It’s back to the drawing board to sketch Pakistan’s economic outlook
The new year began with some positive news for Pakistan’s government. Lending arrangements by Saudi Arabia and the UAE have been formalized which will eventually help reduce pressure on the administration which has been on tenterhooks due to the issue of current account deficit. Oil prices are not increasing any time soon which helps the dwindling foreign exchange reserves and the depreciating value of the Pakistani rupee.
Additionally, recent visits by Prime Minister Imran Khan to Saudi Arabia, the UAE, China, and Malaysia resulted in commitments from Pakistan’s allies to invest in the country. According to the Board of Investment, investors from Germany and South Korea have expressed interest in the auto sector and engineering, too.
Most of the investors who visited Pakistan said they were encouraged by the country’s ranking in the ease of doing business which has improved this year. The new government has also promised investors that they would face fewer hurdles and enjoy reduced costs of transactions in acquiring local licenses and permits for large-scale manufacturing.
However, several others were found complaining that it is still difficult to navigate their way through the initial phases of doing business with Pakistan. Pakistan boasts special economic zones (SEZs) where a one-window facility will be made available with reduced time to facilitate businesses. However, the investors said such zones — in their experience — continue to struggle due to varied reasons including a lack of gas allocation, uncertain power supplies, and weak business infrastructure services, case in point the IT and telecom-related sectors.
Some of these economic zones are not in close proximity to clusters that host skilled labor and, therefore, create additional costs for foreign investors. Even those businesses which are already working in the SEZs struggle to get additional gas and electricity connections once they scale up.
The waiting time can range from anywhere between eight to 12 months, depending on both formal and informal relationships of businesses requesting the connection, while the allotment and possession of land can take up to a year.
While attracting investments remains a key priority for Pakistan this year, it is also important for the government not to backtrack on the structural reforms which it had pledged to implement in its manifesto. Ultimately, the government needs to share its vision for growth — something which can only be sustained once the agenda for structural reforms gets the go-ahead from the prime minister.
A large part of the regulatory burden, which stifles business activity, falls in the domain of provincial and local administrations.
Dr. Vaqar Ahmed
Perhaps the most important element under the planned reforms should be to plug losses which are being incurred by the public sector enterprises (PSEs) and the energy sector. The latter’s circular debt now stands at Rs1.4 trillion. The top loss-making commercial PSEs include Pakistan International Airlines, seven power generation companies, and Pakistan Steel Mills. Losses of state-owned enterprises (which may not be commercial PSEs) also need to be curtailed. These primarily include the National Highway Authority, Pakistan Railways, and Pakistan Post Office.
We have heard several government ministers claim that the growth model of their administration will be export-led. However, this leaves one hungry for specifics. Export-led growth usually requires a plan to free commodity producing sectors of the economy as well as the services sector from the large regulatory burden, substantial tax compliance costs, a high cost of credit, high customs duties, and significant energy costs faced by the businesses. The export promotion measures now need to be defined through trade, industrial, and investment policies which the government has promised to do this year. One hopes that these policies will be developed in consultation with local business communities and think tanks who have evidence-based research in the area.
Several of these reforms cannot be led by the federal government alone and will require the support of provincial governments and other political parties in the parliament. A large part of the regulatory burden, which stifles business activity, falls in the domain of provincial and local administrations. To create urgency and a shared vision for economic reform, the premier could steer the debate on the ‘Charter of Economy’ and in time develop a consensus around key economic reforms so that at least measures facing least political resistance are expedited in parliament.
Finally, the business community in Pakistan wishes to see improvements in dispute resolution mechanisms. Most business associations lament the disposal of (business) cases by the judiciary which they term as slow and uncertain. According to them, the judiciary lacks the technical knowledge on how goods and financial markets work. The data from the Law and Justice Commission of Pakistan says that there were 1,810,745 pending cases in various courts of Pakistan, including 40,243 cases in the Supreme Court as of September 30th, 2018. The shortage of judges also makes the disposal rate slow. For example, as of the same date, there were 17 judges in the Supreme Court of Pakistan. This implies that currently there are 2,367 cases for each judge.
– Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to
the UN Development Programme (UNDP), and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planningand Commerce Ministries in Pakistan.