It’s the earnings again. Every time we are short of funds, we go to the Fund, i.e., the International Monetary Fund (IMF). However, as we know it is titled as the “lender of the last resort”. Unfortunately, in Pakistan it has traditionally been the lender of the first resort. Traditionally, the governments in the past have resorted to and IMF bailout 18 times. That is a regularity that raises questions on how economic management has been done in this country. A country like Pakistan has undergone a number of geo-political and socio-economic upheavals in the last four decades and the easy thing would be to blame it on political instability, policy uncertainty and regional insecurity. All these are factors which are contributing to the present precarious state of the economy but are not the only factors. Thus, this mess is not just a question of sheer bad luck but also of gross bad management.
One does not have to be an economic wizard to know the principle that as long as the cash coming in is more than the cash going out, you are solvent. As the reverse occurs the economy is forced to use borrowed cash that comes with interest and conditions. This is the principle that has been violated to the extent of the economy becoming unsustainable time and again by the successive governments. Does that mean that economies never borrow? No, most economies borrow and borrow heavily. It is the reliance and extent of borrowing versus other sources of funds that matters. The permissible Debt to GDP ratio is 50% for developing countries. In Pakistan’s fiscal and constitutional laws i.e., the Fiscal Responsibility debt limitation Act 2004, says the government cannot have a debt to GDP ratio exceeding 60%. Reckless fund management had led to the ratio being violated in 2013 to reach 64% in PPP government, while in PMLN government it just broke all records and debt to GDP ratio increased another 10% to end up at 74% in 2018.
The over-indulgence in borrowing would still be explainable, if not acceptable, if the money borrowed was invested in long-term industrial or human development projects that would bear fruit over a period of time, thus increasing the revenue pie and reducing the debt burden to restore balance of payment. In Pakistan’s case loans did provide fiscal space and enough funds to restructure and reform the government. The past governments failed to focus on key areas of reform. The present government has approached various sources of lending and some fiscal space can be used to bolster two major areas where Pakistan has underperformed. Firstly, exports and secondly taxing the untaxed. Exports require a policy focus change and tax collection an institutional and an accountability change in the FBR.
Most countries that have reformed and developed in the last two decades have followed the export route. China, South Korea, Malaysia all started their progress in the world with selling their products and services overseas. This model has now also been followed by South Asian countries barring Pakistan. In a recent report published by the World Bank on Export Competitiveness in collaboration with SDPI, after holding private sector engagements with the relevant stakeholders, Enrique Blanco stated that “Pakistan’s exports performance in past ten years has not been stellar,” adding that “exports in goods and services rose by a low of 27.3%, whereas exports on average during the same time period grew by 165% in India, 276% in Bangladesh and 445% in Vietnam, over the period of 2005-16”. In fact, in the last five years Pakistani exports have dipped 20%.
The reasons given are the lack of enabling environment that leads to a bad rating on ease of doing business and high costs of business giving countries like Bangladesh and Vietnam etc an edge over traditional textile exports of Pakistan. The cumbersome duty drawback structure, high tariff of electricity and gas, and a lack of branding make Pakistani exports survive on very low margins that discourage investment in exports. Narrow product line dependent on textile is a major handicap for increasing market share. Pakistan’s exports are highly concentrated in limited items like cotton and cotton products, leather, rice and a few more items. These constituted more than 72 percent of total exports during 2016-17 with cotton and cotton products contributing 60.1 percent. Besides this narrow export basket, exports are also dominated by primary and intermediate goods rather than value-added finished products. 74 percent of food items and 40 percent of textile exports are primary commodities.
On the marketing side Pakistan has not been able to diversity its markets. More than 50 percent of exports rely on only six markets- the United States, China, Afghanistan, the United Arab Emirates, Britain and Germany. These markets are saturated and difficult in terms of tariff and non-tariff barriers, standards and competition. What Pakistan needs to do is to explore the African markets. The focus should not be just on traditional African markets like South Africa, Kenya and Uganda but on the emerging African markets like Ethiopia, Rwanda, Senegal, Djibouti, and Chad. Ethiopia is the fastest growing economy in Africa that hit double digit growth and is now averaging a robust growth rate of 8.6%. Similarly, Rwanda at 7.6% has been a case study of growth and potential.
Trade between Pakistan and Africa is at US$ 3.6 billion with Pakistan’s export volume at US$ 1.4 billion and import volume at US$ 2.2 billion from Africa. At present, Pakistan has not been able to realize its full potential despite enjoying cordial relations with the African countries. All African countries are currently dominated by China and India due to aggressive marketing and continuous presence in this continent. Pakistan can use its foreign missions for economic diplomacy with Africa to export food products especially halal food as many countries have large Muslim populations. Other products include pharmaceuticals, agri machinery and IT solutions etc.
Africa represents to the world today what Asia represented to the world in the 1990s. With a growing economy, large youth population and a readiness to explore new products and brands, it is a natural market to understand, explore and capture if Pakistan wants to shift the fiscal balance from borrowing to earning.
(The writer can be reached at firstname.lastname@example.org)
(This news/article originally appeared in Business Recorder on November 5th, 2018)