Is Pakistan’s economy back on track or is it still struggling in choppy waters? Prime Minister Nawaz Sharif and his financial managers claim they have stabilised the economy and are now set to gradually achieve higher growth in the short to medium-term. The Opposition maintains that the story of an economic turnaround is nothing but a mirage as most of the key economic fundamentals remain negative. Monthly ‘Narratives’ gets in touch with Minister of State for Privatisation Muhammad Zubair and Pakistan Tehreek-e-Insaaf’s central leader and MNA Asad Umar in an attempt to clear the fog on the key economic indicators.
Decline in exports is a global phenomenon due to falling international oil prices. Many countries, including China and India, have witnessed a drop in exports. Today, Pakistan exports more units compared to the past, but the rates (of these units) have gone down. The reason is that imports by the oil producing countries have taken a big hit. Fluctuation in the prices of any major commodity, especially oil, always triggers a chain reaction.
We should also consider the fact that Pakistan has been unable to boost exports, unlike some other countries, because of the lack of investment in value-added items. This is an old problem. A government doesn’t export (goods) by itself but provides incentives and creates a conducive environment where the private sector can take the lead. And we are trying to do this by developing the infrastructure and addressing the energy crisis. Now there is zero load-shedding for industries, which is a big achievement.
<blockquote>Pakistan offers a great opportunity now. No big company or global brand can ignore a country the size of Pakistan’s population. It has a youth bulge and is undergoing rapid urbanisation. If we just sustain the security situation, improve it further and address the energy crisis we will be able to attract a lot of investment</blockquote>
Growing trade deficit
It is a cause of concern for us because the trade deficit converts into the current account deficit, which impacts the exchange as well as discount rates. The criticism that the government moved too slowly to address this challenge is justified as falling global oil prices should have helped slash the import bill. It’s a matter of concern for the Finance Ministry as this trend will affect the balance of payments in the wake of falling exports and a relative stagnation in the growth of remittances, which were sharply up in the past three years. The FDI (foreign direct investment) is also not that great. We need to raise dollar earnings from other means. That’s why the government launched papers like the Eurobond.
Before the 2013 elections, I made the economic plan for the PML-N. On its last page, I asked the leadership to address two key issues which impede growth. First, improve the security, especially in the country’s financial hub Karachi and Balochistan, as well as curb extremism. If security remains fragile, investors won’t come even if you roll out red carpets for them. High profile attacks on sensitive installations, or soft targets, keep investors at bay. Similarly, Karachi had been in a state of turmoil and gripped by targeted killings for decades, given that one party used to shut the city down on ten minutes’ notice. Secondly, I recommended that the energy crisis must be addressed to attract investment.
During the last three-and-a-half-years we have tried to address these issues. We travelled around the globe giving the message that the security situation has improved and the energy crisis is being addressed. Pakistan offers a great opportunity now. No big company or global brand can ignore a country the size of Pakistan’s population. It has a youth bulge and is undergoing rapid urbanisation. If we just sustain the security situation, improve it further and address the energy crisis we will be able to attract a lot of investment.
Private sector investment
The Pakistani private sector has to take a lead to give confidence to foreign investors. Today, private sector investment has improved. The discount rate is at a low not seen in four decades. Private sector credit has picked up and so has the import of machinery and big plants. This may hurt in the short-term, but is good in the long-term.
The privatisation programme has been in effect since 1991. Now only the most difficult State-run companies have been left for this government to privatise, including the power distribution companies, Pakistan International Airlines (PIA) and the Pakistan Steel Mill. But this is a challenging task as it involves political sensitivities. The PML-N manifesto promised to improve the performance of these companies through restructuring or privatisation. This work starts with the appointment of a financial manager and carrying out due diligence. Once you complete this, only then can these entities be restructured or privatised. I am happy to say that more than 80 percent work on the appointment of financial advisors and due diligence has been completed for the five power generation companies, PIA, the Steel Mill and several other organisations. The restructuring process of these companies has also been started. But when we try to market any organisation, we face a lot of resistance. As in the case of PIA, the government caved in; a sunset legislation of two years was made under which the government remains barred from transferring management control and selling PIA’s majority shares. Who then, would want to invest in such an entity? We have, however, started its restructuring process. In the past, we did not have numbers and technical details of these companies. But now we have them, which is a first step for both restructuring and privatisation.
Shrinking agriculture sector
The main reason for the 0.2 percent contraction in agriculture during the previous fiscal year was the sharp decline in the cotton crop, which alone comprises 0.5 percent of the GDP. Secondly, the government proved too slow in responding to the requirements of the agriculture sector. We didn’t anticipate the impact of the fall in global oil prices could be so devastating. But now the government has taken measures and we expect the agriculture sector to bounce back and help achieve 5.7 percent GDP growth this year.
Mounting public debt
There is no harm in taking on more debt if it is sustainable and used for beneficial purposes. When the PML-N came to power, our forex reserves were just $6.5 billion – barely enough to support two months’ imports. The rupee had hit 113 against the dollar and there were speculations of a further decline in the value of the local currency. To stabilise the situation, we built forex reserves. We had two choices; go for the IMF programme or default on our borrowing.
Countries like Pakistan either have to borrow or attract investment for development and growth. As your economy starts picking up, you create fiscal space to manage your debt. In our case, we had to first stabilise the economy. In the next two years, we will concentrate on accelerating growth, which will create fiscal space and ability to repay the loan.
The government’s hands are tied. It has no legal rights to introduce changes in the State-run organisations. We cannot get rid of incompetent people or even transfer them to create space for new people
Trends are improving. Since October 2015, not a single penny has been increased in the overall size of the circular debt which is a good sign. During the last one year, collection (in this sector) has gone up to 95 percent from 88 percent. The line distribution losses fell to 18 percent from 22.
Losses in public sector companies
The government’s hands are tied. It has no legal rights to introduce changes in the State-run organisations. We cannot get rid of incompetent people or even transfer them to create space for new people. People are criticising the legislation giving powers to the prime minister to appoint and sack heads of State-run companies, but there is no other solution. In 18 State-run organisations, the CEOs are still retaining their positions simply because they managed to take a stay from the courts. What’s at stake here? A mere handful of these organisations eat away a massive 600 billion rupees in losses. This amount, one-fifth of the total revenue, could be used for the welfare of the people. The more alarming matter is that the quality of services provided by these organisations remains dismal. You cannot improve the quality of service until you allow performance evaluation under which good performance gets rewarded and poor performers can be held accountable.