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Revolutionary industrial policy can make FDI, GDP and exports well again

Revolutionary industrial policy can make FDI, GDP and exports well again

Interview with Dr Ayub Mehar — a renowned economist

PAGE: Tell me something about yourself and your career, please:

Dr Ayub Mehar:  Currently, I am serving as ‘Professor’ and ‘Executive Director’ of the Economic and Financial Policy Research Center in Iqra University Karachi (Pakistan). I have been serving as ‘Economic Advisor’ of the Economic Cooperation Organization (ECO) Chamber of Commerce for three years and also ‘Director General’ in the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) for seven years. Development financing, macroeconomic policies, international trade and finance are areas of my interest.

I have completed several policy research studies on strategic issues including, ‘Ineffectiveness of ESG Policy and Incentives: Impact of GSP Plus on Central and South Asian Countries’, ‘Infrastructure Development and Public Private Partnership: Measuring Impacts of Fiscal Policy in Pakistan’, ‘Economic Integration in CAREC Member Countries: Financing Economic Corridors and Sovereign Bonds Market’, ‘Infrastructure Development by Liberalizing Economic Policies: The Straight Path of Economic Prosperity’, ‘Financial Cooperation in South Asia: Recent Development and Challenges’, and ‘FDI, Infrastructure Development and CPEC: Is There a Connection?’ for various national and international institutions including World Bank, Asian Development Bank Institute, Friedrich NaumannStiftung (Fur Die Freiheit), SAARC Chamber of Commerce and Industry, and ECO Chamber of Commerce and Industry.

The Technology Policy and Assessment Center at Georgia Institute of Technology acknowledged my membership in the distinguished panel of international experts for Indicators of Technology-based Competitiveness, which is a project of the US National Science Foundation, United States Government. I am also alumni of the IAL Gummerbach Germany, where I got training in Public Finance.

PAGE: Your views on the performance of the industry at present:

Dr Ayub Mehar: According to official statistics released by the Government of Pakistan, the industrial growth rate has dropped from 4.9 percent in 2017-18 to 1.4 percent in 2018-19. The situation is worst in large scale manufacturing, which shows a negative growth of (-2.1 percent) in 2018-19. It was 5.1 percent in 2017-18. This is enough to understand the entire picture of current industrial scenario in Pakistan. The worst performers are sugar, pharmaceutical, steel, jute, soft drinks, cement, automobile and chemical sectors. All these sectors indicate a negative growth in their production. The drop in employment and investment opportunities are quite obvious consequences of this drop in production activities. This situation will be transformed ultimately into lower growth of Gross Domestic Product (GDP) which is already at the lowest level in the region.

The production of electronics goods is the only sector in Pakistan, which shows a positive growth of 24 percent, however, it is lower than its last year’s growth of 107 percent. According to the government sources lower ‘Public Sector Development Plan (PSDP)’ expenditures, muted private sector construction activities and lower consumer spending on durable goods have contributed to the negative growth in large scale manufacturing sector. Moreover, multiple upward revisions in the automobile prices due to depreciation in Pakistani rupee and certain limitations on non-filers have restricted the demand of automobiles.

Another important point is this discussion is that services sector contributes about 61 percent in GDP, while the largest component of services’ sector is ‘Wholesale and Retail Trade Activities’. The share of wholesale and retail trade activities in services sector is one-third, which is 20 percent of GDP. The declining trend of commodity (agriculture and industrial) sector leads to shrinking in wholesale and retail trade activities also. So, declining growth in agriculture and industrial sectors will be another cause of further decline in services sector activities.

In the present scenario, we need a revolutionary industrial policy to enhance industrial output and exportable surplus. This policy should integrate with the provisions of physical infrastructure, as well as monetary and fiscal policy measures to boost industrial output and improve the ease of doing

PAGE: How would you comment on the exchange rate?

Dr Ayub Mehar: The exchange rate of a currency in term of other currency is not an exogenous issue. It is a phenomenon of the overall economic strength of a country particularly flows of foreign currencies. The balance of merchandizing and services trade, inflows and outflows of foreign investment and the foreign remittances determine the magnitude of foreign exchange reserves of a country. The magnitude of foreign exchange reserves and its expected net outflows in near future determine the exchange rate. Unfortunately, Pakistan is facing severe crisis of the balance of payments since last several years. The increasing trade deficit, payments of principle and interest of foreign external debts and payments for foreign services related to health, education, travelling, and tourism etc. are the major causes of the outflows of foreign exchange.

While there is no significant growth in exports, even exports have been declining for some years. The inflow of foreign direct investment (FDI) is also showing the similar picture. Once upon a time Pakistan had attracted 14 billion dollars foreign investment in a year (including FDI and portfolio investment). But now the inflow of FDI is less than 2 billion dollars even 2 years ago it was less than one billion dollar. In this scenario one cannot expect any improvement or stability in the exchange rate of Pakistani rupee. The declining value of Pakistani rupee is a natural outcome of all these factors.

If we want stability or appreciation in the value of Pakistani rupee, we will have to improve our exports and will have to attract foreign direct investment (FDI). These two dimensions require major overhauling in economic policies. The improvement in business competitiveness is the core area which is required to improve trade enabling for export enhancement and inducing the foreign investment (FDI). The improvement in physical infrastructures of transportation, energy and ports are included in the major components of competitiveness. Transparency in financial transactions, security, law and order conditions, ensuring justice, expansionary monetary and fiscal policies and simplicity in regulatory environment are also included in the factors of business competitiveness. The improvement in these factors will improve the trade enabling environment which may lead the export enhancement. Similarly, these factor may attract foreign investment. It is quite obvious that inflow of foreign exchange through export enhancement and foreign investment will build the foreign exchange reserves which can ensure the stability in the value of Pakistani rupee.


