Guiding national economy to sustainability

By M Sharif

One of the most challenging questions faced by decision makers is about giving direction to national economy that faces multiple problems because of complexity of economic environment at domestic and international level. The irony is that problems are well known to all concerned decision makers and yet apt and desired decisions have not been coming through. Also, the feeling of withering away of the economy is surfacing because of inability of the government to tame inflation particularly food inflation and rationalize the cost of energy.

Domestic and international factors

During the past few years, strategy of economic development based on a mix of high domestic consumption through consumer financing and indiscrete imports, moderate growth of around 12 per cent of exports, high growth of financial and services sectors, balancing high trade and current account deficits by foreign loans have made the matters worse. Difficult decisions have to be taken to correct fiscal and monetary imbalances in the economy and to create political stability through institutionalized democratic system of decision making that should be able to withstand the test of time and to build a sound economy.

During the past few months, economic scenario has only worsened to the extent that it compelled textile industry, the major industry of the country, to go on strike to protest against price hike of essential energy and other inputs. Decision of the government to end some of the subsidies and increase price of petroleum products and natural gas, despite   overburdened consumers and industrial sector, has not been welcomed by general public and different stakeholders in the economy.

It has created distortions in the economy and has exacerbated problems of the public. It looks like that economy has lost its direction and all the decisions are ëreactive decisionsí aimed at making up deficits wherever they exist in the economy. This gives a serious impression of adhocism rather than a well planned strategy to cope up with the challenges faced by the economy. All efforts that  government claims to have made during past more than three months have shown little sign of improvement. That is where crux of the problem lies because the government is not ready to accept responsibility and there is hardly any forum to impress upon the government about concerns of the general public and stakeholders in economy. The present economic situation negatively impacted stocks, real estate and confidence of domestic and international investors. It also crept into different sectors of economy with the result that LSM, agriculture and SMEs did not perform according to the targets fixed for FY-08. Poor performance of vital sectors of economy and down ward slide of essential macro-economic indicators like high current account and trade deficit was not exclusively because of political instability there were strong economic factors as well.

Political leadership must therefore, resolve the issues that have kept the economy and the nation hostage without further delay. It is not out of context to mention that Southeast Asian, Chinese and Indian economies did not emerge successful without political stability irrespective of system of governance.

Prices of petroleum products and food items could not be kept on lower side in an economy that was already facing inflation to the tune of 8 per cent because of expansionary fiscal policy and a non-delivering monetary policy when hike in oil, food and other commercial commodities started taking their toll around one and half year earlier. The government heavily depends upon indirect taxes and a high rate of GST. Its plate is full of genuine fiscal demands and not so genuine demands for heavy public expenditure, could hardly manage enough fiscal space to absorb the waves of socks of high prices that stuck at the roots of economy, business and general public.

The economy did not show its strength in the dire strait because of lack of infrastructure, properly trained human resource, constraints of investment, revenue collection and high cost of inputs in industrial and agriculture sector and a flawed strategy of economic growth and development. The economy had to become directionless by any stretch of imagination because of triggering of political or economic crisis. Giving direction to economy is the real crux of economic governance in the country at present. The budget document did not show much substance and direction on this vital point

Potential of the economy and direction

National economy has its own strengths that lie in agriculture and industrial sector, a huge human potential waiting for education and training in different managerial and technical skills and employment in the best possible way, a strategic location for international and regional trading and a supportive attitude of multilateral organizations that can help to fetch foreign direct investment (FDI).

Seen in historical context, priorities of economic growth and development have been at variance with least emphasis on agriculture sector. This has not delivered the desired results over the years. Pakistan despite being an agrarian economy basically is net importer of nearly all food items of daily use. This could have been averted, had agriculture sector been given its due importance in economic planning. Its importance has multiplied many times at present in the context of increase in population, high incidence of poverty in rural areas, food insecurity, hike in prices of food items in domestic and global market and dependence of around 70 per cent population on agriculture sector.

Textile industry also gets raw material from agriculture sector. Improving it and providing liberal incentives for its development should be the first priority in economic planning. There has been substantial improvement in road infrastructure to facilitate delivery of agri-products to the market but this too has a lot scope for further improvement. Irrigation system and facilities to store water for irrigation and hydro-electricity generation needs immediate attention. Neglect of latter over the years is one of the causes of low productivity and energy crisis that persist in the country. The latter has multi-dimensional implications for the society and economy.

Apart from paying attention to these two important sectors on priority basis, the need to bring monetary and fiscal policies on one frequency is imperative. The experience of over past two three years is quite instructive in this respect. Monetary expansion M2 remained out of control of the SBP despite a tight monetary policy that it pursued during past around three years primarily because the government did not fall in line with the SBP policy.

On the contrary it pursued expansionary policy and that too mostly through borrowing from the central bank with the result that well established tool of monetary restriction to contain inflation did not work according to expectations of the SBP. Its quarterly and annual reports during past three years highlighted this significant point repeatedly. The federal finance minister made a statement on the floor of National Assembly that the government will try not to resort to borrowing from the central bank.

Conclusion

National economy is in dire necessity to have a clear direction on monetary, fiscal, growth and development issues. That would be possible only if there is political stability in the country. It would enable the government to do short, medium and long term planning with full concentration in consultation with stakeholders.