Managing trade deficit via three-pronged strategy

Aim is to boost remittances, promote export-oriented software industry, discourage oil demand


Faran Mahmood June 19, 2023
Thai ambassador described Karachi as a “vibrant city” and highlighted a host of business opportunities in many sectors including tourism. PHOTO: FILE

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ISLAMABAD:

Post-Covid, the International Monetary Fund (IMF) has become a strong proponent of fiscal austerity and has been asking for new tax measures and reducing expenditures of the state, unlike Pakistan’s Q-block which believes in an expansionary budget and controlled stimulus to boost growth.

However, due to the stagnant incomes and supply-side inflation, the current economic situation warrants that neither approach is correct per se and a mixed approach is needed to bring Pakistan out of the dire economic conditions.

Pakistan’s primary problem is the surging oil import bill and dwindling imports at the same time. The annual bill for fuel amounts to around 60% of the country’s foreign exchange earnings and must be funded either by the incoming remittances, proceeds from exports or foreign debt.

The current government in its last tenure tried to artificially stabilise the exchange rate for managing prices of petroleum products and hence the Consumer Price Index (CPI) – but at the cost of depleting reserves and a growing import bill (though that boosted the GDP growth).

But in 2023 with limited dollars at hand, this fiscal balancing stunt requires a different three-pronged strategy that aims for boosting remittances, promoting the export-oriented software industry, and discouraging the consumption of gasoline at the same time.

Looking into the past, we note that India managed to increase its remittances manifold after 1993 when it used to heavily regulate the exchange rate. At that time, there were huge incentives to transfer money through the informal Hawala network of family, businessmen and dealers – that not only ensured quick transfers but also a handsome premium exchange rate.

All changed when the Indian High Commissions in various countries started to invite expatriate Indians to dinners where they promoted new products that offered extensive tax benefits, premium profit on bonds purchased through the remitted dollars and numerous provisions for duty-free imports of luxury goods.

At the same time, the government established a market-based exchange rate system and liberalised gold imports, something that reduced the appeal of the informal Hawala system.

The Resurgent India Bonds (RIBs) were foreign currency-denominated bonds and when they matured, a sizeable portion of those bonds was not repatriated abroad, thus converting ‘foreign debt’ into ‘inward remittances’ – thanks to the good economic policies of the government.

Similarly, Indian states such as Kerala encouraged the immigration of skilled software workers to the Middle East and North America. Since the Indian citizenship law doesn’t allow dual nationality, it meant that most of the immigrants will keep sending remittances for a long time horizon.

This is where Pakistan can take a page from India’s book by ending interventions in currency markets and designing new dirham and riyal-denominated instruments to offer premium bond rates and tax credits to expats in the Middle East, who remit through banking channels.

In case, if they decide to not repatriate the proceeds back, additional premium should be paid.

Bonds in western currencies may be avoided as most of the expatriate Pakistanis in the US and in the EU aim to settle permanently there and are seen taking their wealth out of Pakistan after the demise of their parents.

Similarly, Pakistan should not only offer blanket benefits to the software industry but also start aiming to send trained software workers to the rich Southeast Asian and Middle Eastern countries.

The National Information Technology Board (NITB), in collaboration with HEC and OPF, should start standardised skill-testing exams to gauge competence levels of software developers and assist the top-rated workers in immigration process for selected countries.

The final examination of computer science undergraduate courses should be vetted by NITB or NCEAC to ensure that the curriculum stays up to the mark with global trends.

Finally, the last component of Pakistan’s trade deficit model, ie, oil consumption, is normally an indicator of economic expansion but for the country, where industrial output is getting cut, gasoline usage by individuals should be discouraged.

Not only the cheap gasoline has resulted in too many cars on roads, but it has also caused an uncontrolled urban sprawl, lesser spaces for pedestrians and a poorer air quality leading to smog in winters.

The government should firstly enforce the policy of not lowering gasoline prices as any declines don’t translate into a lower CPI or reduced prices for consumers due to poor enforcement.

Secondly, the levy should be increased and its proceeds should be spent on public transport projects around city centres. Thirdly, there should be express or fast-moving lanes only for public transport or private vehicles with full occupancy rate.

Lastly, the government should bar the pick and drop of students in cars by parents and private contractors and schools must cater for the transport of their students themselves.

The writer is a Cambridge graduate and is working as a strategy consultant

 

Published in The Express Tribune, June 19th, 2023.

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COMMENTS (1)

Amir | 1 year ago | Reply Excellent suggestions
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