Easy fiscal and monetary policies to spur growth

Govt needs to relax curbs on raw material imports to reverse decline in LSM

ISLAMABAD: For Pakistan’s economy 2019 was an annus horribilis or a horrible year. Economies of other South Asian countries continued to grow well – for example, growth in Bangladesh exceeded 8%, and in India, despite some slowdown, it was still over 5%.

Pakistan’s GDP growth slid from 5.8% in fiscal year 2018 to a mere 2.4% in FY19, the worst performance in the decade. It was only the third time in the past two decades that the growth rate was not even enough to match the population growth rate.

Commentators have advanced various reasons for each instance of poor performance over the last two decades, but there is little doubt that it was mostly of our own making. In Shakespeare’s words, “The fault, dear Brutus, is not in our star. But in ourselves, that we are underlings.”

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While the poor GDP growth of 2% during financial year 2001 was the result of global sanctions imposed following Pakistan’s nuclear explosions, the other low growth of 0.6% in financial year 2009 had a lot to do with political instability and the chaotic changeover of the government.

Though the global crisis of fuel, food and financial meltdown of the time undoubtedly contributed to the slowdown, the fact is that the other South Asian countries did manage to remain relatively unscathed by those developments.

The poor performance of 2019 had many reasons. There is some merit in the government’s claim of being handicapped by the high twin deficits left by the previous government.

But there is no denying the fact that the policies followed by the PTI government since coming to power further exacerbated rather than improve the economic situation. Indeed, one can clearly identify three factors which seriously undermined the economic performance during the period.

The first factor was the overzealous accountability process at the expense of other serious issues. Many, including the superior courts, considered the process as political engineering.

If one were to look at the profile of the people who were prosecuted, it becomes clear that a majority of them were those public office holders who had in the past actively worked on various infrastructure or energy projects with the previous government.

On the other hand, there was no accountability of those who dithered and delayed various projects due to their incompetence or apathy.

This one-sided accountability sent a clear signal that only those will be held responsible who take decisions while those causing losses through inaction will remain immune from any action. This brought decision-making and almost all economic activity to a halt.

The second major factor was the implications of the International Monetary Fund (IMF) deal. First, the government took a long time in deciding if it should approach the IMF for a loan. The delay caused serious economic hardships.

To compensate for the delay, it signed the deal in a hurry with some unrealistic conditions such as the goal of drastic increase in revenue of about 45% over the previous year. Overemphasis on taxation resulted in strikes and shutdown of many businesses.

Also, very high interest rate, resulting from an understanding with the IMF, discouraged borrowing and consumer spending.

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As a result of these measures, the economy saw a repeat of the Pakistan Peoples Party (PPP) era (2009-2013) when there was no growth for their entire tenure.

The third major factor for the slowdown was the government’s serious effort to curtail imports through tariffs and non-tariff measures.

This also impacted many essential commodities such as raw material for the industry, liquefied natural gas (LNG) for the industry and transport, and much-needed machinery for the production of goods and creating employment opportunities.

As a result, large-scale manufacturing (LSM), which has almost 80% share in manufacturing and over 10% in GDP, contracted for the first time in the past 10 years.

Would the economic outlook be any better during 2020? While the government sees it as a year of growth, this view is not shared by independent observers.

Growth forecasts

The World Bank and the IMF are of the view that the real GDP growth will likely decelerate to 2.4% in FY20. Although Moody’s in its recent report changed Pakistan’s outlook to stable from negative, it also expects Pakistan’s GDP growth to slow to 2.9% in 2020 before rising to 3.5% in FY21.

The government has taken some good steps recently to change its direction. Accountability laws have been relaxed and a new system for determination of tariffs and trade policy has been put in place to give more emphasis to exports but these measures will not be enough.

If the PTI government does not want to leave a legacy of low economic growth and increasing poverty levels, it has to ease its fiscal and monetary policies. It has to lower the interest rate to the level of other South Asian countries (which is about half of Pakistan) and also ease curbs on imports of raw material and machinery to reverse the decline in large-scale manufacturing.

The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008

Published in The Express Tribune, January 6^th, 2020.

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