Economic revival likely post-polls

LSM sector growth, exchange rate improvement key to boosting economy

LAHORE:

As Pakistan heads towards general elections, a ray of hope is emerging among the public and business community. Nearly every individual, no matter rich or poor, businessman or economist, job-seeker or job-holder, is pinning hopes on the upcoming government, believing it will be able to improve the economy and make a sizable reduction in inflation.

While it is premature to predict which party or group of political parties may form the next government, the economic revival agenda is on top of every political party’s manifesto.

One can argue against the tall claims of different parties and their policy mechanism, however, there is consensus among different stakeholders that until the rejuvenation of large-scale manufacturing (LSM) sector, it would be a distant dream to reduce unemployment, and it would be more difficult to control inflation, until the exchange rate improves, coupled with a reduction in the cost of energy.

“Businesses and industries are in a crisis, largely due to high cost of doing business and inflationary pressures,” said Syed Rizwan Haider, a public relations specialist.

Talking to The Express Tribune, Haider saw Pakistan as a country that was full of potential as it had ample manpower, natural and land resources, which could produce different commodities on a large scale.

“What a businessman wants is an enabling environment, which can be created through a stable, long-term policy, reduction in taxes and energy bills. If the government wants to increase power or gas tariffs, it can go for it, but it should exclude various taxes, which normally cost up to 50% of original bills,” he said.

“The not-so-enabling environment for doing business, coupled with import bans, has resulted in massive unemployment, causing further trouble for fresh graduates who prefer to fly abroad for better prospects, despite the fact that a large number of immigration-seekers do not have proper skills set to work in global economies.”

The International Labour Organisation (ILO), in its report, said that Pakistan’s employment-to-population ratio was estimated at 47.6% in 2023, which was nearly 2% below the pre-crisis ratio in 2019.

The estimated ‘jobs gap’ grew to 2.4 million in 2023 and the number of persons unemployed, not working and actively seeking work, was projected to reach 5.6 million for 2023. This translates into an increase of 1.5 million unemployed persons since 2001, and this estimate matches with the International Monetary Fund’s (IMF) projected unemployment rate of 8.5% in 2023, up from 6.2% in 2021.

Lahore School of Economics’ Professor Dr Moazam Mahmood said that with projected economic growth of 2.4%, it was hard to create jobs for millions of Pakistanis in fiscal year 2023-24.

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“Pakistan’s economy is highly import-dependent, especially large-scale manufacturing, as FY22 shows. A high growth rate averaging 6% requires imports of $90 billion.

“In FY23, imports dropped to $67 billion and in FY24 import constraints still appear to bite. Prior to that, in FY22, per-month imports topped $7 billion. In the first quarter of FY24, imports remained at $5.5 billion per month,” Mahmood said.

He added that inflation was another challenge hindering growth, which in 15 months from July 2022 to October 2023 was estimated at 29.39%.

“For FY24, the overwhelming driver of inflation has been the huge depreciation of the exchange rate, by some 37% as observed already over 1QFY24, contributing nearly two-thirds to the inflation rate.”

The second major driver of inflation has been the fiscal deficit, estimated at 6%. “The impact of increased energy prices on inflation, for this most recent period, comes in at 4.2%, a much larger part of this increase is based on additional taxation,” Mahmood elaborated.

“We expect the situation to get worse, but a long-term policy is the solution to achieve better economic growth and generate more employment opportunities.”

He emphasised Pakistan should now divide its economy into domestic economy and the balance of payments situation.

“We as a country now have to decide what to import, for the first five years, as we have to stop importing unnecessary consumer goods, and should opt for import substitution in this category. After a successful five-year ban, the policymakers should then move forward to ban some intermediary goods, at least for five more years, with the objective of locally produced replacements. And then comes the turn for capital goods,” he said.

Increased focus on LSM and agriculture sectors, of course, could put the economy back on track. “It may take many years to overhaul the economy, but we cannot sustain any more without making some fundamental changes, which could ultimately lead towards low inflation and higher job creation.”

Published in The Express Tribune, February 8^th, 2024.

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