Dr. Kamal Monnoo |
Reckon once the Finance Minister is done with his priorities of what anyone’s surname should be or should oratory be in English or Urdu or with handing down certificates of patriotism, he should shift his focus back on the economy, since it is simply not responding to his style of leadership over the last nine months! Economic management is all about maturity, giving a clear direction, and the very ability to synchronize different operational facets to get the desired results – clearly his efforts seems to be failing in achieving these: Investment, especially domestic, is virtually absent owing to a trust deficit of the entrepreneurs, both industrial activity and employment generation continue to shrink, utilities’ supply-side bottlenecks are compounding; stock market is losing value by the day; and last but least, lack of any prudent cum innovative reforms in the FBR – in fact policy direction appears to be going the opposite way – is just making a farce of the much-touted efforts on ensuring ease of doing business.
The culprit tends to be a culture of confused signaling by the economic managers where their rhetoric though may be nice (wealth creation, promoting SMEs, alleviating poverty etc.), their actions, on the other hand, are totally contrary. And if this uncertainty is not quickly addressed it will simply result in making the businesses go into their shells, ultimately leading to perhaps a period of ‘lost half-a-decade’.
Essence is to be steadfast in one’s beliefs, since in most cases the solutions are quite generic and all possible routes, in the end, arrive at the same destination, albeit some with a slight delay.
One can only hope and pray that when the government says that the economy is out of the woods, it is at best referring to short-term cash flow constraints and certainly not to long-term challenges, because by any account we still have a long way to go.
In economic governance, policy-choices can sometimes take a back seat, as long as the selected vision cum direction comes with clarity. Economists and Management Gurus will always quibble or differ over policy choices to reach eventual goals and therefore, importantly, if a leadership is confident, sincere and committed to do the right thing (even if difficult), the results will eventually be forthcoming. Essence is to be steadfast in one’s beliefs, since in most cases the solutions are quite generic and all possible routes, in the end, arrive at the same destination, albeit some with a slight delay.
However, what we have here is a case of complete confusion where economic strategy changes by the day and quite often policy actions are opposite to what is foretold: A revival plan for the SOEs will be given but no hang on as we may just privatize them all; government plans to encourage the taxpayer but hey the collector is going to come hard on the existing filers while facilitating the non-filers to continue with business as usual; wealth creation will be encouraged but beware if you want to invest further in real estate the very process of transfer and evaluation could be endless; we will encourage the SME sector but the governmental oversight will in fact increase thereby making a mockery of ease in doing business; utilities to the industry will be ensured on a continuous basis at competitive pricing but then remember both delivery and the billing mechanism in-turn could be dodgy; cost of doing business will be decreased but interest rates will become even more steep; we want to gain people’s confidence in order to document the economy, but from now on the tax collector will have unchecked access to your homes and work premises; the list is endless.
The thing is that Pakistan’s economy is relatively a simple one with not too many variables. This in a way is bad as the options to turn things around are somewhat limited, but also good in a way because by only tweaking a few key sectors the positives can be significant.
Interest rates in Pakistan today have climbed into double digits at the central bank’s rate of 10.25%, meaning the effective borrowing rate for the SMEs being close to 17% or more.
Implying, that more often than not, at least in the short-term there is no need to come up with any new or complicated solution and just honestly resorting to the time tested prescriptions will do – streamlining the power sector, sell or otherwise turning around the loss-making SOEs, spurring up domestic manufacturing and aiming to boost exports in tandem with curbing unnecessary imports. Do these and the economy is in business.
One just needs a cursory glance at our economic history (since the 60s) to ascertain that any buoyance in economic activity has almost always come about on the back of local investors and not through foreign investors. The idea is to look inwards and not outwards. One keeps on hearing about the ongoing governmental jargon of how the NRPs are going to bring about a huge influx of foreign exchange in the country and change its destiny.
It is about time that this delusion must also come to an end. Pakistani foreign diaspora is surely very good and contributing significantly through regular remittances, but they are mostly workers or professionals and not entrepreneurs, so counting on them to come and invest would only be foolhardy. In fact, the once strong infatuation of countries with FDI is fast losing its charm, as prudent economies these days have become quite wary of unbridled FDI inflows that in the long run only end up burdening the external account.
For example, India’s majority portion of its annual FDI is being driven in essence by Indian multinationals only who are mostly looking to leave or reinvest profits at home; also, the Indian government has recently introduced a number of constraints to discourage unchecked profit repatriations and outflows under the heads of technical fees, royalties, etc. Likewise, the Bangladeshi government makes it very clear that any FDI must supplement its overall export vision for the Bangladeshi economy.
Kondratiev’s or similar economic theories are well established and respected in all circles and surely our current economic team would not only be fully aware of the same but it also comprehends what truly needs to be done.
More than eighty years ago, prominent Russian economist, Prof. Nikolai D. Kondratiev described and theoretically substantiated the existence of grand cycles of economic development, in which framework the national ‘reserve of major material values’ is regularly being replenished, i.e. the aggregate productive forces in an economy are transcending to a higher level in each cycle.
According to Kondratiev, every cycle has a rising and declining phase. The internal dynamic of the cycles (named K-cycles after him) and the principle of fluctuations is based on the mechanism of accumulation, concentration, dispersion, and lastly the devaluation of capital in ‘combination’ with its cost-of-access for its most efficient users (meaning the private sector) – the ‘combination’ being key to the healthy development of any market or economy. Put simply: Higher the cost of capital the longer it will take the next cycle of growth to arrive. Alarmingly a typical K-cycle puts this length (of an era of meaningful growth to arrive) to 45-60 years once interest rates enter into double digits.
Interest rates in Pakistan today have climbed into double digits at the central bank’s rate of 10.25%, meaning the effective borrowing rate for the SMEs being close to 17% or more. As a comparison with across the border, the official borrowing rate in India is 6.25%, and the RBI is endeavoring to bring it down further, as in its hand out it believes that for India GDP to grow at the desirable rate the interest rates need to be much lower.
In contrast, the SBP is contemplating raising interest rates even further. Kondratiev’s or similar economic theories are well established and respected in all circles and surely our current economic team would not only be fully aware of the same but it also comprehends what truly needs to be done. The thing though is that one has had enough of accusatory tell tales and it is now time to act – Facta non Verba (Deeds not Words)!
Dr. Kamal Monnoo is a political analyst, he can be reached at email@example.com. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.