ECONOMIC growth is all set to touch 6 percent mark for the current fiscal year, but sustaining high economic growth in future remains a challenge in the wake of structural issues like weak tax base and collections, deficit in public infrastructure, lower labor productivity and persistent rise in twin deficits on the fiscal and the external side. The current government, which is nearing the end of its term, has put more focus on public infrastructure than on human capital development. In Public sector Development Program 2017-18, the budget allocation for National Highway Authority (NHA) were Rs 320 billion, while for Higher Education Commission (HEC), Science and Technological Research Division and Prime Minister’s Global SDGs Achievement Programme, the budgeted allocations were Rs 35 billion Rs 2.4 billion and Rs 30 billion respectively. On the other hand, the prime reason why we remain incapable to compete on cost and quality in our exports to the rest of the world is largely due to lower labour productivity and lack of product innovation. In low value-added exports, our ‘commodity’ nature of exportable goods does not allow product differentiation and high margins, and thus are easily prone to strong price competition. On the other hand, services exports including IT exports can help us push the exports. India’s IT exports were $50 billion in 2010 and now they have crossed $117 billion in 2017. Here, the effect of deficiency in lack of human capital development and social infrastructure (rule of law, governance and intellectual property rights) becomes self-evident.
On the external trade front, two policy steps had been taken recently to reduce the trade deficit. Firstly, rupee devaluation and secondly, the rise in import duties on selected imported products. Tighter import controls can reduce the imports of goods for which the demand is more elastic, but, in the long term, the trade deficit cannot be contained if we keep exporting low value-added goods versus importing high value-added goods. Since there is a heavy reliance on imported petroleum products, machinery and other capital goods, the imported goods with inelastic demand cannot be reduced in the short term and thus, rupee devaluation might lead to higher trade deficit. The early signs corroborate this line of thinking. Even with devaluation and tighter controls, the trade deficit has risen by 24 per cent in 7MFY18. Among other alternative policy steps to control trade deficit, we need to revise our Free Trade Agreements (FTAs) with various countries, align foreign and trade policy on the same path and capitalize on Central Asian markets with which we have a trade surplus. Our trade balance has been deeply negative with China and it has affected our domestic industries and industrial sector employment. Availability of domestic credit is vital for the private sector to expand its productive capacity and take benefit of China Pakistan Economic Corridor (CPEC). There is also a 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. This requires strong efforts to make the labour more productive and provide ease in financing business projects for the domestic firms and entrepreneurs.
The high fiscal deficit can crowd out private sector investment in future and result in higher cost of capital in the long term. The recent surge in petroleum prices has already created a spike in inflation. Going forward, a tighter monetary policy can further squeeze the credit. It is concerning that despite lower policy rate on a long-term basis in recent past, the finance to deposit ratio in the banking industry has remained at a lower level of 55 percent. The investment to deposit ratio has exceeded the finance to deposit ratio which does not present a promising picture of the meaningful function of financial intermediation in the country. With lower FDI, remittances have given us a lifeline to contain our balance of payment deficit. Nonetheless, Brexit, unfavourable terms with the USA and geopolitical crisis in the Middle East present 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 GCC and East Asian countries due to weak diplomacy. Favourable visa policy needs to be sought which favour our entrepreneurs and workers. Structural issues require increasing the tax base and providing pre-production incentives than just income tax concessions. It is time to have a national action plan on economics and development policy matters so that political instability does not result in losing the growth momentum again as had happened in past.
— The writer is Assistant Professor at SZABIST, Karachi.