The economy seems to be sailing like a rudderless ship which has lost its captain. Everyone connected with the economy is coming up with his own revival theories, without taking any practical steps, resulting in a steep productivity decline.
Economic experts are appalled at the indifferent approach of the economic managers of the country. They seem to be in no hurry to take the measures required to put the derailed economy back on track. The central bank has kept its policy rates very high and without any justification. In fact, the Karachi Inter Bank Overnight Rate (KIBOR) for 6 and 12 months has come down much below the State Bank of Pakistan’s policy rate of 15 per cent and banks are lending on the basis of KIBOR rates. So, in fact, interest rates have practically come down, but are still very high, as the State Bank is stubbornly sticking to its policy rate of 15 per cent.
Experts say that if the central bank brings down its rates by two per cent, six months KIBOR would decline from the current level of 12.44 per cent to 10.44 per cent. The banks lend on the basis of KIBOR plus premium, ranging from 2-5 per cent, depending on the credit worthiness of the borrower.
The economic managers have provided no roadmap for taking the economy forward. They are more worried about boosting revenues, instead of saving jobs. Their indifference to the closure of scores of industries has not only caused huge unemployment, but also impacted its revenue targets. Pakistan is likely to miss its revenue and export targets this year, mainly due to the flawed approach of its economic planners.
The government is curtailing the development budget, but increasing food subsidies which are being provided non-transparently. The criterion for the distribution of the Benazir income support program is the recommendation of ruling party MNAs and MPAs or party officer-bearers. The distribution is lopsided; it benefits a few and ignores millions. Development work benefits whole society while subsidies are temporary measures and have to be provided regularly to shield a small segment of society.
Large scale manufacturing, which only a few years ago was registering double-digit growth, is now in recession. The productivity of this sector has declined by over 5 per cent during the first eight months of this year. The government has done nothing to remove the reasons that caused the decline. The high interest rates, coupled with even higher inflation, were one of the reasons. A flawed import regime of the government was another drawback, as local producers have been exposed to cheaper imports, managed through under-invoicing. The law favours those who under-invoice than those who challenge it.
The political uncertainty has definitely played havoc with the economy. If the aim of the rulers is to control the entire country, without respecting the mandate of others, then political turmoil cannot be stopped. Corruption flourishes in the situation. The cost of doing business increases and the local manufacturers suffer.
The cost of doing manufacturing business has got out of hand of even privileged multinational companies. Most of the companies are now importing some of the items they have been manufacturing in Pakistan for decades. The aim of the multinationals is to make money. It does not matter whether they manufacture a product in Pakistan or import it from their subsidiary abroad.
The deteriorating economy is impacting the lives of poorer households. They are losing jobs. A new trend has just emerged in some industries, where employees are asked to leave the job or accept a substantially lower salary. A medium enterprise in Lahore recently negotiated a 40 per cent salary reduction with its 500 employees, as the other option was a 40 per cent reduction in the workforce. However, even these measures are not helping the industries.
The entrepreneurs, who accumulated wealth over the years, first tried to keep their industries afloat by selling their assets. They did it on a hope that sense would prevail and the economic wizards of the country would come out with a viable plan for the industrial sector.
However, after exhausting all their resources, the entrepreneurs now realize the blunder they have made. An industrialist said it would have been better to close the industry instead of pouring in huge money, because the government was unmoved. He said he had sold his property worth Rs140 million in he past two years to save his small weaving unit from going sick, but the situation is what was two years ago. "In fact, pressures have increased further due to global recession."
The country, at this juncture, needs prudent economic management, both at macro and micro levels. Generally, the government is supposed to improve macroeconomic credentials of the country and micro level improvements automatically take place. However, the situation in Pakistan is such that the government intervention is essential even at micro level.
Thousands of industries have gone sick during the past two years. Their financial liabilities are soaring with every passing day. Even if the issues are addressed, the industries need working capital to start production. The problem will not be solved if the problems that made these industries sick are not resolved. The economic managers will have to look at all angles and come out with a plan to revive these industries, which could immediately add about a million jobs to the economy.
The problem in this regard will be the manner in which the issues are tackled. Transparency will be the key to it. Infusion of cash in these industries will require a substantial amount. It will have to be assessed whether the sickness occurred due to an inefficient management or the circumstances beyond the control of the management.
The global situation will also be important. Reviving an industry in the global recession mandates that it will be futile to waste time and resources on the export oriented industries which cannot compete globally in the current situation. The alternative with the government will be to either provide them with an atmosphere, where they can compete globally or let them remain sick.
The government has the studies of creditable global consultants that point out the difference between the facilitations and incentives, provided by competing economies to their similar industries. The economic managers will have to come out with a similar facilitation program to revive the industries. They will have to act fast, because time is running out. The World Bank President has already warned that developing economies, which are not performing well, must prepare for the worst, as the global recession deepens…