Thursday, 11 July 2013

Towards Revival

Towards revivalArticle was Published in the Money Matter on may 6, 2013 
 By M. Ali Kemal 
According to a recent report issued by the Asian Development Bank (ADB), chances of economic recovery in Pakistan are bleak. The report also said that the chances for immediate recovery are nil. In such a scenario, the first two years will be very difficult for whichever party comes into power in the upcoming elections. Interestingly, if they are ousted in the third year, they will not have much in hand to show to the people and ask for them to vote again. Despite all the challenges, all the parties are vigorously participating in the elections.

The economy desperately needs stronger actions, which will fix things in the short to medium run. Meanwhile, in the long run certain reforms are needed that will stabilise the growth process.

Investment is crucial for growth. To achieve high growth rates, high levels of investment are necessary. In the last five years, investment in Pakistan declined to 12 percent from 22.5 percent in 2007. The decline in investment is associated with rise in extremism/terrorism, energy crisis, decline in profitability and lack of demand, which is also linked with the first two problems.

The previous government is getting ready for the next elections and so are the other parties. Everyone is all geared up to come into power. All the parties have published their manifestos, which cover various issues pertaining to the country, to inform the people about their agenda.

I have selected four major national parties, which are expected to form government in the centre or a coalition with the so-called regional parties or smaller parties. The four parties that have been analysed in the article include Pakistan Muslim League-Quaid e Azam Group (PML-Q), Pakistan People’s Party Parliamentarians (PPPP), Pakistan Tehreek-e-Insaf (PTI) and Pakistan Muslim League- Nawaz ( PML-N).

All the four parties have talked about economic revival. The PML-Q said that they will achieve six percent growth in their first term. The PPPP expects a six percent growth till 2016 and eight percent afterwards. On the other hand, the PTI does not mention their growth target but they expect to achieve 22.5 percent investment as percentage of GDP by 2018. The PML-N has a modest growth target of six percent till 2018 with 20 percent investment by 2018.

Investment, which kick starts the growth process, is common in all the manifestos. Due to terrorism, private as well as foreign investors are reluctant to invest in Pakistan as there is a high cost of security, which reduces profitability. Moreover, energy crisis is one of the major determinants of low investment in the country as most of the firms are unable to produce even to their installed capacity (due to unavailability of electricity and gas). Therefore, they do not want to invest more in physical capital.

By the same token, new investors are not investing in the country due to the prevailing energy shortages. One of the main reasons for low investment is the government’s bank borrowing, which crowds out private investment. It is pivotal to mention here a new growth theory, as said by Dr Nadeem-ul-Haque,  that the lack of private investment is due to lack of entrepreneurship. Do we have such policies that allow new entrepreneurs to experiment their ideas? Moreover, do we have policies that welcome new entrepreneurs into the market?

Despite the differences among political parties, they have agreed on a single point: terrorism is a deep-rooted problem and cannot be handled with force. However, the PPPP said that they will use force to eradicate terrorism where it is necessary. Apart from awareness programmes, education and employment opportunities, none of the parties has a tangible policy to eradicate terrorism.

Similarly, everyone talks about energy issues and all the four parties have their own way of solving this issue. A few days ago, Sartaj Aziz in an article, blamed the IPPs for high fiscal deficit. The article further stated that when the IPPs were asked to produce electricity, the price of oil was $18 per barrel, while today it stands at more than $100 per barrel. Hence, the cost of electricity production has increased significantly, especially in the last five years. Moreover, Aziz further said that the ratio of thermal to hydel was 40 to 60 in 1994 and it has now increased to 80 to 20. Thus, we are relying more on thermal electricity in the presence of high oil prices. This raises the issue of circular debt since the government needs to give more money to the IPPs.

The PML-Q thinks that the issue of circular debt will be abolished with a one-time settlement, whereas, the PPPP is thinking long term, i.e., building dams and renewable energy options. However, the PPPP’s manifesto includes an important point that has been missed by everyone and that is the policy of energy conservation, which can take place through different awareness programmes. Nevertheless, these awareness programmes should not involve huge costs. The PTI wants to wipe this problem out by moving towards lower cost of production. Nonetheless, their manifesto does not mention how they would go about it in the short run. They are keen to divert all resources to maximise energy production.  The PML-N, on the other hand, understands the problem of circular debt very well and their policy of mitigating power outages sounds better than all the other parties. According to the PML-N, they will find ways to reduce the cost of production by better management, and by replacing the use of furnace oil with coal in the short run. In the long run, they seek to introduce reforms in distribution and generation companies by corporatising and privatising both the institutions, decreasing line losses by less than 10 percent and introducing a pre-paid billing system to avoid non-bill payment problems.

In addition to terrorism and energy crisis, private investment crowding out due to massive government borrowing from scheduled banks in the last few years attributed to the high fiscal deficit. Thus, to counter the problem all the parties have vowed to reduce the fiscal deficit by increasing revenue as well as reducing wasteful spending, including untargeted subsidies. All the parties’ revenue targets are quite ambitious and seem impossible to achieve without structural reforms.

Moreover, cities are the engines for growth. All the manifestos incorporate urban land records as their main policy, which help in securing property rights. However, only the PPPP embraces the policy of expansion of markets in inner cities, promotion of cluster development and energy-efficient buildings. These policies are a significant part of the new growth framework of the Planning Commission, which enhances growth.

Other than the above mentioned challenges and their possible solutions provided by the four parties, certain reforms are necessary that involve ease in the process of service delivery, less paperwork, and lower bureaucracy restrictions, which help in reducing the cost of doing business and increases profitability. All the manifestos have touched upon these issues but the entire policy framework has not been shared and certain loopholes are prominent in each policy.

Besides a few reforms mentioned in the manifestos, various reforms are needed, including civil service reforms to achieve higher growth. The current bureaucratic system gives too many discretionary powers to the person sitting in the seat, who does not allow for new entrepreneurs to enter the market. The Planning Commission’s new growth framework tells us to implement various reforms that allow equal opportunities to everyone.

I would congratulate all the political parties who came up with different strategies for economic revival. It is now necessary that whoever comes to power, they involve other political parties and think tanks, e.g., the Pakistan Institute of Development Economics, to help them in implementing these policies in line of research.

The writer is a research economist at PIDE.

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