Economy: The Way Forward

It’s that same song and dance once again. Why have things gotten so bad that we need an IMF bailout and who is to blame for it? Contradictory statements, feeble excuses, and a lot of finger pointing are rife. The current government is blaming previous governments for squandering the country’s wealth and the previous government blaming the current government for incompetence, reminding them of the larger than life promises they made to the people. There is enough blame to go around. However, ironically enough, maybe for once, neither side is entirely responsible for this crisis. I don’t want to absolve our leadership but there is more to it than what meets the eye.

Let me focus on two things: first, the aspect of the current crisis that is global in nature and, as such, mostly out of control of the control of our government, and secondly, and more importantly, what are some of the things that the government can do to stop the bleeding and move the country in the right direction.

Pakistan, once again, finds itself in the middle of a global power struggle. I frankly don’t envy the officials attempting the very delicate and tricky balancing act to appease competing global powers.

There is a seismic shift in the global power structure that has been triggered by American President Donald J. Trump. His trade war with China has threatened to put the already slowing Chinese economy in a tailspin. It has put many of the ambitious infrastructure projects, especially around the Belt and Roadway Initiative, on the back burner. Infrastructure spending on these projects has slowed down significantly over the past year due to various reasons, including a shift in focus of the Chinese government on the domestic economy to cushion the blows from the trade war. This doesn’t bode well for Pakistan as a major recipient of these investments.

United States has seized this opportunity to achieve two primary objectives of the Trump administration: a negotiated withdrawal of U.S. forces from Afghanistan and curtailing Iran’s influence in the region. It will squeeze Pakistan– both politically and economically — to “cooperate” in isolating Iran and bringing the Taliban to the negotiation table. Last but not the least, the jingoism coming from India and re-election of Modi government doesn’t bode well for Pakistan and investor confidence.

Things are grim on the international stage, all of which have eroded investor confidence, which may as well be a “goodbye” for FDI in the near future. I am sure at this point most readers are thinking, tell me something I don’t know Sherlock, I know things are bad; the question is how do we to fix it?

The answers to this question are not that easy. However, there are specific quick steps the government can take to put the country on the right footing. Pakistan is a country of 200 million with a GDP of ~$ 300 billion, it is resource rich and has a large young population; all the drivers needed to turn the economy around without a lot of FDI.

First, create certainty by providing business owners with a clear path forward. Pass legislation that removes any uncertainty related to changes in laws/regulation and the threat of dragging them in front of courts for past and current “malpractices” as it refers to minor offenses. Please give them a breather. i.e., don’t raze shops of small vendors or flip carts of street food vendors for not being officially licensed.

Provide clarity on the devaluation of the currency that is sustainable and then hold on to it. If the exchange rate needs to be Pkr 200 per dollar, then provide a specific timeline for the devaluation and stick to it. It is not helpful for any business person to wake up every morning wondering how much the exchange rate will fluctuate that day and how the government will give many contradictory statements around exchange rates.

Moreover, please for the sake of sanity, can we get all government officials to be on the same page and provide consistent responses? Provide talking points to all officials making public statements so that at least there is coherence in the messaging. If you can’t get your people to listen and believe your message, then you will have a hard time making the population listen to it.

Streamline and in many cases outrightly eliminate many of the regulations that are slowing business activity unless it is causing a mortal danger for the citizens, freeze the regulation requirements.

Make it easy for people to get appropriate permits and register a new business. The goal should be to allow a person to be able to register and start a business in a matter of days from his/her computer.

Anyone who has dealt with bureaucracy in Pakistan knows how difficult it is to do business. For those who haven’t, according to the World Bank, Pakistan ranks 136 out of 190 in terms of ease of doing business. Ironically Pakistan is one of the lowest ranked countries when it comes to ease of paying taxes.

Create incentives to businesses for hiring people especially small businesses, but giving them tax breaks or easing for them permit and licensing processes i.e. opening bank accounts, obtaining permits, doing business in residential areas, getting power connections, etc. This would have the added benefit of bringing these businesses and their employee payroll into the official economy.

