Money Matters

Policy pitfalls

December 4, 2017
By Mehtab Haider.

As an outcome for consistently pursuing wrong economic policies as well as passing through an era of acute energy crisis in the last decade, country’s industrial base has not only shrunk manifold but also touched its lowest ebb, leaving Pakistan lagging behind even neighbouring Bangladesh, mainly because of lack of exportable surplus.

Insight

As an outcome for consistently pursuing wrong economic policies as well as passing through an era of acute energy crisis in the last decade, country’s industrial base has not only shrunk manifold but also touched its lowest ebb, leaving Pakistan lagging behind even neighbouring Bangladesh, mainly because of lack of exportable surplus.

This is the major cause of all economic woes and ills faced by the country right now. Industrialists and manufacturers were the first to take the blow because of nationalisation during the Bhutto era. Now after the reversal of nationalisation and initiation of liberal and free market policies, there were still inbuilt biases against industrialisation coupled with flawed taxation and lack of incentive based regulatory regime for promoting industrial sector.

When the market-oriented policies were framed under neo liberal economic mantra for pleasing International Monetary Fund (IMF) and World Bank, the imports were liberalised by reducing tariffs significantly on the pretext the raw material and machinery would become cheaper and by doing value-addition, the country’s exports would pick up with the passage of time.

With rampant surge in imports, which shot up to $50 billion last year, the country’s economy became dependent upon consumption of imported goods as just cellular phones worth over $2 billion were imported into the country.

The imports-led consumption boom was quite apparent from the rampant flooding of Pakistani markets with every necessary item of different imported brands.

Owing to these wrong economic policies, the country’s trade and current account deficit widened manifold, touching $32 billion and $12.4 billion respectively in last fiscal year 2016-17. The hard-earned foreign currency reserves started depleting and have already evaporated over $5.5 billion during the last 16 months. In first few months of the current fiscal year alone, the yawning current account deficit had wiped out around $2.7 billion from the country’s foreign currency reserves.

The Pakistan Muslim League-Nawaz (PML-N) led regime launched a package, doling out billions of rupees in incentives for giving a jumpstart for the revival of exports but it had a fundamental flaw as it didn’t have anything in it for ensuring exportable surplus. When Pakistani industry will be able to produce exportable surplus at competitive price then the country’s exports would pick up in a major way. The second part of the policy was to discourage imports through tariff and non tariff barriers.

Now it’s a proven fact, with empirical evidence, that free trade agreements (FTAs) and preferential trade agreements (PTAs) had miserably failed to boost exports in the last two decades mainly because of two major reasons. First, these agreements were signed without doing proper homework for analysing strengths and weaknesses of the structure of our trade and second, Pakistan lacked with regards to producing sufficient surplus at competitive price in order to protect its share in the global trade.

Another policy that negatively impacted exports was too much love of the Ishaq Dar for stable exchange rate and his overshadowed role also weighed on exports. There is a need to go further into the details whether it was the increased influence of Mr. Dar that became a major stumbling block for boosting exports or it was the weak role played by the then commerce minister, Khurram Dastgir Khan, which had resulted into a decline in exports.

For checking the surge in imports, the government has come up with a prescription of placing tariff and non tariff barriers in a big way. The Federal Board of Revenue (FBR) has enhanced the scope of Regulatory Duty (RD) and raised the rates manifold with an aim to reduce rising imports. Owing to litigations and lagging impacts, it had not dealth any major dents to the import bill and it will take a few more months to analyse its outcome.

In terms of placing non tariff barriers (NTBs), the Indian model for imposing NTBs for curtailing imports had failed to achieve the desired results mainly because of weak governance structure in Pakistan.

The ministry of commerce had imposed NTBs for issuing Statutory Regulatory Orders (SROs) for making acquisition of No Objection Certificates (NOC) from respective quality standard bodies mandatory so that imports of food stuff and non essential items could be reduced. However, on the ground these NOCs can be managed by giving few thousand rupees so these NTBs became ineffective for all practical purposes.

Now there is a need to place well-thought-out mechanism under which NTBs should be implemented in their true letter and spirit and if the government cannot impose such orders then there is no need to become a laughingstock among the global comity of trading partners.

Discussions are underway at the highest level of the government to devise an effective strategy for ensuring effectiveness of the NTBs otherwise the current account deficit would be touching $15 to $18 billion for the current fiscal as it had already peaked to $5 billion for first four months (July-Oct) period of the financial year 2017-18.

However, one top official of Finance Division argued with this scribe that the rate of long-term financing for industries was brought down from 11 percent to 6 percent resulting into achieve higher positive growth in Large Scale Manufacturing (LSM) during first couple of months of the current fiscal year. He said the energy bottlenecks improved and there was almost zero load-shedding for industrial sector so it started paying off in terms of achieving higher growth in LSM sector.

Federal Secretary Finance Shahid Mehmood, who seems upbeat after launching Sukuk and Eurobond for attracting $2.5 billion from international investors, argued that the commodity crisis had caused recession and suppressed demands of all of regional competitors in export sector.

Pakistan is not alone in the struggle to boost its exports as suppressed demand caused losses to our endeavors for boosting exports like many other competitors in the global market.

The official also said the country’s exports had started picking up in the ongoing fiscal, going up with by 11.2 percent in the first four months (July-Oct) period of FY18. The exports witnessed growth of 12.4 percent in first three months (July-Sept) period of the current fiscal year.

If one buys the arguments of top official guns, there is a need of more in-depth analysis to find out solutions based on detailed research for finding out right kind of prescription after witnessing this fact that exports of Bangladesh had surpassed Pakistan by crossing $30 billion last year. Although, it is a fact that Bangladesh was enjoying the status of least developed country (LDCs) that helped its exports grow.

Pakistan’s exports had fetched just $21.9 billion last year despite having the incentive of GSP Plus from European Union. Without striking out the flawed economic prescriptions, the aims of improving governance structure, reviving exports, and achieving $100 billion exports target by 2025 will remain pipedreams for Pakistan.

The writer is a staff member