Spearhead Analysis – 30.07.2018
By Shirin Naseer
Senior Research Analyst, Spearhead Research
The coming government in Pakistan (although still in the making) is set to introduce as Pakistan’s new Premier Imran Khan revealed in his speech, a set of radical changes in the way the nation’s economy and administration has traditionally functioned. The aim is to stabilize the nation’s security situation, improve its global image, fight corruption and wealth aggregation, and overhaul the country’s economy and governance through boosting tax revenues and introducing innovative policies aimed at improving the quality of life of the average Pakistani.
The Pakistan that Khan has taken on is one that, save China (with its multi-billion-dollar investment in the China-Pakistan Economic Corridor), has failed to attract any significant international investment. Pakistan’s global image has taken a hit over the past few years. The country was recently ranked 147th of a total of 190 globally competitive markets in the World Bank’s 2018 “Doing Business Report”. Foreign investment is fundamental for countries not only because it helps them expand markets and benefit from information and expertise exchange between investors, but also because it allows countries economic globalization and helps channel economic growth. Foreign investors aside, Pakistan’s own indigenous investors are also wary of the country’s selective justice system, poor security and law and order conditions, and the incredibly volatile business environment.
Khan has a great task at hand.
Large sums of money are leaving Pakistan’s unstable economy annually. During a recent suo motu case “related to the retrieving of suspected fraudulent money from foreign accounts”, it was reported that in the financial year 2016-17 an alarming total of $15.253 billion was transferred abroad by individual account holders in Pakistan through normal banking channels. Subsequently, Chief Justice of Pakistan Mian Saqib Nisar, head of a three-judge bench, constituted a committee of experts to trace and recover the transferred pecuniary abroad.
With the huge drain of assets, the country’s exchange rates are at risk. Pakistan is already nearing a currency crisis. The US dollar hit a record high of approximately Rs 130 in interbank trading, after the State Bank of Pakistan (SBP) devalued the currency for the third time since December. This also puts the stability of the country’s foreign exchange reserves in question. As large sums of money leave the national economy, the economy becomes even more vulnerable to the pressures of foreign currency obligations. After Khan’s election, the Pakistani rupee settled at around 122.50 per dollar. According to reports, Khan is thinking to pursue the country’s 12th IMF credit line. The International Monetary Fund (IMF)’s tough requirements with respect to “reforms, fiscal austerity and transparency” however may make this difficult. In such a case, Pakistan will again have to turn to China.
Owing to the poor law and order condition, long-standing electricity shortages, and the economy’s troubled performance in recent years, investors in Pakistan are understandably against investing in the national economy. Recovering and taxing the income and wealth that has escaped the economy, or even convincing and encouraging new investment will be a tough ordeal. The concerns of the business community must be addressed. It is important to consider that investors can always seek residency in other countries to avoid action by Pakistani authorities. Any action then taken by the court in light of the recent suo motu case or by Khan to save the nation’s economy must be taken with great care and pragmatism since it will affect the confidence and decision-making of both domestic and international stakeholders, and possibly even future investors.
As luck would have it, it seems the newly-elected premier recognizes many of the challenges facing Pakistan’s economy today. He believes most of these can be solved with administrative reform. “Our economy is going down because of our dysfunctional institutions. We need to fix our governance systems,” Khan said. On several grounds improving institutions related to business and investment can make a drastic difference. Reforming the legal framework on the protection of the rights and benefits of investors for instance can improve investor confidence immensely.
Pakistan has the potential to progress as a competitive market. Extensive steps however need to be taken to bring about sociopolitical stability and restore investor confidence in the local markets. Although it will be challenging, the future government must consider restricting the economy’s dependence on its imports. Educating and training the large young working-age population is also important in building the economy from the bottom-up. Fortunately, this is on Khan’s agenda. Investment in the country’s research and development sector is also crucial since it not only encourages the creation of new products and services but also drives economic growth and job creation.
Imran Khan’s post-election speech was comforting in this regard. He took on the challenge of heading socio-economic development nation-wide. In order to ensure a comprehensive and efficient transition Khan must also perhaps consider appointing a credible ‘economic advisory council’, which can assist the government in orchestrating a campaign devoted to ridding the economy of previous counterproductive policies and introducing new ones that address challenges native stakeholders are facing on the ground.
Other than the economy, Khan in his address last week also covered foreign relations– the state of which can make a great difference to any efforts at improving the nation’s economy. From his speech Khan displayed a balanced, conciliatory and progressive understanding of foreign relations. He acknowledged many of the key challenges facing Pakistan, including: the ongoing Afghan war, tensions with India and relations with China. If Pakistan’s economy has to improve the nation must also now consider opening its routes to other neighboring nations besides China, and Khan from last week’s speech seems more than willing to do so. Pakistan can gain substantial income if Khan is able to convince India, Afghanistan and Iran to let Pakistan provide trade routes. Attracting more investment into the country is crucial. A step in this direction will not only cover creating the right conditions for economic stability but will also tackle improving the international image of Pakistan.