Converting Pakistan’s green shoots of recovery into economic takeoff
Javed Hassan
Early signs of a V-shaped economic revival are starting to show in Pakistan despite challenges posed by the COVID-19 pandemic. Consumer Confidence surveys conducted by the State Bank of Pakistan (SBP) show that the Overall Business Confidence Index increased from 39 in June, the lowest point in the past five years, to 52 in August. This uptick in business sentiment is reflected in Dun & Bradstreet upgrading the country’s “overall outlook to stable amid an improving economic recovery.”
High frequency indicators also show a positive turnaround in business performance. Textile and clothing exports in September 2020 grew by 11.3 per cent year-on-year, and by 2.92 percent in the first quarter of FY2020-2021 to $3.46 billion. Notwithstanding a global economic slowdown due to COVID-19, the pace of export growth appears to be accelerating, and Pakistan is outperforming other South Asian countries over the last six months.
Similarly, the cement sector recorded its highest sales in 24 months, which in October 2020 surged by 26 percent year-on-year. Having collapsed during the lockdown, the sales of automobiles, tractors, motorbikes and three wheelers bounced back and grew in the first quarter year-on-year by 2.74 percent, 14.02 percent and 22.05 percent respectively. Earnings of companies included in the KSE-100 index rose by 37.9 percent year-on-year and 51.6 percent quarter-on-quarter for the period July-September 2020.
The improving corporate environment has helped the Federal Bureau of Revenue (FBR) exceed its tax collection target by 4.95 percent in the first quarter of the current fiscal year, which has contributed towards the primary surplus of Rs286 billion against a deficit of Rs48 billion in the comparable period of the previous year. In the same period, remittances rose by 31 percent year-on-year to $7.1 billion. The narrowing of the trade deficit and robust inward remittances have resulted in the first quarterly current account surplus in five years.
However, while the overall macroeconomic conditions and corporate activity has improved, inflation remains an area of concern since it adds considerably to the misery of the poorest segments of society who have already had to endure the privations of the lockdown. In October, the Pakistan Bureau of Statistics (PBS) reported an 18.40 percent year-on-year increase in food prices in rural areas and a 14.94 percent in urban areas. Inflation not only inflicts a political cost for the government, but impacts inflation targets and potentially the monetary policy stance. If it forces SBP to increase the interest rate it will have adverse implications for economic growth and the incipient recovery.
Seasonal factors and volatility in global food commodity prices have contributed to the price hikes. For example, tomato and onion crops were damaged due to heavy rains and global wheat prices spiked up due to governments stockpiling for fear of possible shortages due to the pandemic. In the short run, the government is trying to alleviate the supply constraints by importing essential food commodities in order to increase availability in the market at controlled prices. In addition, the government has undertaken administrative and price monitoring efforts to prevent hoarding and price gouging. There are signs that the prices of staple foods items such as wheat are stabilizing as imports arrive in the market.
In the long run, the government must accelerate the removal of restrictions on imports and exports as well as limit its role in price setting or providing support prices on agricultural commodities. This should be accompanied by gradual minimization or withdrawal of various subsidies that are not only a source of rent-seeking, but also result in inefficient usage of land and scarce water resources.
The government’s overall vision of reform has to be supported by a roadmap that accelerates the restructuring of the economy to create a competitive environment and eliminates cartels operating in various sectors, including the essential food commodities sector.
The federal government can take credit for proactively pursuing a ten-year-old case to win a landmark high court ruling, which finally vacated the earlier judgement limiting the jurisdiction of the Competition Commission of Pakistan (CCP) to the regulation of trade and commercial activities across provinces. This will significantly empower the CCP to act against anticompetitive practices, and help in the development of a business environment that levels the playing field for all market participants.
Finally, market distortions arising from a complex and opaque regulatory regime impede efficient allocation of resources as well as create opportunities for graft and influence peddling. Multiple layers of interface required to start and operate businesses with both federal and provincial authorities is not only time consuming but also subject to the shadow of corruption.
The government must automate and integrate processes across the board to streamline the regulatory environment. Unshackling the private sector will help accelerate productivity growth and incentivize foreign direct investment (FDI) and SME entrepreneurship. Such investment is necessary to convert the green shoots of recovery into sustained economic takeoff.