requirements of projects such as China-Pakistan Economic Corridor (CPEC).
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