A New Emerging Market | Munir Akram

IN the aftermath of the 2008 financial crisis in the US and, later, in Europe, global economic growth was generated mainly by the so called ‘emerging markets’, especially China, Brazil, Russia, India and South Africa. Today, growth in the emerging markets is either negative, stagnant or slower. Some fear this may halt the weak recovery in the US and Europe and even lead to another global recession.

Such fears are overdrawn. China’s reduced annual growth rate of 7pc is still the highest in the world. India too is growing, although its claim of a 7pc growth rate is a bit of a fudge.

Another reason for optimism is that several of the so-called ‘frontier markets’ — such as Vietnam and Pakistan — are growing or could grow at rates of 6pc and over. Pakistan, in particular, after several years of stagnation, has the potential for rapid growth due to the confluence of several factors.

First, relative political stability. Despite its mishaps, there is a general consensus now that the current government is likely to be able to serve out its term, unless it makes serious political mistakes.

Second, improved security. Although the job is not yet fully done, Pakistan’s fight against terrorism has succeeded in reducing violence. The Zarb-i-Azb operation has cleared most frontier areas and big cities of terrorist groups and political gangs. And, despite the ongoing ceasefire violations along the LoC, most analysts discount the danger of a war between nuclear-armed Pakistan and India.

Third, macro-economic balance. Lower oil prices, large remittances, monetary discipline, an IMF programme, bond sales and domestic borrowing have enabled the government to balance the external account and limit the budget deficit and inflation. The IMF has certified Pakistan’s economic health and rating agencies have upgraded it to investment grade.

Fourth, manageable private debt. When they were the ‘flavour of the month’, emerging market companies received generous and almost indiscriminate credit. Now, much of this debt is ‘toxic’. Pakistani companies do not carry this baggage because they have not had easy access to international or domestic credit. Although the KSE fell in recent weeks along with other bourses, this was due to global ‘market sentiment’, rather than problems with the fundamentals of Pakistan’s economy or the traded companies, most of which are credit-worthy.

Fifth, the China-Pakistan Economic Corridor. If the projects envisaged under the $46 billion Chinese commitment are implemented, it will provide a solid foundation of infrastructure and economic activity to jumpstart growth in several segments of Pakistan’s economy, and add up 2pc to annual GDP growth. Under the CPEC umbrella, Chinese companies are actively looking for investment opportunities in addition to already identified projects. Also, China’s commitment has had a positive impact on investor sentiment in the Gulf, Europe and America.

Sixth, Pakistan’s demography. With almost 200 million people, Pakistan has the fifth largest population in the world. The median age of 22 implies a vast source of both workers and demand. Pakistan’s level of urbanisation (36pc) is among the lowest in the world but rising rapidly. This will propel high consumption led growth. So too will Pakistan’s middle class, which constitutes 40pc of the population, a higher proportion than in India or Bangladesh.

Seventh, ability to grow autonomously. Eighty-four per cent of Pakistan’s GDP is created by domestic demand, a larger share than any other Asian economy, including China (34pc), Indonesia (57pc) and India (59pc). Thus, unlike most older emerging markets, Pakistan’s growth is not dependent on finding export markets; it can be generated largely within Pakistan itself.

Eighth, vast investment opportunities. Due to the paucity of past investment, there is a huge pent-up demand for goods and services in almost every sector: energy, transport, agriculture, housing, health, education, IT, consumer and durable goods. The negligible ratio of private equity penetration in Pakistan — with a private equity investment to GDP ratio of less than 0.01pc — is indicative of the sizable investment opportunities in Pakistan.

Pakistan must avail of the window of opportunity created by the confluence of the listed circumstances to accelerate growth and development. The government, in partnership with the private sector, should launch a campaign to project the attractions of Pakistan as an investment and business destination. It can also take some steps to reassure potential investors, such as on the creation of an investment insurance facility.

To successfully make Pakistan a prime investment destination, the government needs to urgently address two critical problem areas. One, revenue generation. National savings should be available for development and growth-oriented investment, not for current consumption by governments. The government should refrain from borrowing from the national savings by generating sufficient revenues. To this end, it is essential to: expand significantly the country’s very narrow tax base; ensure the full collection of taxes (by using new technologies and appropriate penalties for evasion); accelerate the privatisation or ‘turnaround’ of the score of loss-making government corporations and end wasteful subsidies. Such revenue rationalisation would also inter alia solve the ‘“circular debt’ problem in the energy sector, a major impediment to investment and growth in the entire economy.

Two, economic and investment oversight. Like many other countries, especially developing countries, Pakistan is plagued by the phenomena of ‘crony capitalism’ and accompanying corruption, inefficiencies and inequalities leading eventually to social and political challenges. To put an end to this, and create a ‘level playing field’, it would be wise to create a high-level and independent economic and investment commission, composed of qualified, reputable and experienced Pakistanis from private and public life. The Commission could be responsible for: introducing clarity in economic regulations and jurisdictional responsibilities in each sector of the economy; ensuring the functional competence of persons leading major economic- and investment-related institutions; ensuring transparency in every major investment or economic transaction; providing speedy resolution of disputes or complaints relating to major economic or investment issues.

All Pakistan’s national goals rest on the realisation of rapid economic and social development. Pakistan has a unique opportunity today to emerge as one of the world’s dynamic growth stories. It cannot afford to lose this opportunity (again).

The writer is a former Pakistan ambassador to the UN.

A New Emerging Market | Munir Akram

Published in Dawn, October 4th, 2015