Fragile economic recovery

The writer is a group director at Jang Group.

Make too many promises and sooner or later a government will find out that not everything can be kept. This is especially true of economic policy where it is strongly recalled that some stakeholder objectives must be abandoned in favor of another objective. Thus, high levels of spending on physical infrastructure or on social development programs aimed at stimulating the economy will generally lead to inflation, unless the economy is in deep recession and has a large capacity for production or production. enough foreign exchange to finance a surge of imports.

In an attempt to stop the widening current account deficit, the State Bank of Pakistan (SBP) recently raised its policy rate to 7.25%. However, the rate hike is unlikely to alleviate inflationary pressures, as the inflation we are experiencing is not only due to excess aggregate demand, but also cost pressures on the supply side.

A major downside to increasing interest rates is the additional burden it places on the Pakistani government with debt service obligations as the increase in the SBP key rate is rippled throughout the economy, including across the economy. federal government savings plans.

The current account balance is in the red at $ 5.4 billion in the first eight months of 2021 alone. This contrasts with a small but positive current account balance of $ 245 million in 2020. The surplus of last year, however, is an aberration; it reflects depressed industrial activity in the global economy because of the Covid-19, which caused a drop in the prices of raw materials, in particular that of crude oil.

The ongoing problem with our trade balance is the large gap between exports and imports of goods and services, even after eliminating imports of crude oil.

The saving grace for the checking account continues to be worker remittances which reached a record high of nearly $ 26 billion in 2020 – a growth rate of 17% from 2019. In 2021, remittances of funds have already exceeded $ 20.5 billion in the first eight months. by 2021, then we may well have a record annual inflow of around $ 27 billion by the end of this year.

Relying primarily on remittances to cover the trade deficit is a risky proposition, however, due to the underlying political and economic currents. According to the International Labor Organization (ILO), Covid-19 resulted in the loss of more than 114 million jobs worldwide in 2020. It is also revealing that many jobs lost during the current pandemic are permanently disappearing as workers host countries are switching to robotics and automation to replace unskilled labor or impose more stringent restrictions on the movement of border workers due to the populist backlash against migrants.

The outflow of dollars to Afghanistan, coupled with the rampant trade deficit, means further depreciation of the rupee is to be expected, even though the SBP governor, in a recent press briefing, tried to twist positive to negative trade gap due to increased investment in factories and machinery heralding a period of faster GDP growth in Pakistan. It’s the same type of fallacious answer (if not why the new restrictions on auto financing by the banks?) We remember the situation in Lewis Carroll’s “Through the Looking Glass” when a bewildered Alice discovers that she is. stuck in one place as she runs as fast as she can. The Red Queen’s response is that Alice’s attempts to move forward are in vain if she only runs as fast as she can. To go elsewhere, she has to run at least twice as fast as that!

As recently announced by the SBP, quantitative measures such as tightening the conditions for granting auto loans by banks are an appropriate corrective measure to slow the growing trade deficit. The assembly of cars on site requires significant foreign exchange requirements, as components and parts have to be imported by domestic producers. Foreign currency is also used for additional imported oil to meet the gasoline production of petroleum refiners for the growth in the number of cars. Add to this the negative impact on the current account due to the repatriation of profits by automakers and the need to curb car purchases is clear.

This is because the state of congestion on the roads of major cities and the fact that our urban areas rank among the worst in the world in terms of air quality, resulting in higher health and mortality costs in the world. population, provides a strong rationale for reducing air pollution through an emission permit system for car manufacturers. (Other polluting sectors like cement and power generation can be dealt with later under a “cap and trade” system).

Pollution permits mean higher prices for owners of cars driving huge gas guzzlers, but this would be offset by lower prices for smaller, more fuel-efficient vehicles. It would also boost the prospects of owning electric vehicles in this country.

A central implication of climate change is that changing patterns of global food production will cause seismic changes in the geopolitical landscape. Countries that have or are acquiring food export capacities will find that their importance has increased in international geopolitical terms. Frankly speaking, food crops will be the new oil.

One of the areas requiring immediate intervention in Pakistan is increasing the production of oilseeds and edible oils, which could reduce dependence on their imports which cost the country more than $ 3 billion. dollars per year. Surprisingly, very little has been achieved in the area of ​​oilseeds and edible oil self-sufficiency despite several important studies and recommendations on this sector by international and local consultants dating back to the mid-1980s. annual expenditure on importing these products is a direct consequence of a massive increase in the country’s population coupled with a decline in the production of traditional sources of edible oils such as cottonseeds while the area devoted to production cotton decreases.

Our planners are obsessed with promoting large-scale manufacturing even though, after more than 70 years of disappointments, it is evident that Pakistan lacks a comparative advantage in large-scale industry, which survives largely because ‘it has been pampered by a combination of protectionist barriers and a profusion of tax breaks and subsidies. Consumers pay the high cost of inefficiency.

It is disconcerting to note that recently reductions in excise duties and sales taxes were allowed on imports of spare parts for automobile production while taxes on personal computers and laptops were increased. Given their importance to the digital economy and to distance and hybrid learning in schools and universities, there should be zero taxes and duties on imports of laptops and PCs whose dollar prices have already increased due to a shortage of microprocessors in the world.

The digital economy is one area where Pakistan has a comparative advantage, as evidenced by the fact that we earn millions of dollars, despite an attitude of benign neglect on the part of the authorities, from the IT services offered to international clients. What’s remarkable is that much of this development has happened through seed efforts through which our young people have learned their craft through self-help initiatives by accessing free resources. on the Internet such as YouTube videos. The government must facilitate their efforts by expanding the broadband footprint to all corners of the country. Hopefully a million digital flowers will bloom as a result.

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