Enough credit should be provided to the micro financing activities
Interview with Dr. Ayub Mehar — a renowned economist
PAGE: Tell me something about yourself and your organization, please:
Dr. Ayub Mehar: I am serving as ‘Professor’ in Iqra University Karachi and also ‘Economic Advisor’ of the Employers’ Federation of Pakistan. Currently, I am also associated with the Asian Development Bank Institute on a project for Infrastructure Financing in CAREC member countries. Development Financing, Macroeconomic Policies, International Trade and Finance and Economic and Financial Modeling are areas of my research interests. I have completed several policy research studies for international financial institutions and think tanks including ‘Economic Integration in CAREC Member Countries: Financing Economic Corridors and Sovereign Bonds Market’, ‘Ineffectiveness of Environmental, Social, and Governance Policies and Incentives: Impact of Generalized Scheme of Preferences Plus on Central Asian and South Asian Countries’, ‘Impacts of the Patterns of Financing on Logistic Infrastructure in CAREC Member Countries’, ‘Impacts and Financing Infrastructure Development in Pakistan: Role of CPEC and FDI’, ‘Infrastructure Development by Liberalizing Economic Policies: The Straight Path of Economic Prosperity’, ‘Financial Cooperation in South Asia: Recent Development and Challenges’, ‘Political Economy of Subsidies’, ‘Magnitude and Determinants of the Flows of Investment among South Asian Countries: Considering Economic Prosperity without Politics’ and ‘South Asia in New Economic Order: Need of Accelerated Liberalization Process’.
In recognition of my expertise, the Technology Policy and Assessment Center at Georgia Institute of Technology acknowledged its 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.
PAGE: What are your views on the level of poverty in Pakistan?
Dr. Ayub Mehar: Though poverty estimates assessed by various institutions and think tanks describe different pictures of the level of poverty in Pakistan depending the source of their data and definitions of poverty. However, in the light of recent speech delivered by the Prime Minister Imran Khan on talking the strategies to combat the effects of coronavirus, 25 percent population of Pakistan lives at below the poverty line. It is a dangerous indicator which states that around 55 million peoples live in absolute poverty. The poverty line is drawn based on the number of peoples in absolute poverty, while absolute poverty indicates the risk of death due to hunger if there is a decline in their daily earning or increase in the prices of basic commodities.
Obviously, the earnings and prices are affected by any change in the value of domestic currency, interest rate, GDP growth or law and order situation etc. The effect of present coronavirus crisis on the level of poverty is too obvious. The drastic picture of this crisis is that the recommended strategies are favoring the higher income groups. There are no significant direct strategies to protect the peoples under the absolute poverty.
To mitigate the effects of crisis and to protect the nation from great economic losses, the first step is to estimate the economic losses in terms of GDP, investment, tax revenue, trade balance, employment and inflation. How much losses will have to be encountered by which groups. The chain of losses is started from the declining returns on investment and ultimately trickled down to the losses of life time savings and jobs of the peoples in lower income classes. It is obvious that at the end of such disasters and crisis, the peoples in high income group loss their profits and inflows of income, but middle income groups have to loss their savings. The most vulnerable losses have to be suffered by lower income groups. They have to loss their family’ structures, because they may shift or move from their residence and localities. They may be isolated from their relatives and friends. They have to change their future plans including education, jobs and running businesses. So, the priority of a public policy should be to protect this vulnerable group.
PAGE: How could Pakistan tackle the issue of poverty and microfinancing?
Dr. Ayub Mehar: It is an established fact and global phenomenon that microfinance institutions play an important role in the economic progress of the countries. This phenomenon is common not only in developing countries, it has also been noted in industrialized countries. Microfinance institution create demand for the products and provide a liquidity to the producers and manufacturing industries because in the presence of microfinance institution the large scale industry and producing units do not need to stuck their money in credit supplies. The information technology, health services, tourism, travelling, transportation, real estates and education are included in the beneficial sectors of microfinance institution. It is unfortunate that in case of Pakistan this sector is badly ignored. One of its major reasons is the monetary policy bias. It is notable that in 40 percent of the banks’ credit to private sector in Bangladesh belongs to SMEs and micro financing; this ratio is 25 percent in India, while in case of Pakistan this share is less than 4 percent. It is enough to know the ineffective role of this sector. This sector no doubt hit the level of poverty directly and provide a mechanism to bring poor people in the nest of economic activities. It provides financing to consumers and small size service providers. To promote this sector we will have to remove the monetary policy bias and enough credit should be provided to the micro financing activities.
