SHAHID SATTAR AND EMAN AHMED
Pakistan is amongst the nations with the lowest investment and saving rates in the world. This has obstructed progress towards a sustainable economic growth. According to data from the Economic Survey of Pakistan 2019-20, the investment-to-gross domestic product (GDP) ratio deteriorated to 15.4% in the outgoing fiscal year. The pressure of a shrinking national economy suggests that the government's journey to address structural imbalances is yet to show results. However, there is hope in the sense that the savings rate has started to improve mainly due to significant improvements in the external account.
Savings increased from 10.8% to 13.9% of GDP in the last fiscal year, exceeding the government's target and expectations. The reduction in interest rate to 7% in June 2020 provided much-needed relief to industries which can now benefit from long-term lending and working capital loans. Full-cost loans are generally taken by the SME sector and indirect exporters and this is a very significant relief for them. It is possible to improve the economic position of Pakistan if the savings rate is facilitated to grow further, which in turn requires choosing long-term investment over short-term consumption. The figures below show the high degree of household consumption in contrast to the abysmal state of investments over the years.
Private investment has been declining for several years, suggesting that private investors have been losing confidence in the economy. This can be attributed to skewed priorities such as the non-favoring of exports and reliance on low value-added products, archaic technology, lack of policy continuity and redundant business practices. Due to a lack of profitability, Pakistan has not been able to access quality resources, leading to a vicious cycle where the country unsuccessfully competes for investments and market share in the world economy. The unprofitable nature of the economy is exacerbated by unreasonable anti-export biases, inefficient energy costs and high tariffs, leaving firms in a quandary as exorbitant amounts have to be set aside to meet these requirements.
When it comes to export-oriented industries, as long as energy sector losses continue to pile up and taxes remain high, other economic concessions are likely to provide minimal relief. The issues of unavailable energy, as well as excess and expensive energy have plagued the industry, leading to a decade of hampered growth. Furthermore, the country has failed to increase its exportable surplus in any sector, in order to meet local demand and produce value-added exportable commodities. When it comes to cotton, local farmers have not been given sufficient training to produce quality lint, leading to a burdensome need for imports of raw material that could easily be prevented. The farmers are neither trained nor supported to use certified seeds to produce quality cotton that once we used to export after meeting the local demand.
Another crucial factor impacting the investment climate is the degree of sophistication of Pakistan's products. The myopic focus on cotton has led to the neglect of the synthetic fibers market, and the country lags behind regional textile-based economies. World Development Indicators show that Pakistan has had a flat trajectory for value added manufacturing per capita in recent years. While Pakistan reported a maximum of $181 and a minimum of $161 per capita between 2011 and 2018, Bangladesh boomed from $138 in 2011 to $361 in 2019. Furthermore, Vietnam more than doubled its value from $204 in 2011 to $448 in 2019.
The country's policy environment at present has served to squeeze exporters' profit margins and responsiveness, thus reducing their competitiveness in the global market. Pakistan's industry has been held back by gaps in the supply chain that are exacerbated by a complicated tariff regime. Meanwhile, Sri Lanka has eliminated all import tariffs on textiles to improve competitiveness in the apparel industry, while Bangladesh's Special Bonded Warehouse Scheme (SBWS) provides rapid, duty free access to all imported inputs for all exporters in all sectors of the Bangladesh economy.
It is projected that the textile sector's export volumes can be doubled if the government's long-term policies are corrected. It must be noted that the industry sustains no energy losses, whether line or recovery, and hence 7.5 cents/kWh is the actual cost of service, so the need for regionally competitive energy pricing is not an unreasonable demand.
Pakistan's apparel producers are hamstrung by costly, unstable and insufficient access to energy. These challenges have prevented Pakistan from matching the export growth of countries such as Vietnam, Bangladesh, and Cambodia, and have negatively impacted the confidence of foreign investors in the country.
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Textile Exports ($ Billion)
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Countries Growth
2009-18
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China 65%
Bangladesh 201%
India 69%
Vietnam 252%
Pakistan 41%
Cambodia 434%
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Locally manufactured goods continue to lose share in the world market due to their unsophisticated nature, mainly concentrated in low-grade produce and animal products. Such products are characterized by low income elasticity of demand and high price elasticity of demand. Our products are currently not competitive in the global market and are doomed to remain so as long as our industries are burdened with high tariffs. There remains no liquidity to invest in technological up-gradation, innovation and progress as all the cash flow goes into meeting these high costs.
One technique to achieve value addition relies upon discouraging the export of low value-added cotton fiber, yarn and fabric, whilst formulating policies which encourage new investment in garment sector, thereby developing new production units for more garment exports. Without value addition, industrial growth remains elusive, while regional competitors have made significant progress in producing advanced goods. It is essential that policymakers focus on improving industry competitiveness in order to ensure sustainable economic growth and accumulation of much-needed foreign currency reserves. This can only be deemed possible with a long-term investment policy in place.
There has been a tendency to rely on redundant past practices for business and governance, while the world is constantly innovating in these spheres. This has been a significant cause of Pakistan's obstructed growth. It is important to point out how bans on popular social networking and streaming sites have set Pakistan back by a mile in the past, with its most recent ranking at 110 out of 141 countries on the Global Innovation Index. Social networking and media sharing applications have long since become the hub of information sharing, learning and conducting business. Furthermore, they serve as a crucial avenue for creativity for the youth, and provide boundless opportunities in every possible field. Pakistan needs to bridge the digital divide and prioritize development in the spheres of innovation, business environment, research, infrastructure, institutions, market and business sophistication, as well as a commitment to knowledge and creativity.
This brings us to another factor contributing to the weak investment climate - brain drain, whereby the trained manpower of the country flees towards better prospects. Human capital is one of the key drivers of economic development and sustainable competitive advantage in the global market, the loss of which can lead to a permanent impact on the growth process of the country of emigration. The consequences of brain drain for poverty, economic growth, and human development are boundless, as these are the minds which could pull Pakistan upwards in the fast-paced global environment of today.
Pakistan has been hit hard by the Covid-19 pandemic, which has possibly disguised the pre-existing need for macroeconomic and structural reforms to support economic stability and expansion. The country has seen issues such as the non-availability of energy, as well as excess and expensive energy in the recent past, leading to a lost decade in terms of profitability, up-gradation and expansion. Once structural reforms are initiated for these persistent problems, technological advancement and value-addition can take place. There also remains an urgent need to retain the human capital of the country by creating suitable employment opportunities for them, coupled with efforts to make Pakistan more competitive and fiscally sustainable. As the country can no longer afford to rely on loans, we must prioritize sustainable reforms and long-term investment.
