'Businesses must compete globally'

SBP governor says current growth model unsustainable for Pakistan's economy

ISLAMABAD:

The central bank governor said on Wednesday that the current economic growth model cannot sustain a country of 250 million people and the economic stabilisation policies cannot continue indefinitely, urging businesspersons and policymakers for a shift in their approach.

Governor Jameel Ahmad spoke about Pakistan's economic model and its implications a day after Planning Minister Ahsan Iqbal blamed the International Monetary Fund (IMF) for the nation's highest unemployment rate in 21 years.

"Continuing with stabilisation policies indefinitely is neither desirable, nor sustainable," said Ahmad while delivering a keynote address at the opening session of the Pakistan Business Council's (PBC) "Dialogue on the Economy".

The governor said that economic growth had been on a steadily declining trend, which has slipped from an average of 3.9% over the last 30 years to 3.5% over the last 20 years and to 3.4% over the last five years. "Our business cycles are shortening and as such our current growth model simply cannot sustain a country of over 250 million people," he said.

Pakistan is passing through a prolonged phase of stabilisation, which overburdened people and businesses in the shape of heavy taxation, high energy cost to offset the impact of inefficiencies and no control over growing expenses.

The unemployment rate has reached a 21-year high of 7.1%, while the World Bank has calculated the poverty rate at 44.7%.

"Let us not declare victory too soon and those who are responsible to run the economy should not be undermined by saying that too much pain has been inflicted on people," said former central bank governor Dr Reza Baqir while advocating the continuation of economic stabilisation policies.

The governor said "it will not be an overstatement to say that Pakistan's economy stands today at an inflection point where the focus must shift from short-term stabilisation to sustained and inclusive growth".

Jameel Ahmad said that there was a need to rethink the economic model and the policymakers and businesses need to take a long-term view of policies, regulations and business strategies.

He advised the policymakers to address structural issues through long-term reforms, terming it "imperative", and suggested the private sector not to compromise long-term gains for the sake of short-term profits.

Businesses must shift their focus from looking inwards to looking outwards and compete on the global stage by producing goods that meet global demand and quality benchmarks, he added. This will only happen if they integrate into global value chains, modernise their production processes and stop relying on shortcuts as a substitute to genuine competitiveness, said the governor.

"We cannot achieve long-term sustainable economic growth, if the private sector cannot move beyond short-term profit margins and the cost of long-term stagnation and global irrelevance," said the State Bank of Pakistan (SBP) chief.

He said that the central bank was doing whatever was needed to make sure that the economy does not face another phase of boom and bust.

He stressed that the monetary policy has become more forward looking over the last few years and the monetary policy committee regularly reviews projections for the next eight quarters rather than looking at just near-term projections.

"Inflation has declined and it is expected to remain within the target band over the medium term," said the governor. The central bank's medium-range inflation forecast is 5% to 7%.

He said that there was a growing recognition that sustainable growth would remain elusive until policymaking is reoriented towards a long-term vision of achieving socio-economic prosperity for the people, instead of looking for short-term consumption growth spurts.

The governor said that despite challenges and scepticism, the government has achieved the ambitious but necessary fiscal consolidation over the past three consecutive years – even surpassing its primary surplus targets.

Solid reserves

The governor called the SBP's massive purchases from the market to build up foreign exchange reserves in the absence of higher exports as a "strategic" move.

The recent buildup of Pakistan's external buffers has been driven by strategic purchases of foreign exchange reserves, rather than the building of reserves through external borrowings, he added.

Ahmad said that from June 2015 to June 2022, external debt rose from $55 billion to around $100 billion, an average increase of about $6.4 billion per year. Yet, despite this additional borrowing, the SBP's reserves did not increase.

In contrast, since June 2022, the public sector external debt has remained broadly unchanged in absolute terms around $100 billion, resulting in a substantial decline in the external debt-to-GDP ratio from 31% to 24%. And the foreign exchange reserves increased from $2.9 billion to $14.5 billion.

The central bank purchased around $8.4 billion in the last fiscal year alone to cushion the reserves, which put pressure on the exchange rate.

Former central bank governor Dr Ishrat Husain said that compared to the $350 billion size of the formal economy, the total size of the economy is around $700 billion after adding the impact of illicit economy and the informal untaxed economy.