It is increasingly becoming clear that the next 12-18 months will be difficult for global economy as expectations of economic slowdown to even contraction are building up. The key question for Pakistan is whether she will be able to weather the global storm, and if that storm has any bearing on the country then what should the government do to mitigate the damage, if any.
It so happens that Pakistan is somewhat insulated from global crises. The country’s capital/financial markets and banking circuits are not well connected to global markets. Nor is it so that Pakistan’s GDP growth is substantially driven by growth in exports; much to policymakers’ chagrin the economy is mainly driven by domestic consumption.
And as luck would have it, the global slowdown seen coming by leading global economic observers has two likely characteristics: lower commodity prices and low or negative interest rates in the developed world. (See BR Research’s Caution: global economic headwinds ahead Oct 10, 2019)
This may have two positive spillovers for Pakistan. Lower commodity prices can help keep per unit cost of imports on the lower side, which means, for instance, if the government manages to kickstart housing sector, low steel import prices can be quite a boon. At the same time, lower interest rates in the developed world means that possibility of carry over trade, or the hot money flowing in Pakistan’s bond markets, can last as long as at least Pakistan’s interest rates offer a promising risk-reward ratio.
Meanwhile, it’s heartening to note that news flow on the China Pakistan Economic Corridor (CPEC) has gained momentum of late; PM Khan’s visit to China has also reinvigorated CPEC sentiments. Of course, it is still too early to expect any fresh inflows since state backed FDI inflows is one thing and private sector led B2B inflows is another. But at least the good thing is that CPEC news stream has started flowing again, after a much disheartening hiatus.
The Belt and Road Initiative (BRI) of which CPEC is a part of was itself envisaged as a part of Chinese plan to stimulate its own economy. While a long-held vision, what triggered BRI into action was in part a reaction to the last major global slowdown that emerged in 2007, after which the Chinese decided not to put all her eggs in one basket. Instead they decided to look inward and develop, should the global economy decide to melt again. That melting is being feared again, and in light of that original Chinese vision, one can expect the BRI and the CPEC to continue.
But must Pakistan bet on only on one horse (CPEC) to drive its growth. Granted that possible FDI inflows from China’s private sector can drive growth. But those who think that FDI alone will drive reform and unlock Pakistan’s growth potential think again. Pakistan has had FDI in power, banking, dairy, etc. But the growth potential of all these sectors remains locked behind the inertia to reform. But what are some of those critical reforms?
To begin with, Pakistan must have savings. There have been recent efforts to improve public savings by driving up tax revenues; and credit goes to Shabbar Zaidi for that, who has been able to put all those long pending ideas into action. Let’s hope they work out. But private savings must be promoted as well, and to that end there is pressing need to unlock domestic savings parked as dead capital in the shape of real estate.
Second, improve the functioning of domestic commerce, as VC Pakistan Institute of Development Economics Nadeem ul-Haq has long been arguing. In his former role as chairman Planning Commission, in 2011, Nadeem had rolled out the widely acknowledged new growth framework. That framework argued for reforming and strengthening of institutions such as the civil service, legal and judicial framework, and the taxation system.
All of these items have been pending since then, and save for green shoots in taxation, Khan’s regime is also playing deaf ears to those critical reforms, where one cannot help but notice the failure to fill key positions even though a year has passed since Khan took office. The new growth framework passed by the then parliament had also advised the government to take its foot off the so many sectors it directly participates in, such as agriculture, storage, transport, construction. But to no avail.
Third, undo the obsession with the time-tested failed governance mindset that aims to protect the poor in a manner that is irrational to the extent that it prevents economic growth in those sectors. By adopting the policy of price regulations or instruments of this failed governance mindset, and that too by incompetent people in many cases, Pakistani governments have long been stifling growth and development in some of the key sectors such as dairy, pharma, housing. (For more on this read: Failed governance mindset, Dec 5 2018)
Fourth, fix the institutions of coordination with and between the provinces. Corruption may be a big problem but the Ministry of Interprovincial Coordination, the National Economic Council, the Council of Common Interest and other mechanisms are also worthy of discussion. Post-devolution the fate of many business sectors such as mining, dairy and livestock, and related economic affairs such as vocational training now rests with the provinces. And yet the centre is not taking the lead in coordination or even finds ways to incentivise provinces to develop and foster growth in sectors that lie in provincial domain (Exploring NFC to boost exports, Apr 22, 2019).
Lastly, start giving the right kind of messaging to businesses and bureaucrats – both in terms of reform communication and the anti-corruption drive, which too many businesses is a kind of witch-hunting affair. If and when exports will tank, as it might in the wake of global economic slowdown, and if domestic economy doesn’t pick up, this obsession with corruption, which appears to be coming at the cost of focus on other reforms, will come back to haunt the government.