Roadmap to economic recovery [Part – IV]


Roadmap to economic recovery [Part – IV]

The latest news has kept us on our toes with the ups and downs of our agreement with the IMF. We are at a stage where going into debt, not for a project but to make ends meet, is cause for celebration. It’s easy to borrow, very difficult to repay. There is now a serious breach in the country’s economic model, under which for years it took out consumer loans.

Decision makers need to know that the party is over. The music stopped. It’s time to rebuild the economy, put the nation above yourself, and plan ahead to stay out of trouble. Once the economy is on solid ground, we must try to improve the country’s standard of living.

The government is right to focus on the main problem it faces, which is how to pay the bills owed to foreigners. Naturally, he is plagued by the restoration of the IMF loan. The Chinese have done it too, and others may follow. Yet so far borrowing more is the government’s only stated policy. More debt does not solve the problem, it only postpones it. This ensures that before long we could be in for a worse crisis.

We must make parallel efforts to reduce debt, revive the economy and exports and limit imports. In previous writings I have spoken of the first two. Today I want to discuss how we can bolster the economy’s lost growth and export capacity while reducing imports.

Because we don’t produce enough at home, the economy faces a crisis whenever its growth rate exceeds about 3%. At higher growth rates, imports swell and must be financed by external debt.

Final figures are not yet known, but it is safe to say that in FY22, Pakistan will import edible oil worth $4 billion. In addition, it will import wheat worth about $1 billion. Remember that until a few years ago, we exported wheat. Importing machinery will cost $11 billion. And if the economy is to grow, we need more factories and machines. Drug imports will exceed $4 billion.

There was a time when Pakistan was obsessed with construction. Within the first 25 years, the new country had achieved food security, built two of the largest water dams in the world, and had the means to provide fixed-interest loans for private credit.

Telling the story of the core industry is essential, due to its key role in any production. Pakistan was the first to set up a steel mill. Even before that, he created a machine tool factory and soon after the HMC and HEC. It started shipbuilding in the 1950s. It built its first oil refinery in 1960.

The only flaw in the model was that the steel plant, HMC and the rest were all publicly owned. They did not prosper because the government funded the operating costs but not the capital expenditures. Without investment, these units quickly lost any promise they had at the start. Now they are just shells of what they originally intended to be. The HEC will be privatized. We hope it will become a dynamic unit.

In FY2, we will import eight million tons of iron and steel for $5.3 billion. The steelworks with a capacity of 1.1 million tonnes will not produce anything. Also, there will be few factories and machines produced in Pakistan. And there is not enough foreign currency to import them in the necessary volumes. HMCs, HECs and machine tool factories failed to deliver on their promises, while governments stood idly by. Since the oil crisis of the 1970s, policy-making has become the domain of the IFIs; the government followed orders.

Manufacturing apathy comes at a cost. Today, Pakistan produces few of the goods required by downstream industries. It produces five million tons of steel against 40 million by Turkey and 29 million by Iran. India produces 120 million tons and China more than a billion. Pakistan is nowhere in basic chemical production. India and Brazil rank ninth and tenth in the world. Among the countries that export the most drugs and medicines, India is tenth with 17 billion dollars in exports. India also has the fourth highest oil refining capacity in the world. Pakistan has not done too badly in the area of ​​fertilizers. But that’s about all. It produces more light industrial goods than before but cannot export them in large numbers.

Agriculture has fared particularly badly. Since 1977, Pakistan has had an organization to stimulate domestic production of oilseeds, our main food import. After 45 years of effort, Pakistan still sources only 12% of oilseeds from within.

Among other things, the Ayub Agricultural Research Institute has studied why we are not producing more. Their work is thorough. But the important conclusion is that the price obtained by farmers is uncertain and changes often. There is no reliable channel to sell the production. Thus, the country buys poor quality palm oil from abroad. And what we buy is bad for our health.

Locally produced oilseeds do not cost much more. In 2019, with a 36% recovery, the cost of local canola seed was 25% higher than the C&F price of imports. This cost is before duty. And that is at the value of the rupee in 2019, which was 35% higher than today’s value. The cost of local sunflower was 10% higher in 2019. After taxes and other expenses, the cost of imported oilseeds leaving the factory was much higher than the price of local seeds even in 2019.

The study indicates that to source entirely from the interior, oilseeds need five million hectares of land. Since water and land are scarce, this area has to come from somewhere. PARC says there are varieties that would grow in arid areas or in the hills. We may have the necessary land.

If it wants to reduce imports, the government must act in favor of oilseed producers. It must set up channels for farmers to sell their products with a mechanism to prevent sudden price fluctuations. It can offer credit and technical support.

Wheat is the key to a country’s food security. In the 20 years between 1980 and 2000, its production increased by 67%, from 12.5 million tonnes to around 21 million tonnes. In 15 years, between 2006 and 2021, production has only increased by 18%, from 23.3 million tonnes to 27.5 million tonnes. In FY22, its production fell to 26.4 million tons. So what went wrong?

The economic survey of Pakistan tells us that the “sown area” is less this year, water for irrigation is scarce, there was drought at the time of sowing and there was not enough fertilizer . Thus, the area planted with wheat has decreased, even though the government has increased the support price.

As yield per acre fell, with only 2% less acreage, production in FY22 fell 4%. While the population has increased by about 2% per year, the area under wheat has not increased. In 2010, wheat was grown on 8,901 hectares. In 2022, it had 8,976 hectares, less than one percent more.

Water is a severe constraint. Pakistan has not increased its water supply. In 2010, the water supply was 137 MAF. In 2022, it’s 131 MAF, 6 MAF less.

Cotton has been Pakistan’s key export. All indicators for cotton are worse than before. We produced 11.5 million bales of cotton in 2011. It peaked at 13.6 million bales in 2012. Production is now 8.3 million bales, well below 2011. The area under cotton is increased from 2.7 million hectares in 2011 to 1.9 million hectares. To stem the decline, Pakistan needs to increase the use of BT cotton, but with regulation. Studies show that using BT cotton increases yield and reduces the cost of pest control. This results in higher gross margins for the farmer. Low use of pesticides reduces the effect on the environment as well as the health costs of farmers.

For years, the country has known that climate change could reduce water for crops. In various forms, the government has had projects for the efficient use of water. The goal of the project is for farmers to switch from flood irrigation to drip irrigation or targeted water use. Yet in the 30 years since the start of these projects, the country has made no progress. Either we flood and waste, or we deny water to some. The result is that we cannot expand the cultivated area.

We had a similar top-down approach for another key input, fertilizer. Its production has increased by about 60% in 20 years, but the price and reliability of supply remain a problem.

To grow again, these many products need a variety of government policies and new investments. Above all, their revival requires governments to be vigilant and want growth to resume. For years, without worrying about producing at home, governments have placed loans and debt at the center of their economic policy.

So my request to policy makers is this: deal with the emergency, but pay some attention to the long term. Otherwise, the long term catches up.

Concluded

The writer, former trade minister, is president and CEO of the Institute for Policy Reforms.

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