Dr Salman Ahmed Shaikh
WEAK tax collection, infrastructure deficit, lower labour productivity and twin deficits on the fiscal and the external side continue to remain potent challenges despite the revival in economic growth in recent years. On the external front, Pakistan’s import to GDP ratio has risen more than its exports to GDP ratio in the last decade. The European Union and the USA still hold great significance for Pakistan for exports and source of remittances. Pakistan has a positive trade balance with the USA and the European Union. On the other hand, Pakistan has a negative trade balance with the majority of Asian countries. Pakistan still needs to focus more on North America and Europe for its exports. There is a need to have tighter import controls in relation to its East Asian trading partners.
It is vital for us to balance our relations with both the West and the East. The Free Trade Agreements (FTAs) with China and other Asian economies need to be renegotiated since our trade balance has been negative with China and it has affected our domestic industries and industrial sector employment. Among Asian countries, Pakistan only has a positive trade balance with some Central Asian countries. In providing access to the ports to the Central Asian countries, it is important to effectively renegotiate FTAs and trade concessions with Central Asian countries in return. Fresh domestic investment has been far from impressive in Pakistan. In the China Pakistan Economic Corridor (CPEC), special incentives are provided to the Chinese companies in CPEC. They are able to repatriate profits without any compulsion of reinvestment. Furthermore, if the key white-collar positions are taken up by foreign workers, then it will not enable Pakistan to get significant gains from CPEC.
Availability of domestic credit is vital for the private sector to expand its productive capacity and take benefit of CPEC. The government’s high fiscal deficit can crowd out private sector investment in future and result in higher cost of capital in the long term. The recent move to go for the global issuance of Eurobonds and Sukuk at a higher markup rate will be even more costly if the currency depreciates in future. A few years back, Pakistan was able to issue the previous bonds in the global market at a much lower interest rate when the domestic policy rate was higher. Going for an expensive global issuance of bonds at a time when local currency might depreciate will make the fresh external debt even more expensive in rupee terms.
Our forex reserves are diminishing due to the high trade deficit. With lower FDI in the last decade, remittances have given us a lifeline to contain our balance of payment deficit. With Brexit and geopolitical crisis in the Middle East, we face the risk of decline in remittances. It is important to negotiate workforce outmigration in the FTAs with Turkey, China and other trading partners. Despite having the sixth largest workforce, we are not able to export our workforce as much as Bangladesh and India even within Asia due to weak diplomacy. Favorable visa policy is needed to be sought, especially with countries to which we have provided free market access and yet not negotiated terms with them which favour our entrepreneurs and workers.
Asian economies have benefitted from integration with the global value chains. Pakistan, being in South Asia with discontented neighbors cannot by default become the factory for the world through CPEC alone given that Pakistan is very much a latecomer in this bandwagon now. There is concern that CPEC might increase our external debt, imports and displace domestic producers not just in the short run, but also in the long run. Finally, on the political and social front, the distributional equity concerns across Pakistan’s regions are hard to handle in post-CPEC Pakistan if there is weak confidence and unity in the federation and when political leadership has self-incentive for short-term gains in resorting to narrow ethnic politics. It is time to have a national action plan on economics and development policy matters as well so that political instability does not shut the window of opportunity that we have at our disposal through CPEC if we fully capitalise on it.
— The writer is an economic based in Islamabad.
Dr Salman Ahmed Shaikh