Dr. Hassnain Javed
January 08, 2019
Currently, Pakistan is recovering from a growth which was fueled by short term debt and declining investments. The economy was in a bad shape, and by the end of year 2018 Pakistan was almost on the verge of bankruptcy
After taking office, the new government was faced with the challenge of the devalued currency, increasing import bills and huge amounts of debt obligations. Therefore, there was a need for radical reforms in the economic policy of the county. The first agenda was to service the debt obligations of USD 9 B due in the year 2019 and second, to reduce current account deficit to USD 11-13 Billion from the current 19 Billion. Also the last government’s fiscal deficit of 6.6% is not sustainable and needs to be revised.
Fortunately, the government has already began to set their plan in motion, by instructing the State Bank of Pakistan to adjust the exchange rates from 26% to negative figures and lowering regulatory duties on non-essential items. This move has dramatically reduced Pakistan’s import bill but, some critics argue that the decline was a steady decline that might hurt the market sentiments. However, such a steep decline was essential considering that a real adjustment has not been made since four to five years. The exchange rate decline has also fuelled remittances to 12.5% and improved exports. The government is also planning to launch a program in 2019 to encourage overseas Pakistanis to send their remittances via a formal channel by promising them improved speed, security and reduced administrative issues that are surrounding the formal channel procedures at the moment. A good foreign policy has also supported Pakistan in securing fruitful bilateral relations like deferred oil payment facilities from countries like United Arab Emirates and Kingdom of Saudi Arabia. Generally the focus of this government is to raise capital by encouraging foreign direct investment in the country, fostering exports and productivity rather than imports and consumption. An increase in exports would help Pakistan in gaining self-sufficiency and reduced reliance on debt financing. Previously, the governments were funding their projects from the withholding taxes of the entrepreneurs, which had significantly hurt their business. Reducing exchange rates to actual rate has therefore enabled Pakistan to boost its export trade, and release tied up working capital of the businessmen.
Moreover, in order to further encourage business in Pakistan the government has been making efforts to reduce the costs of energy. For instance, the LNG costs have reduced to a regional average rate of USD 6.5 per MMBTU and the electricity tariffs will be notified at 7.5 cents/KWH for the export sector.
Despite of these positive economic indications, the challenge is not over for the government yet. As mentioned earlier, the government has increased interest rate which is generally followed by a decrease in investment since the cost of borrowing increases. This effect will contradict the current government’s agenda to boost investments. However, the action was a necessary evil, since inflationary pressures from the rupee devaluation made it inevitable in order to control prices. It should also be noted that the new 4% rate is approximately the average rate prevalent in the whole region. Moreover, since the move has been taken, there was a 400% increase in private sector’s credit take off. This can be attributed to the fact that the overcrowding of the provision of loans from the previous government was cleared after the interest rate increase.
Other challenges currently looming over the administration are the excessive taxes and security problems. The security issue has been improved by the efforts made by the Pakistan Army in the mission ‘Zarb e Azab’. However, the problem of taxes, still remain very relevant. According to recent statistics, Pakistan is ranked at the 136th position in the ‘ease of doing business’ index, and 173rd in terms of complicated tax systems. In order to cater to the tax problem, the government has set up a Tax Reform Implementation Committee in order to separate FBR duties from Tax Policy Division. This move would reduce costs of doing business in Pakistan, and encourage businesses and SMEs to operate freely. The power of government departments are proposed to be redistributed in order to reduce redundant and precarious steps that businesses need to get through in order to get government approvals.
With the beginning of 2019, Pakistan would be entering into the second phase of China Pakistan Economic Corridor. This means that the government would focus on trade policies and industry development, moving on from infrastructure. Large multinational companies are already interested in setting up industries in the automobiles, telecommunications, energy and electronics industry, in order to tap the undiscovered potential of the people of Pakistan.
Conclusively, the prompt and timely measures taken by the new government has impeded the immediate crisis of the balance of payment however, much more effort is needed to bring the proposed plan to life. Not only macroeconomic indeed – microeconomic – indicators have to be stabilized in order to encourage steady foreign direct investment in Pakistan.