Pakistan is buzzing with positive vibes these days as the economy continues to register solid recovery despite the ongoing second wave of COVID-19. In the first five months of this fiscal year, the current account deficit has turned into a surplus, the Pak Rupee has strengthened against the US dollar, large scale manufacturing has grown over 7%, and worker remittances have crossed USD 2 billion for the seventh consecutive month. While some competing Asian economies are shut for business, even Pakistan’s exports have recorded a turnaround to reach over USD 12 billion in the first half of fiscal year 2021. While there is plenty to rejoice, the big question is: will this be another boom-bust cycle, or will Pakistan maintain this momentum to achieve consistent, export-led growth?
If Pakistan is to seize this opportunity and transform its economy on the back of higher exports, it will have to make some tough calls for structural adjustments in these four areas: agriculture, energy security, trade liberalization, and productivity enhancement.
Historically, agriculture has remained the mainstay of Pakistan’s economy as it contributes over 21% to the GDP and employs around 45% of the labor. Yet, the sector faces nagging problems of low crop yields, poor quality seeds, improper nutrients’ application, lack of mechanization, and low agricultural R&D expenditure. The country’s agricultural production is focused on meeting domestic needs rather than being market-driven and high-value added, with only surplus produce of rice, horticulture, cotton, and livestock sold globally.
South Korea presents a classic example of how a primarily agrarian economy transformed itself into a leading industrialized nation by following a planned curve. In the 1950s and ‘60s, Korea taxed the agriculture sector by maintaining low grain prices and then, subsequently, subsidized agriculture to ensure food security through domestic self-sufficiency. Further, the Korean authorities focused on reducing costs of production through research and development, increasing price support, and cheaper availability of inputs – such as fertilizers. Over the last few decades, the government has continued to invest in infrastructure development to promote rural industrialization.
Pakistan has much to learn from the South Korean experience to improve productivity of its agricultural sector and rural incomes, which will help boost the national food security and grow exports through competitive supply of raw materials for the downstream industry. Like South Korea, the journey must start with the much talked about broad-based land reforms for the benefit of not only small farmers, but also to attract investments in corporate farming in line with the government’s vision. The government must prioritize the promotion of higher seed quality, farming technology and techniques, and water infrastructure. To encourage balanced use of fertilizers and improve agricultural output, subsidy should only be provided on Phosphate, Potassium, and micro-nutrients products. In addition, there is a need for targeted, value chain aggregated projects and cooperatives to improve efficiencies and credit-worthiness of small farmers. On the export front, Pakistan has the potential to gain substantial market share in meat, poultry, fruits, and vegetables, while the government also foresees rice exports to surge to USD 5 billion in the next five years. The Fertilizer Policy 2001 has encouraged PKR 162 billion investments in capacity expansion and state-of-the-art production facilities by fertilizer manufacturers. Pakistan is now self-sufficient in urea production and has the capacity to export more than 1 million tons to earn valuable foreign exchange.
Export-led growth and higher rates of industrialization cannot be achieved by Pakistan till the chronic problems faced by its energy sector are resolved. Due to the energy sector’s inefficiencies, Pakistan has one of the highest electricity tariffs in the region at around 12 cents/kWh. As a result, the export sectors of China (7.5 cents/kWh), Vietnam (8 cents/kWh), and Bangladesh (9 cents/kWh) are much more competitive globally and have become a growth engine for their economies. To revive the power sector, the government must reform distribution and transmission companies on a war footing, promote indigenous fuels, and work in partnership with IPP investors to catalyze Pakistan’s industrial growth and power demand. These reforms will also remove market distortions, discourage rent-seeking behavior, and reduce the discretionary power of regulators, all of which hamper the creation of a level playing field. With domestic natural gas reserves dwindling, Pakistan must harness the full potential of Thar projects and other renewable alternatives to ensure its energy security for uninterrupted industrial activity.
As highlighted by the World Bank in its recent note, the success of ‘Make in Pakistan’ strategy will depend on the country’s readiness to ‘Sell to the World’. Value addition and brand building is the name of the game in the modern world, but this is where Pakistan has unfortunately faltered the most. Around 40% of Pakistan’s exports are concentrated in a few Western markets, while 75% of export value is derived from five product groups of cotton-based yarn, textiles and garments, rice, leather and leather products, and sports goods. For higher value-added exports, it is critical that import restrictions for raw materials required by manufacturing sectors are eased and investments made in human capital and technology. The local industry must obtain global quality certifications to make the products more marketable. By 2030, Asia will represent 66% of the global middle-class and 59% of consumption. Therefore, the key is to diversify – both in terms of destinations by gaining tax-free market access to regional countries and marketing non-traditional products and services.
The economic miracle of Asian countries, like Korea, Thailand, and Singapore, is based on higher productivity and labor efficiencies for improved global competitiveness. With investments in research & development and automation, the highly skilled labor of these economies converted imported raw materials and semi-finished goods into exportable high value-added products. The productivity of workers in Pakistan has remained relatively stagnant across manufacturing, service, and agriculture sectors, while that for India and Bangladesh has increased in recent years. To reverse this trend of labor market inefficiency, Pakistan cannot afford to continue to neglect technical and vocational training. At the same time, the government must create an enabling environment to encourage private sector investments to set up new industries and upgrade plant and machinery to benefit from higher productivity levels. The “Digital Pakistan” agenda presents an opportunity to make a concerted push towards a knowledge-based economy, upskilling labor force and promoting exportable Information Technology-based services.
While recent figures show impressive gains by Pakistan in the global trade market, the government has set itself a challenging target of increasing annual exports from USD 25 billion to USD 150 billion by 2025. The progress on China-Pakistan Economic Corridor (CPEC) and Special Economic Zones will remain critical to achieve this vision. Moreover, the desire to achieve export-led growth will require actions beyond slogans, rebates, and subsidies for the local industries. An “exports first” approach will require the government to deliberately allocate resources toward sectors that produce for the export markets at the expense of domestic consumption. Other Asian economies have achieved socio-economic development following this path, Pakistan can do so too with persistent focus and the right set of policies.
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