Apr 23, 2022 (MLN): Income earned through relatively less productive avenues, such as investment in land and real estate, ultimately increases import demand that continues to drag Pakistan into chronic balance of payments (BoP) problem, Atif Mian Senior Economist said during a speech at the webinar recently hosted by Princeton University.
Pakistan has a fundamentally unsustainable growth model as the majority of the people make a lot of money by valuing the land they own (less productive) and end up consuming capital gains that put pressure on imports, while at the same time the export volume does not expand by the same magnitude in the absence of productive economic activities, he explained.
As a result, Pakistan’s economy faces a chronic balance-of-payments problem, which is the main culprit holding Pakistan from growing like other neighboring countries.
“Pakistan is on track to have a current account deficit (CAD) of $18-20 billion by the end of FY22, and the country cannot sustain such a high-level CAD forever,” he underlined.
In addition, the large scale of investment in less productive roads forces to discourage investment in relatively more productive roads, mainly export-related sectors that are ultimately less competitive in the global market.
He further stated that the sugar industry is a highly subsidized industry. As a water-poor country, it is not logical that Pakistan is so intensively involved in the sugar cane industry, but for political reasons this industry receives huge subsidies. Pakistani sugar will generally not be competitive in the international world because the country creates demand, but through activities that do not generate demand from the rest of the world.
As a result, Pakistan repeatedly sees a chronic imbalance between imports and exports. The volume of imports is twice that of exports, which is a remarkable imbalance.
Remittances are the only source helping to fill some of the gaps, but if the gap between imports and exports continues to widen, the current account deficit will have to exert massive downward pressure.
In other words, Pakistan faces a serious productivity challenge, as the economy is partly tied to politics and partly to a “lack of vision”.
On the solutions to counter the BoP problem, Atif Mian said, “First of all, it is 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 with macro-potential regulation in the next direction,” he advised.
First of all, the exchange rate needs to be flexible and Pakistan has been moving in that direction lately. However, in the past, the country has had serious problems with the artificial exchange rate being imposed on the country for a long time with a negative effect on its exports.
He also talked about the liberalization of the capital account, proposing to use the capital account again very wisely, bearing in mind that productivity mantra that you want to encourage as much investment from the outside as possible, as long as that investment is a green field that allows it new capital projects. start , and projects of a certain variety.
In addition, he advised that a capital account should be opened for foreign investment that brings technology and know-how about highly productive things that Pakistan can export to the rest of the world.
As a result, it will have a positive effect on the balance of payments position.
In terms of remittances, he explained that the increasing remittances are a reflection of the fact that less employment opportunities have forced citizens to move to other countries. Meanwhile, relying too much on remittances to bridge the gap between imports and exports can also be problematic from a macro perspective.
To effectively tackle the problem of BoP, Pakistan would have had to move very aggressively to the alternative energy front by investing and building value chains such as solar projects in the country to generate electricity from renewable energy sources.
Pakistan has an excellent environment especially for solar with renewable energy and these avenues should be exploited, he suggested.
As for the tax, he recommended that the tax on urban land could be based on the value of the land or it could be a combination thereof with capital gains on realized gains. These revenues can be used to finance urban infrastructure development.
In addition to taxes and energy, there is a great need for financing in the agricultural sector, especially in the research and development division of this sector.
Pakistan should create centers of excellence from a research and development perspective to improve productivity, he advised.
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