Roadmap to economic recovery – 25 Jun 2022

The writer, former commerce minister, is chair and CEO of the Institute for Policy Reforms.

Recent news has kept us stirred up with the ups and downs of our deal with the IMF. We are at a stage where taking on debt, not for a project but to make ends meet, is reason to celebrate. It is easy to borrow, very difficult to repay. There is now a serious dent in the country’s economic model, under which for years it took loans for consumption.

Decision-makers must know that the party is over. The music has stopped. It is time to rebuild the economy, put the nation above the self and plan to stay out of trouble. Once the economy is on firm footing, we must try to improve the country’s living standards.

The government is right to focus on the top issue it faces, which is how to pay the bills due to outsiders. Naturally, it is beset with restoration of the IMF loan. The Chinese have obliged 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. It ensures that before long we could be in a worse crisis.

We must make parallel efforts to reduce debt, revive the economy and exports, and to limit imports. In previous writings, I have talked about the first two. Today, I want to discuss how we may build the economy’s lost capacity for growth and exports while reducing imports.

Because we do not produce enough at home, the economy faces a crisis any time its growth rate goes over three per cent or so. At higher growth rates, imports balloon and need to be funded by foreign debt.

Final numbers have yet to come, but it is safe to say that in FY22 Pakistan will import edible oil worth $4 billion. Also, it will import wheat worth about $1 billion. Recall that until a few years ago, we exported wheat. Import of machinery will cost $11 billion. And if the economy has to grow, we need more plant and machinery. Medicine import will be over $4 billion.

There was a time when Pakistan was fixated on building. In the first 25 years, the new country had gained food security, made two of the world’s largest water dams and had the means to give fixed interest loans for private credit.

It is vital to recount the story of basic industry, because of its key role in all production. Pakistan was early in setting up a steel mill. Even before, it established a machine tool factory and soon after the HMC and HEC. It began shipbuilding in the 1950s. It built its first oil refinery in 1960.

The one flaw in the model was that the steel mill, HMC and the rest were all in the public sector. They did not flourish because the government funded operating costs but not capital expenses. Without investment, these units soon lost any promise that they had in the beginning. Now, they are shells of what they had initially set out to be. The HEC is to be privatized. We hope that it will become a dynamic unit.

In FY 2, we will import eight million tons of iron and steel for $5.3 billion. The 1.1-million-ton capacity steel mill will produce nothing. Also, there will be few plants and machinery produced in Pakistan. And there is not enough foreign exchange to import them in needed volumes. The HMC, HEC and the machine tool plants have all failed their promise, while governments stood by. Since the oil crisis of the 1970s, policymaking has become the preserve of IFIs; the government followed orders.

Apathy to manufacturing comes at a cost. Today, Pakistan produces few of the goods needed 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 over a billion. Pakistan stands nowhere in basic chemical production. India and Brazil rank ninth and tenth in the world. Of the nations that export drugs and medicine the most, India is tenth with $17 billion in exports. India also has the fourth highest oil refining capacity in the world. Pakistan has not done too badly in fertilizer. But that’s about it. It produces more light industrial goods than before but cannot export them in large numbers.

Agriculture has done especially poorly. Since 1977, Pakistan has had an organization to boost home production of oilseeds, our biggest food import. With 45 years of effort, Pakistan still sources just 12 per cent of oilseeds from within.

Among others, the Ayub Agriculture Research Institute has studied why we don’t produce more. Their work is in-depth. But the important finding is that the price farmers get is uncertain and changes often. There is no reliable channel to sell the output. So, the country buys low quality palm oil from abroad. And what we buy is bad for health.

Locally produced oilseed does not cost that much more. In 2019, at 36 per cent recovery, the cost of local Canola seeds was 25 per cent above C&F price of imports. This cost is before duties. And it is at the 2019 value of the rupee, which was 35 per cent higher than now. Local sunflower cost was 10 per cent more in 2019. After taxes and other expenses, the cost of imported oilseeds at the factory gate was far more than the price of local seeds, even in 2019.

The study says that to entirely source from within, oilseeds need five million hectares of land. As water and land are scarce, that acreage must come from somewhere. PARC points out that there are varieties that would grow in arid zones or in the hills. We may have the needed land.

If it wants to reduce import, the government must act in support of oilseed farmers. It must put in place channels for farmers to sell their produce with a mechanism to prevent wild swings in price. It may offer credit and technical support.

Wheat is key to a country’s food security. In the 20 years between 1980 and 2000, its production grew by 67 per cent, from 12.5 million ton to about 21 million ton. In 15 years, between 2006 and 2021 production grew by just 18 per cent from 23.3 million ton to 27.5 million ton. In FY22, its production fell to 26.4 million ton. So, what went wrong?

The Pakistan Economic Survey tells us that the ‘area sown’ is less this year, irrigation water is short, there was drought at the time of sowing, and there was not enough fertilizer. So, the area under wheat fell, even though the government has increased the support price.

As per acre yield fell, with just two per cent less area, production in FY22 was down by four per cent. While the population has grown at about two per cent a year, the area under wheat hasn’t grown. In 2010, wheat was grown on 8,901 hectares. In 2022, it had 8,976 hectares, less than one per cent more.

Water is a severe constraint. Pakistan hasn’t added to its water supply. In 2010, water supply was 137 MAF. In 2022, it is 131 MAF, 6 MAF less.

Cotton has been key to Pakistan’s exports. 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. Area under cotton has fallen from 2.7 million hectares in 2011 to 1.9 million hectares. To halt the decline, Pakistan needs to increase use of BT cotton, though with regulation. Studies show that use of BT cotton increases yield and lowers cost of pest control. It results in higher gross margins for the farmer. Low pesticide use cuts the effect on the environment as well as famers’ health cost.

For years, the country has known that climate change could reduce water for crops. In various forms, the government has had projects for efficient use of water. The project’s goal is for farmers to shift from flood irrigation to drip or targeted use of water. Yet in 30 years, since these projects began, the country has made no progress. We either flood and waste or we deny water to some. The result is we cannot extend crop acreage.

We have had a similar up and down approach to another key input, fertilizer. Its production has grown by about 60 per cent in 20 years, yet price and reliable supply is still a problem.

To grow again, these many products need a variety of government policies and new investment. Most of all, their revival demands that governments are alert and want a resurgence of growth. For years, without paying any mind to producing at home, governments have had loans and debt as the main focus of economic policy.

So, my request to policymakers is: deal with the emergency on hand, but pay some attention to the long term. Otherwise, the long term catches up.


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