April 23, 2022 (MLN): The income earned through relatively less productive avenues such as investment in land and real estate eventually increases the demand for imports that continue to drag Pakistan towards the chronic issue of Balance of Payment (BoP), Atif Mian Senior Economist said while speaking at the webinar hosted by Princeton University recently.

Pakistan has a fundamentally unsustainable growth model as the majority of people make a lot of money through appreciation of the land they hold (less productive) and ultimately they consume capital gains that put pressure on imports, while at the same time, the exports volume does not expand by the same magnitude in the absence of productive economic activities, he explained.

Resultantly, Pakistan’s economy has to encounter a chronic balance of payment issue which is the major culprit that prevents Pakistan to grow like other neighbouring countries.

“Pakistan is on the pace to have a Current Account Deficit (CAD) of $18-20bn by the end of FY22, and the country cannot sustain such a high-level CAD forever,” he underlined.

In addition, the heavy magnitude of investments in less productive avenues forces to disincentivised investment in relatively more productive avenues, mainly export-related sectors which end up being less competitive in the global market.

Explaining further, he stated that the sugar industry is a highly subsidized industry. Being a water-scarce country it does not make sense for Pakistan to be so intensive in the sugar cane industry but for political reasons, this industry is given huge subsidies. Pakistani sugar by and large is not going to be competitive in the international world as the country is creating demand but through activities that do not generate demand from the rest of the world.

As a result of this, Pakistan sees a chronic imbalance between imports and exports repeatedly. The import volume is twice as large as exports that are a remarkable imbalance.

Remittances are the only source which helps to fill some of the gaps however if the gap between import and exports continue to increase, the current account deficit will have to bear huge downward pressure.

In other words, Pakistan faces a serious productivity challenge as the economy is partly wired to politics and partly to a “lack of vision”.

Talking about the solutions to counter the BoP problem, Atif Mian said, “First of all it's very important to have a clear vision of what needs to be done.”

“Pakistan needs to communicate very strongly to the rest of the world that it has a new credible regime that has a macro potential regulation along the following lines,” he advised.  

First of all exchange rate has to be flexible and Pakistan has already moved in that direction recently. However, in the past, the country has had serious issues where the artificial exchange rate has been imposed on the country for long periods of time with a negative impact on exports.

He also talked about capital account liberalization wherein he suggested using capital account very judiciously again keeping that productivity mantra in mind you want to encourage as much as possible investment coming from the outside as long as that investment is greenfield in nature that it's starting new capital projects, and projects of a particular variety.

Adding to it, he advised that capital account should be open for foreign investment that brings in technology, and know-how on highly productive stuff which Pakistan will be able to export to the rest of the world.  

Resultantly, it will start to have a positive impact on the balance of payment position.

On the remittances front, he explained that the increasing remittance reflects the fact that due to fewer employment opportunities,  citizens are forced to go to other countries.  Meanwhile, the over-reliance on remittances to bridge the gap between imports and exports can also be problematic from a macro perspective.

In order to tackle the problem of BoP effectively, Pakistan should have moved to the alternative energy front very aggressively by investing and building value chains like solar projects inside the country to generate electricity through renewables

Pakistan has an excellent environment for renewable energy solar in particular and these avenues should be exploited, he suggested.

On the taxation side, he recommended that taxation on urban land could be based on the value of the land or it could be a combination of that with capital gains on realized gains. These revenues can be utilized to fund the development of urban infrastructure.

Along with taxation, and energy, there is a dire need for funding in the agriculture sector, particularly in the research and development department of this sector.

Pakistan needs to create centers of excellence, from a research and development perspective in order to improve productivity, he advised.

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