Ishaq Dar, the country’s new financial czar, has laid out three priorities – to strengthen the rupee, reduce interest rates, and cut down inflation. Critics say that in his previous four-year stint as finance minister ending in 2017, Dar put the economy on the wrong trajectory by borrowing significant debt to lift the foreign exchange reserves. On the other hand, his supporters point towards the strength of the local currency during his term in office.
Back then, Dar received a lot of support from declining oil prices that helped contain the current account deficit and played a crucial role in keeping the exchange rate relatively stable. The price of Brent crude stayed at or above $100 a barrel in 2011-14 but plunged to the $40-50 range in the period between 2015-17.
This time around, as fate would have it, oil prices have fallen once again as Dar takes charge, with Brent dropping from more than $120 a barrel in March to $90 at the time of this writing. As a result, government officials are now hoping that this decline will help reign in the current account deficit and put the economy on the right track.
However, hope is not a strategy. What this country needs right now is less talk, and more action.
The unchecked growth in consumption of imported goods has milked the country dry. Pakistan continues to struggle with low levels of foreign exchange reserves and relatively modest growth in exports, despite the massive devaluation of the rupee. The nation’s economic health relies heavily on remittances received from overseas Pakistanis who send foreign exchange equivalent to the sales of the export industries.
In the last fiscal year, Pakistan received $31.7 billion in remittances while export proceeds were $31.8 billion, as per data from the State Bank of Pakistan (SBP) and Pakistan Bureau of Statistics (PBS). This is not a sustainable strategy. A country cannot rely on remittances to fill the trade gap, particularly since the Global economic slowdown will hinder remittance flows. Prudent economic reforms that are long overdue should be implemented.
Those at the helm of affairs must implement policies that can help push Pakistan’s production of energy products higher, thereby bringing investment into the energy sector and reducing the nation’s dependence on expensive energy imports.
Energy sector reforms, ranging from the long-awaited oil refining policy to the enactment of business-friendly regulations for oil and gas exploration, are badly needed and should be pushed forward. Archaic regulations, bureaucratic red-tape, and the government’s unnecessary interference in the functioning of the market (through OGRA as a price setter) have created anomalies in the market and damaged the energy sector.
Take the oil refining industry as an example. The refiners produce high-value petrol and diesel by processing low-value crude oil. They can save the country hundreds of millions to billions of dollars in foreign exchange through import substitution. On top of that, oil refineries in many developing and developed countries, including the US and India, have been running their plants at maximum capacities to earn revenues from domestic sales as well as exports.
Pakistan, however, barely utilises 60-70% of its total oil refining capacity. The local plants come short of meeting domestic demand, so there is no question of exports. Due to the lack of favourable policies and excessive regulation, refineries have not been able to expand and modernise their facilities. To fix this problem, the government should introduce the oil refining policy so that refineries can work on plant expansion and deliver forex savings to the country.
Similarly, through full deregulation of fuel prices, policymakers can make the energy industry more lucrative for investors as well as more competitive. This is also the primary way through which the government can remove inconsistencies (such as rent-seeking behaviour) that have emerged in the energy market.
Broadly speaking, the government must also get rid of the mindset of fixing prices, whether of fuel or currency (exchange rate), since we’ve repeatedly seen how this ends up hurting the economy. Instead, policymakers should let the fundamentals of demand and supply make the decisions.
In short, import-driven consumption needs to be brought down through reforms. Additionally, it is time for the government to take a closer look at the export industries that haven’t shown robust growth, despite the rupee’s devaluation and support from the government in the form of subsidies.
The government should realign its priorities and focus on supporting those industries that offer the greatest potential for future export growth. The government must look into information technology (IT) and other industries that show promise, as opposed to those sectors that have a poor track record of increasing export earnings and can’t survive without subsidies. A strategy that targets export diversification with clearly identified objectives and realistic targets must be implemented.
With dark clouds gathering on the economic horizon, reforms should be initiated at the earliest. The floods have already delivered a devastating blow to the economy and the country might continue to feel its aftershocks for years. Following damage to crops, Pakistan will have to increase imports of cotton and wheat in the winter. Furthermore, oil prices may move upwards as the OPEC+ alliance curtails production by two million barrels per day, as per the group’s latest announcement.
Pakistan’s current account deficit dropped by 42% in August from the previous month, which was a welcome development. However, considering the aforementioned factors, this drop might not be sustainable as demand for imports climbs and oil prices rise. This cycle of a short recovery followed by a large drop might continue until Pakistan undertakes economic reforms, particularly in the energy sector and export-oriented industries.
The writer focuses on subjects related to business and economics, specialising in the energy sector
Published in The Express Tribune, October 17th, 2022.
Originally published at tribune.com.pk