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11 - 17 Aug, 2012
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ECONOMIC REVIEW
Is Pakistan Becoming A Failed State?
The country has a robust economy that does not require offering incentives but removing irritants at the earliest is a must
by SHABBIR H. KAZMI

Is Pakistan Becoming A Failed State?
Lately, Dr Murtaza Mughal, President, Pakistan Economy Watch, has rightly indicated that the impact of high political volatility has become unbearable for the masses and the business community. He has raised the caution that perpetually high political volatility and confrontation among various institutions has been dragging the economy down and there seemed no respite in sight. He is of the opinion that stalemate of relationship with the judiciary has hampered government's ability to take effective steps that could facilitate recovery of the economy.
The government which is frequently accused of mismanagement and inefficiency has failed to resolve the economic challenges, augment investor confidence and attract external financial support. Murtaza warned that weaknesses of the government are adding to the external vulnerabilities and debt burden that could lead to further down grading of Pakistan's sovereign rating. Policy planners must pay attention to Mughal's warning that Pakistan is plunging deeper into a state of general insecurity, indicators are pointing to a meltdown of public institutions, sovereignty of the state is jeopardised and country is turning into a failed state needs immediate attention.
While one may not subscribe to the basic premise of Dr Murtaza Mughal that the country is fast becoming a 'failed state' there is a consensus that if timely steps are not taken Pakistan can face real precarious situation. The point of concern is that policy planners and decision makers are fully aware of the problems and also the solutions but little is being done to resolve the situation. While it is necessary to point out that the situation is not as gloomy as being painted by certain quarters, there is also no room for complacency.
Is Pakistan Becoming A Failed State?The government is yet to tackle energy shortages, reduce cost of credit, restructure public sector entities, revive investment, create jobs, increase agricultural and industrial production and take steps to lower political uncertainty. Pakistan has a robust economy that can be improved by taking the right remedial measures. To reject the premise that Pakistan is a failed state or inching towards being labeled as failed state, it is sufficient to say that the country has achieved around 2.5% GDP growth rate and missed the export target only marginally, despite suffering from energy crisis. The outcome would have been very different had uninterrupted supply of energy products at affordable cost would have been ensured. It is necessary to highlight the role of overseas Pakistanis who sent record remittances that helped in containing current account deficit despite the country also posting a record trade deficit.
Some of the quarters, including Dr Mughal are critical of the role being played by the Federal Board of Revenue (FBR). The general perception is that the FBR is not able to collect enough revenue that forces the government to borrow huge amount from the central bank as well as the commercial banks. Mammoth government borrowing is fueling inflation and crowding out the private sector as banks are left with little money to be disbursed to the private sector. The implications are that excessive borrowing not only fuels inflation keeping interest rate high, it is proving detrimental to the economy.
Lately, when US$1.1 billion were released to Pakistan from the Coalition Support Fund it gave some respite but apprehensions were also expressed that it may have provided a temporary relief but would not help the country in the long run without undertaking structural reforms. Release of the amount may ease pressure on country's foreign exchange reserves but efforts have to be made to boost exports and contain imports, especially import of petroleum and petroleum products and food items. The delay is announcing Trade Policy, working of TDAP without a full time chairman, delay in finalising barter trade details with Iran, and, above all, failure to take measures to resolve energy crisis will seriously hamper Is Pakistan Becoming A Failed State?Pakistan's economic growth.
Some of the quarters in a bid to enhance exports are demanding incentives to boost export of raw cotton, especially because of looming energy crisis. However, this can be termed a morbid approach because it will enable Pakistan's traditional competitors to boost their value-added exports. The prudent approach is to impose complete ban on export of raw cotton, yarn and unprocessed cloth.
Suspending gas supply of industrial units, including fertilizer units is the worst policy. The government must stop doing this at the earliest. Efforts should be made to contain theft of electricity and gas and improve recovery rather than give more gas to the power plants. Improving cash flow of power generation companies will enable them to improve electricity supply. Pakistan has an installed capacity to generate 24,000MW but has been producing less than 12,000MW due to limited availability of fuel. Experts are of the view that release of Rs100 billion by the government can help in resolving the circular debt issue to a large extent. However, the amount has to be recovered by making deductions at source. Many of the government, semi government offices and state owned enterprises owe billions of rupees to oil and gas supply companies.
Last but not the least, exports can be increased by removing irritants and resolving issues. Export of wheat and sugar can help in earning millions of dollars. At present bulk of the quantities are being smuggled due to lack of clear cut policies. As a first step porous borders have to be plugged in to stop slipping of these products to the neighboring countries but appropriate policies have to be introduced to facilitate export of these commodities through official channels.
Since the country suffers from shortage of electricity and gas the second best option is to focus on agriculture. Boosting production of wheat, rice, sugarcane and cotton can help in achieving food security as well as improving performance of Pakistan's two agro-based industries. Achieving higher export of textiles and clothing can help in earning more foreign exchange and crushing more sugarcane can help in producing E-10 (motor gasoline blended with ethyl alcohol. While it is necessary to install CNG/LGP kits to facilitate their use, E-10 does not require installation of any additional gadgetry.
These are only some of the suggestions that could help in putting Pakistan's economy on track. The beauty of it is that the government wouldn't have to offer any incentives and/or subsidies but the irritants have to be removed. The private sector must also stop complaining about shortage of electricity and gas. It must opt for in-house power generation and establishing LNG terminal. Till the time onshore facilities are created a floating terminal can be used.

 
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