January 17, 2022 (MLN): Pakistan lacks a coherent macro growth strategy while it needs a functioning nervous system, Mian Atif, a senior Economist said on Saturday.
“Those in charge have repeatedly failed to recognize the requirements of a coherent growth strategy for Pakistan,” he expressed these views via his official Twitter handle.
He pointed out, “Pakistan's economy is not in a good place as the per capita income has not risen in 3 years, infact, it dropped slightly. Even over the last 20 years, income per capita has grown at a paltry 1.9%.”
In a series of tweets, he added that a fundamental imbalance between anaemic supply (domestic productive capacity) and the exaggerated external demand driven by its rentier economy has been the core problem.
“A broken economic decision-making system” is the fundamental cause of the problem, he underlined.
For instance, a 30year old flawed energy policy that relied on imported fossil fuels and guaranteed returns in dollars for producers, while the power output was largely used for domestic consumption. The policy was designed to fail then how is the electricity payback feasible under this policy, he said.
“The circular debt is nothing more than a manifestation of the fact that Pakistan adopted an unsustainable energy policy. The same is true of many other dollars funded “infrastructure” projects, he noted.
The “Naya housing” which is the cornerstone of current government economic policy, a promise to build five million houses, is also designed to fail. It is practically impossible to build five million houses in five years, he added.
However, the deeper issue is that housing is a final good and hence does not help boost productivity, which is what Pakistan desperately needs. A credit-fueled housing policy will subtract from growth and put further pressure on the Balance of Payment (BoP).
Highlighting another flaw, he said exchange rate and capital account policies continue to be at odds with Pakistan's growth needs. Earlier regimes actively kept an appreciated exchange rate which discouraged investment in high-productivity export sectors.
Unfortunately, the current regime has also promoted capital account policies that are detrimental to growth. It started with the opening of a capital account for speculative portfolio investment in government bonds.
He advised that capital account convertibility should be prioritized for tradable and high-spillover sectors, and for long-term capital. Convertibility should be discouraged for non-tradable sectors such as real estate.
More recently, a capital account has been opened up to actively encourage expat Pakistanis to buy real estate in Pakistan.
Pakistan already has an out-of-sync housing market with a very high urban land value to income ratio, he noted.
Encouraging external capital flows into real estate is negative for growth because it makes the country more expensive to live in, without providing any productivity advantage and builds speculative foreign liabilities that will further destabilize future BoP position.
He also added that there are many more loopholes including a regressive taxation system, implementation of IMF conditions, a rent-seeking industrial structure etc. that need to be correct.
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