Chopping and stretching finances

In Greek mythology, Procrustes was a unique character known for his obsession of making his guests fit perfectly in his iron bed. His methodology, however, was disturbingly brutal. He altered his guests, not the bed. If a guest was too tall, he’d cut their legs off. If they were too short, he’d stretch them until they occupied the bed entirely. As peculiar as his method was, Procrustes achieved his goal, though the welfare of his guests was undoubtedly compromised.

An oddly similar methodology seems to have been adopted by Pakistan’s economic managers, particularly under the current administration. Rather than directing efforts towards establishing a path for sustainable growth and addressing deep-seated economic problems, these financial architects have taken hasty steps to fix the situation.

This has involved imposing severe short-term measures and turning a blind eye to their potential pitfalls. They might have begun with commendable intentions, but their approach has pushed the economy to a precarious edge.

The present PML-N government inherited an economy that was in a dire state, grappling with issues like a burgeoning current account deficit that relentlessly drained the country’s foreign exchange reserves. As of April 2022, when the PML-N administration took the reins, Pakistan was haemorrhaging an average of $1.3 billion per month due to the current account deficit, as per the data from the State Bank of Pakistan for the initial 10 months of FY22.

Pakistan has managed a considerable reduction in the current account deficit, but it has come with an overwhelming cost that could have been avoided

Fast forward to this year, this deficit has contracted substantially to an average of $326 million per month. The country even registered current account surpluses in March ($750m) and April ($18m).

However, this apparently positive turnaround has come at a steep price. The PML-N government’s economic team took drastic measures by imposing stringent restrictions on imports, reminiscent of Procrustes chopping off limbs to make his guests fit the bed. Consequently, the economy is reeling under a crisis of unprecedented proportions.

The government now projects a paltry economic growth of merely 0.29 per cent for the ongoing fiscal year, and the prospects for the coming year that starts from July appear challenging. A significant decline in business activities is apparent from an 8.1pc drop in Large Scale Manufacturing (LSM), as reported by the Pakistan Bureau of Statistics (PBS) for the first nine months of this fiscal year. That’s a stark contrast to the double-digit growth witnessed a year ago.

This will undoubtedly be accompanied by a rise in unemployment. That’s happened against the backdrop of crippling inflation rates, with headline inflation reaching the highest-ever point of 36.4pc in April.

Indeed, Pakistan has managed a considerable reduction in the current account deficit, but it has come with an overwhelming cost. The regrettable reality is that the country could have avoided this precarious situation.

Pakistan has long grappled with a pressing economic conundrum: limited growth in exports coupled with a surging rise in imports. This mismatch has birthed a sizeable trade deficit, exerting undue strain on our forex reserves. A case in point is the previous fiscal year when imports skyrocketed by 42pc against a relatively modest increase in exports of 26pc, PBS data shows.

To rectify this predicament, strategic emphasis should have been placed on the development of import-substitution and export-oriented industries.

Take the oil refining sector, for instance, an industry that fulfils the role of import substitution by producing petrol, diesel, and other essential fuels. This eliminates the need for costly energy purchases from abroad. Pakistan’s refining sector can quickly grow production, given how the facilities are underutilised.

Refineries can potentially generate forex savings around $1bn annually, especially at a time of high gross refining margins, according to some estimates.

Another prime example is the Thar coal projects, which have proven to be a reliable and cost-effective source of electricity generation. The utilisation of local coal could feasibly displace imported LNG, a resource whose supplies are not only expensive but also unreliable. This could also result in potential annual savings of billions of dollars.

The strategic development of import-substitution industries could considerably reduce the current account deficit. And we haven’t even considered the export industries yet, such as textiles, a labour-intensive sector providing employment to hundreds of thousands across the country, which bring foreign exchange and have the potential to significantly boost our reserves.

Fostering the growth and expansion of import-substitution and export-oriented sectors is not a quick process. Indeed, the journey towards bolstering these critical industries is long, with bumps along the way. However, this is the only sustainable trajectory for our economy.

In contrast, the government seeks shortcuts by imposing severe restrictions on imports. This Procrustean approach to addressing the current account deficit has paradoxically hampered the very sectors that were crucial for our economic transformation.

Oil refiners, Thar coal project operators, textile exporters, and others have been mired in challenges. Opening letters of credit for the import of essential machinery and raw materials like crude oil for refineries has become an uphill battle, pushing many to curtail operations. This scenario played a pivotal role in the marked decline in the LSM numbers.

It is imperative for policymakers to pivot towards strategies that deliver enduring growth, even if this yields modest or no immediate returns. They must break free from the shackles of poorly-conceived fixes, which have ensnared Pakistan in its current economic predicament. It’s time to move beyond the Procrustean tactics and craft sustainable solutions.

The writer focuses on business and economics. He can be reached at sarfarazis@yahoo.com and tweets @sa_cubes

Published in Dawn, The Business and Finance Weekly, May 29th, 2023

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