Pakistan is facing the worst economic crisis of its history. The balance of payment has soured to such a level that the trade account deficit has widened manifold. This situation has led to an increase in the current account deficit, which has climbed to $18.0 billion, which is 5.7 per cent of GDP and stood at 4.1 per cent last year of same time period.
As a result,a fall in foreign reserves is being observed;it has a direct relationship with the value of the Pakistani rupee. The help of international financial institutions is imminent, therefore the International Monetary Fund (IMF) bailout cannot be ruled out. The situation is not favourable for Pakistan, since it was recently placed under the FATF grey list. On top of these problems is the issue of water scarcity. Rapid construction of dams by India on waters coming from eastern rivers into Pakistan is the most dangerous phenomenon to have appeared. The trade war between USA and China is another problem indirectly facing Pakistan in shape of a rise in cotton prices, where China is buying cotton from Pakistan and India instead of the USA.
China Pakistan Economic Corridor (CPEC) could be a game changer project, had the previous government negotiated it on the discussion table well before its final execution. The great plan is still unclear to the public and therefore speculations are at their peak. The newly established government should immediately focus on CPEC projects and their impacts on Pakistan’s economy, whether positive or negative.
One of the major negative impacts is trade imbalance. This trade imbalance can be protected by revamping the Free Trade Agreement (FTA) with China. Pakistan should negotiate with China to import its agriculture products, which can result in earnings upto $12 billion, as China imports food amounting to $120 billion, out which a 10 per cent can be our share. Moreover, Iran also imports food amounting to $65 billion where food products can be exported to this US-threatened country by bartering oil as payment.
Under CPEC, Chinese partnerships with local manufacturers will not only help GDP growth, but will also generate employment and business opportunities by empowering small medium enterprises (SME). This partnership is possible by attracting private equities companies and venture capital companies from across the border. China may invest into these companies not only to manage and boost the manufacturing process of SMEs in Pakistan but to also earn better profits.
Pakistan’s banking system needs to be addressed very technically. An immediate tilt towards Islamic banking may give better results for just distribution of money in the shape of credits or loans
For this reason, Pakistan’s government must ensure a smooth and speedy IPO process, while education about private equities companies should be disseminated to the public at large. This will result in foreign exchange inflows from China, other countries, and expatriates.However, reinvesting returns into these special companies may be negotiated with China so that outflow of funds can be avoided.
The balance of payment crisis starts when apart from necessary machines or raw material for industrial production or lifesaving drugs a country start importing items that may be available locally. It could be fast moving consumer goods or home appliances or cars etc. Merely increasing import duties cannot stop this large segment for long. Promotion of local brands can lead to abstaining from such imports which need some quality control assurances from government institutions.
These institutions are already available, but corruption becomes a massive hindrance and stops them from working properly, thus allowing multinational companies to enter the local market. If we observe consumer preferences, we may see that we as a nation do not use even our own water, purified by our local facilities, but buy multinational brands selling the same thing.
Cotton prices are also increasing due to the China-US tussle. Cotton is a major input for the textile industry, which is the largest contributor to our exports and helps in earning foreign reserve. Now when this input cost is increased it will result in increasing cost of production where pricing of all other factors is also increasing like labour and overheads etc. It was also observed again this year that the production of cotton crop was not upto the mark and the target set was not achieved.
Here is an opportunity in this scenario for earning foreign exchange by selling raw cotton to China. For this purpose, the government may focus on cultivating cotton more in the short-term, without undermining sugarcane and wheat crops. Apart from better seeds, fertilisers, and pesticides, farmers need access to bank credit as well.
Pakistan’s banking system needs to be addressed very technically. An immediate tilt towards Islamic banking may give better results for just distribution of money in the shape of credits or loan. The Islamic banking system promotes opportunity of business on partnership and rental basis rather than giving loans on interest as conventional banks do.
This means that if Islamic trend in banking are adapted then behind every transaction there will be a trade which will result in developing industries, equal distribution of wealth and better employment opportunities. Government spending through Islamic Banks will also control public debt usage towards developmental expenditures, which will in return fetch better economic results and good governance.
People of Pakistan voted for change to counter the status quo. This change needs to address challenges, like economic crises and other related issues.The government can take actions on the challenges discussed in this piece and take immediate measures to deal with the grim situation Pakistan is facing. We as a nation also need to change our priorities and promote our own brands. A mutual effort from the government and the people will help make Pakistan a prosperous country.
The writer is an Economist, Columnist, and Chartered Banker in the UK
Published in Daily Times, August 10th 2018.
Source:Â https://dailytimes.com.pk/280822/dealing-with-our-economic-emergency/