Provide civil servants written legal assurances (maybe through act of parliament) that the steps taken to streamline businesses and eliminate delays will be supported by the government and no punitive actions will be taken against them for circumventing un-necessary red tape.

Significantly increase the import duties on luxury and non-essential items. Why we are importing $1billion of cell phones is unfathomable. Drastically increase import duties on cars. This is where the public holds as much responsibility for this situation as the politicians. Pakistan needs to provide protection and incentives to domestic businesses from foreign competition and may I say whims of the people who have developed a peculiar taste for imported items.

While expanding the tax base is necessary, and the amnesty schemes introduced are a good first step to move in the right direction. There needs to be a two-pronged approach to solve this problem. First, instead of creating uncertainty for small businesses when it comes to bringing them in the tax net, take a slower approach. The unofficial economy is the golden goose that keeps the economy going. Please don’t kill it in haste to increase tax revenues as quickly as possible.

Digitize the economy by creating incentives to move transactions from cash to electronic so that more of the unofficial economy is formalized. This would allow the government to bring in more of the informal economy into tax net over the long run, while at the same time removing inefficiencies from day to day business transactions.

Leverage the infrastructure that has been built over the past decade to create opportunities for businesses. For example, create special economic zones on the CPEC routes, especially close to population centres, and provide incentives to people to build storage/staging facilities for imports and exports, providing incentives to buy heavy transport vehicles to move goods and provide tax incentives to manufacturing companies who would be interested in manufacturing products on the route to easily access the ports. Chinese firms, engaged in exports, would be an ideal target for these incentives as it would allow them to circumvent the U.S. China trade war.

Increase spending on port expansions and streamline port operations so that we can cut the time to get produce on ships for export. Spoilage due to delays is one of the big reason grains and produce from Pakistan doesn’t make it to the international markets. This is by no means an exhaustive list of steps the government can take to get things on the right footing but a few quick and easy fixes.

For a long-term solution, as the first step, Pakistan needs to get some serious people to sit down and reassess the current MDTF and build a new five-year plan, similar to the ones that have been created since 1955. Maybe some of the retired bureaucrats that have built some of the more effective plans in the past should be brought out of retirement along with experts today to create a plan that addresses long term challenges and lays down an achievable strategy for growth.

Identify specific sectors and focus energies to develop those sectors/industries rather than taking a shotgun approach and achieving nothing due to lack of focus and funds.

Not every country needs to be the back office of global businesses like India. Focus on businesses that have traditionally provided growth such as textile and agriculture that while low value added to provide consistent growth and cash flow and then focus on a handful of leading-edge sectors such as arts and entertainment, robotics, medicine, genetics, and defense production. Just pick a few and concentrate energies across the value chain for five years to put these sectors on a strong footing. This would differentiate us from the pack and ensure that we are on the leading edge on some of the emerging sectors rather than behind the curve on everything.

Importance of investment in education and healthcare can’t be overstated. One of the primary reasons for our problems is that none of our leaders have ever taken education seriously. Education doesn’t win elections as it takes decades to educate people. A new road can be built in months and will win the politician the next election, which is why they focus on building roads. If people voted for those who built schools and got higher pay for teachers, maybe more politicians would focus on education. This is especially relevant when it comes to higher education.

Focus on quality and depth of research and higher education. The number one complaint I have heard from foreign businesses trying to set up research or back office in Pakistan is the abundance of candidates with university degrees yet a complete lack of basic underlying concepts and principals in their respective fields. It seems too many students are good at passing exams but not understanding or applying the material.

Increase the focus on specializations that are cutting edge such as genetics, A.I., materials sciences, etc. rather than generating waves and waves MBAs. I assure you as an MBA myself, the world does not need a lot of MBAs.

The challenges are many, and the path forward is not without peril. However, I am hopeful for the future. All we need to do is to stop searching for a silver bullet and instead pull ourselves up from the bootstraps.