Mending the Economy

Asad Umar and team started the innings with tough pricing measures to lower the twin deficit. The process is painstaking, and is resulting in a broad-based economic slowdown - numerous industries are taking tough cost cutting measures including layoffs and salary cut. This coupled with higher imported goods prices is creating resentment against incumbents. Since media employees are amongst those affected, the hue and cry is overplayed.
Time is running fast to demonstrate progress. A medium term actionable strategy is warranted, which can keep the deficits at manageable levels without compromising the employment generation. There are numerous economic theories proposed, which can complement or contradict each other, to lower the economic gaps. Concurrently, relevant ministries are working on industrial, trade and other policies frameworks.
The policymakers may get confused by simultaneously working on bridging all the gaps, and the sectoral priority objective may get lost in the quest of reviving all the sectors. For instance, one theory says that to enhance domestic savings, real interest rates are to be positive, but it increases the debt servicing cost to inch up the fiscal deficit. This lowers the government savings to nullify the benefit of higher domestic savings. Plus, the economic slowdown due to higher rates is eroding the tax revenue potential. Hence, some economists are for tightening and others against it.
Asad and team should think beyond what a few EAC members and other economists are saying. The macroeconomic deterioration in Pakistan is due to micro and sector-level issues, and these cannot be solved merely through macroeconomic adjustments. It requires simple and workable solutions in various sectors and institutions - the government needs a battery of sector specialists, not a bunch of macroeconomists under one roof.
The strategy adopted is of import compression through demand management. Around a two-fifth of imports are in food and agriculture, and energy. These are termed as 'essential imports' and the number cannot fall without denting economic growth, and employment loss is an ugly consequence. The focus has to be on substituting these essential imports.
The secret of sustainable economic recovery is beyond the discussion of IMF programme and quantum of economic tightening. This has to be achieved by harnessing the potential in agriculture and its value addition, and resolving the energy mess. Globally, economists have consensus on one theory and that is of comparative advantage. Pakistan's advantage is hidden in agriculture jewel. And to convert comparative advantage into competitive edge, cost of energy has to be rationalized.
An agriculture focused policy is warranted - by substituting crops, and providing water to uncultivated land. Pakistan imported $1 billion of raw cotton last year as over the past few years, cotton production is replaced by sugarcane in a few areas. The process has to be reversed. The other potential gain is in growing oilseeds to lower the $2 billion edible oil import bill. The distortion in support price mechanism for wheat and sugarcane has resulted in the decline of oilseeds production which has increased the imports of edible oil. This issue needs to be tackled soon.
Apart from these obvious moves, too much wheat production has to be discouraged and the need is to grow other crops which have exporting potential including vegetables. Since agriculture is a provincial subject, federal government has to sit down with provincial economic and agriculture departments to have a comprehensive agriculture policy soon.
The other important area is energy. According to an ADB report, Pakistan uses 15 percent more energy than India and 25 percent more energy than the Philippines for each dollar of GDP produced. This partially explains why energy cost is high for industry, and to make it regionally competitive, fiscal subsidy is required. The other obvious benefit of bringing energy efficiencies is to lower the import bill. The government needs to be firm on policy of relying on indigenous energy sources, and explore the comparative edge in renewable.
The third area is of turning around public sector entities - bulk of them are in energy segment. Finance minister is appointing people on merit at various vacant positions, however, the recruitment process is taking too long and not the best people are applying for the job. The fear of accountability and low salary packages is keeping best talent at bay from joining government.
It is best to privatize these entities, as government does not have the luxury of time to turnaround badly shaped companies. At this point, these companies are eating away fiscal resources, and after turnaround, by private sector, government can earn dividends on its remaining holdings. Plus, the potential of collecting taxes is huge in discos and other companies in the energy chain.
Once these sectors are on the right path, twin deficit reduction would be a natural progression. The economic growth will generate employment and enough tax resources to deploy on social sectors - health and education. The future is in knowledge economy, and for that government has to increase its spending on education, and to have fiscal space for higher social spending, tax collection from agriculture, exporting and energy sectors are to be in proportion to their economic share.