PAGE: Could you tell us about the saving and investment in Pakistan?

Dr Ayub Mehar: According to official statistics, the Gross Fixed Capital Formation (GFCF) for the year 2018-19 was Rs.5.3 trillion, which shows a growth of 2 percent over the last year. However, growth in Gross Fixed Capital Formation in private sector was 6.5 percent, which is now standing at Rs.3.8 trillion. However, GFCF related expenditure by provincial governments has declined by 29 percent from Rs.909 billion to Rs.644 billion. But surprisingly the expenditure on GFCF incurred by district governments has increased by 48 percent from Rs.91 billion to Rs.135 billion. These statistics indicate the patterns of investment in Pakistan. One can summarize these details that private sector and local governments are largely participating in developmental activities but provincial governments are reducing their role in developmental activities. This is a surprising phenomenon in Pakistan, however, in the global context the similar trends are emerging all over the world.

The banking statistics indicate a significant growth in savings and bank deposits. However, this historical growth in bank deposits is not an indicator of the expansion in economy. In fact, because of the lower demand in consumer durables goods, motor vehicles and declining investment in real estates and construction activities pushed the investors to park their savings into bank accounts. The widening saving-investment gap was a natural outcome of this situation. The State bank of Pakistan has made a sizeable adjustment in the interest and exchange rates to contain the aggregate demand and ease the pressure on the balance of payments. These efforts helped in reducing saving-investment gap. In discussing overall investment scenario, one cannot ignore the declining trends of the inflows of Foreign Direct Investment (FDI) in the country. The government has to introduce investors’ friendly policies to boost the foreign investment. It is important that present trend of increasing primary rate of interest and ‘Karachi Inter Bank Offering Rate (KIBOR)’ are causing the lower domestic investment also. In this situation, the investment-saving gap cannot be filled on sustainable basis.

PAGE: Your views on the cost of doing business in Pakistan?

Dr Ayub Mehar: In last few days, there was a media activism on the improvement in doing business indicators in Pakistan. Here it is notable that in the latest survey carried out by the World Bank in 2019, Pakistan is placed at 136th rank out of 190 countries, while last year Pakistan was placed at 147th rank. So, it may be considered a steep improvement over the time. But in the same year, India is placed on 77th, Sri Lanka at 100th and Nepal at 110th rank in the ease of doing business indicators. In interpreting the improvement in doing business indicators, it should be noted that this indicator is based on a composite index of 10 indicators which are: Starting a business, Dealing with construction permits, Getting electricity, Registering property, Getting credit, Protecting minority investors, Paying taxes, Trading across borders, Enforcing contracts, and Resolving insolvency.

According to the World Bank survey, Pakistan made an improvement in starting a business easier by enhancing the online one stop registration system, replacing several forms for incorporation with a single application and establishing information exchange between the registry and the tax authority.

In Lahore, Pakistan made registering property easier by streamlining and automating administrative procedures and by increasing the transparency of its land administration system, while in Karachi, Pakistan made registering property easier by increasing the transparency of the land registry. Pakistan made improvement also in resolving insolvency easier by introducing the reorganization procedure and improving the continuation of the debtor’s business during insolvency proceedings. Based on this report, it is clear that use of information technology has played a great role in the improvement of ease of doing business indicators of Pakistan. While no improvement has been observed in banks credit, international trade, supply of electricity and construction permits. What its mean? The credit of improvement does not go to the economic policies, it is the outcome of good administrative measures based on the proper use of information technology.

PAGE: Your views on the availability of energy in Pakistan:

Dr Ayub Mehar: In recent past, the energy crisis has badly hampered the economic growth of the country. The government has incorporated massive energy projects between years 2013-18. But the higher energy prices are a by-product of such aggressive capacity additions. I have discussed previously that in fiscal year 2000-01, the installed capacity was 17,498 MW and generation was 68,117 GW per hour. Now the installed capacity is 33,553 MW while generation is 120,715 GW per hour. However, the share of thermal capacity has increased, which is the cause of increase in power tariff. Another surprising fact is that the installed capacity has increased by 92 percent during the last 10 years but increase in generation is 77 percent- much less than growth in installed capacity. It reflects that the share of idle capacity has increased in power sector. In fact, the oil based thermal units are idle because of hike in oil prices.

In term of energy-mix, Pakistan reliance on oil was reached at 43.5 percent in fiscal year 2000-01. Now, oil reliance has reduced to 31 percent which is a welcoming sign. Similarly, hydroelectricity had a 13 percent share in 1997-98, which is now at 7.7 percent. It can be observed that the share of hydro in electricity generation has decreased over the last few decades. Availability of water is one of the main reason for reduced generation of hydroelectricity. The hydroelectricity is the cheapest energy, but, hydropower plants are the most capital intensive projects and for Pakistan, it is not possible to undertake such big projects without the financial support of international development organization (World Bank, Asian Development Bank, and International Finance Corporation etc.).

The government efforts to construct the large dam for water reservoirs and energy are quite obvious but current fiscal space does not allow government to construct these dams through tax payers’ money. Government has formed a task force on energy to propose immediate, medium and long-term policy interventions with the aim to provide indigenous, affordable and sustainable energy for all. The large scale grid connected renewable energy based power generation projects are being pursued through private sector. Five wind power projects of 247 MW capacity have started the supply of electricity to the national grid. Though the direct contribution of electricity and gas generation and distribution in GDP growth is 2 percent only, its growth in value addition has arrived at 40 percent in last fiscal year from minus 23 percent in 2012-13. But, still this sector requires further participation of private sector. Now, the share of imported LNG has increased from 0.7 percent in 2015 to 8 percent in 2018. Now, the immediate focus of the government is to reduce the losses and increase the effectiveness of the whole value chain.

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