PAGE: What are your comments on the impact of coronavirus on the already poor nation?
Dr. Ayub Mehar: The present crisis of coronavirus is not simply a crisis it is a global disaster, while the disasters’ management experts know that a three-stage mechanism is required to combat a disaster. The most important thing at the earliest stage of a disaster is to save maximum lives of the peoples. After completion of this stage the next important thing is to tackle the economic losses. The revival of economic activities at micro and macro levels and bring the peoples back in their normal economic activities are the component of this stage. Then the third stage deals with the rehabilitation of the peoples and families who have lost their members, life styles, assets and future plans. This third stage belongs mainly to social psychology. It is important to note that economic losses and rehabilitation plans are not considered at the first stage when saving of the lives is the only concern. We cannot consider or estimate the cost of human life. The protection from expected economic losses cannot justify any compromise on human lives. Unfortunately, the financial losses and economic issues have been much highlighted during the present crisis as a top priority in Pakistan. It has been observed that government, policy makers and some persons who belong to business community have been repeating the decades old proposals during this crisis. Moratorium in the recovery of loans of financial institutions, reduction in tax rates, easing of monetary policy by reducing interest rates, and speedy payments of sales tax refunds are included in those suggestions which have been demanded every time and in every occurrence since last two decades. There is no novel idea in these suggestions. The repeating stereotype suggestions is not a solution. The most important and considerable point in all policy recommendations is to analyze the short and long-term effects and side effects of these recommendations; who will be the direct and indirect beneficiary of these recommendations and who will be the net looser? If government spends more money to protect some businesses, groups or communities from the expected economic losses, where from such spending will be financed.
PAGE: What must the government do to tackle to impact of Coronavirus crisis?
Dr. Ayub Mehar: According to the Asian Development Bank’s estimation, Pakistan has to bear 5 billion dollars losses, which is 1.5 percent of its Gross Domestic Product (GDP). An expected decline of 2.7 billion dollars in the exports from Pakistan and Rs.300 billion losses in tax revenue are included in this loss. An aid of 350 million dollars from Asian Development Bank and 180 million dollars from World Bank covers 10 percent of the total economic losses. It means 90 percent losses will have to be incurred by the nation. It is the task of policy makers to develop a mechanism to mitigate the magnitude of these losses and create barriers in the way of trickle downing of these losses to lower and middle income groups. The halts in world supply chain, declining imports from China (A large part of 15 billion dollars imports from China belongs to those consumer goods, which help to control over inflation in Pakistan) and a drop in the size of domestic cotton crop are the sources of those problem, which will have to face Pakistan. But a steep decline in oil prices will help to control its trade deficit and domestic inflation.
In global scenario, it is estimated that world economy has to face a loss of 200 billion dollars which is 0.2 percent of global GDP of 90 trillion dollars. Forty-seven billion dollar losses in tourism sector are included in this loss. The sharp decline in world stock market, decline in trade of goods and services and lower tax collection will transfer these losses to the common public.
From the time of recovery point of view, the economic disasters and crisis are classified into three classes: (1) In a ‘V-shape’ crisis, recovery is started immediately when the crisis is arrived at its bottom level. Economic recovery is bounced back from the bottom and economy is arrived at the same level as it was before the crisis. The recovery period is almost same as it was during the declining phase from top to bottom. However, in a ‘U-shape’ crisis, the economies and stock markets do not go into recovery just after the end of crisis. The economy takes some time at the bottom level before its recovery. The most dangerous situation is the ‘L-shape’ crisis. In this case once an economy or market arrives at the bottom, it does not go up again. In this case the majority of enterprises and businesses do not just shut down their operations; they close down or dissolve their businesses. It seems that the nature of present crisis belongs to second (U-shape) category. Because the fear of coronavirus will always remain until the discovery and worldwide application of the vaccination. If medical practitioners and public policy makers get success to flatter the curves of the magnitude of infected persons and deaths, the fear will not be removed because of the possibility of the existence of virus in some persons. So, immediate economic recovery will not be possible.