Pakistan’s economy: charting the politics

Ali Salman

Country should strive to align good economics with good politics

ISLAMABAD: In his recent blog, while commenting on Pakistan Democratic Movement’s plan to organise rallies and protests, Pakistan Institute of Development Economics staff member Nasir Iqbal has estimated that the direct economic loss (of strikes) is three times greater than the total expenditure on social protection (only 0.6% of GDP allocated for social protection).

Iqbal was of the view that Pakistan could easily alleviate poverty and hunger if the same amount (loss in protests) was invested in the poor. The writer subsequently argued that “if we can restore political stability, the economic potential ranging from human capital to natural resources can quickly change outlook of the country.”

Ironically, similar calls were made when the ruling party Pakistan Tehreek-e-Insaf (PTI) staged a 126-day sit-in in Islamabad in 2014 forcing the Chinese president, on one occasion, to cancel his trip to Pakistan. There is no guarantee such protests would not be organised again if a new government is in place tomorrow. That is the very nature of a healthy democracy.

Various stakeholders have given the call for a cross-partisan consensus on economic policy to insulate it from political shocks. These calls assume that the economy can be isolated from politics, which is a naivety. A common phrase used is political stability.

If political stability is interpreted as having one leader for a long time, which happened in the case of Malaysia, it can also open doors for deep-rooted nepotism.

On the other hand, we can find examples of countries where the change of the head of government has been much more frequent, such as Japan. Despite frequent changes, Japan has continued on the same economic policy and has maintained a broadly consistent framework of economic governance through its Ministry of International Trade and Industry.

There cannot be even two countries which would follow the same path because of uniqueness in their historical paths and national dynamics, thus I am not proposing to adopt the Malaysian or Japanese model here.

In a vibrant democracy, we should expect the economic policy to change with the change of government. In competitive politics of Pakistan, political parties have contrasting economic visions and they can be genuinely expected to follow their visions once they are voted in.

For example, the PML-N is known for its strong preference for public sector infrastructure spending, which has a strong visual appeal as well as deep spillover impact on the economy. PTI, on the other hand, came to power with the claim of fixing governance first, development later. If there is a third party tomorrow in the government with a free-market orientation, we can expect taxes and tariffs to go down considerably.

There is nothing wrong with changes in the political government and the change itself does not imply lack of political stability. What matters more for investors and businesses is not who the prime minister is or what is his party’s name, instead, it is the quality of regulators, courts and civil bureaucracy, which has a direct impact on the business environment.

If courts develop a knack of interfering in economic policy, the accountability drive freezes decision-making by policy managers, regulators are incapacitated and businessmen stop investing in any growth-enhancing risky ventures. Instead, they park their capital in safe havens either inside or outside the country. At this juncture, it becomes irrelevant who the prime minister is and what is his or her party.

If key institutions are reasonably functional, then politicians themselves become less relevant. It is that point of institutional maturity when a stable economic policy can be crafted. Only then we can expect predictable taxes and tariffs, for example. The mechanisms themselves determine the outcomes. What needs to be done?

To start with, Pakistan needs an open, candid and serious dialogue between the private sector and key institutions of economic governance. This can be organised autonomously without having politicians involved at the first stage, though surely such a dialogue will have its own politics.

Once some points of consensus are evolved, then political parties can be involved. Such a dialogue may lead to certain points of agreement or a new national agenda for growth and prosperity.

A working relationship between the private sector and key institutions responsible for economic management is vital for the country. This can be established even if there are political storms and may even become more crucial in this case. We need to align good economics with good politics.

The writer is the founder of PRIME Institute, an independent think tank based in Islamabad

Published in The Express Tribune, October 26^th, 2020.

Let consumers, farmers decide

Ali Salman

Wheat crisis brewing as evident from recent price hike and shortage of commodity

ISLAMABAD: Last week, the Indonesian parliament passed historic laws to liberate its agriculture market from excessive state control, opening up its food trade and increasing the role of private sector.

My good friend Rainer Huefers, who leads a think tank named Centre for Indonesian Policy Studies (CIPS) in Jakarta, has been part of the voices demanding these reforms. Some of the highlights of these changes, as reported by CIPS, are worth consideration by Pakistan’s policymakers as the country is reportedly going to face another wheat, and probably sugar, crisis in a matter of weeks.

Like Indonesia, Pakistan is a populous country and thus agricultural policies have serious implications for the productivity of farmers and food security for consumers. Here is one part of these reforms, which are directly relevant to us.

Just like Pakistan, previously, Indonesian laws only allowed considering imports when domestic supplies were insufficient. The new Indonesian law:

• Acknowledges imports as a legitimate source of food (but also seeks to protect farmers, fishermen and micro and small food actors through tariff and non-tariff trade measures).

• Drops import restrictions as a strategy to support farmers and plans to boost domestic agricultural growth instead.

• Removes penalties on imported agricultural commodities when national stocks are considered sufficient.

• Permits imports of horticulture, livestock and animal products.

It is expected that Indonesian consumers will be able to get cheaper and more nutritional food as a result of these changes. Furthermore, these laws will encourage international investors to return to Indonesia and as a result more jobs will be created for the Indonesians.

Pakistan should seriously study these changes in Indonesia and should conduct an extensive review of its laws. In fact, if such reviews have been made, which is likely the case, then there should be a public discourse leading to policy changes.

In Pakistan, earlier this year, the government, through its Economic Coordination Committee (ECC), decided to export wheat, which it thought was surplus. After a few months, it decided to import wheat, which it discovered to be short in supply.

When it asked the Trading Corporation of Pakistan (TCP) to issue tenders, it failed to decide three times. In the meantime, international prices of wheat went up considerably, while first shipment of imported wheat has just arrived. Precious time and money have been wasted in this exercise.

Wheat stock

On the other hand, the wheat stock available in the country, reportedly in government warehouses, is also waiting for government permission to be released.

I recall how there were deaths and a famine-like situation in Thar a few years ago simply because the deputy commissioner did not sign a letter for some months to release wheat.

In fact, according to some news reports, the wheat stockpiled in some warehouses in Sindh is being infested because the tenders needed to procure medicinal spray could not be awarded.

From support price for wheat farmers to procurement, storage, trade and release of stock, the government permission is needed at each and every stage. Why blame so-called mafia?

Governments have been involved in these decisions in the past as well. These decisions stem from a belief that some ministers and bureaucrats know the supply and demand of wheat better than farmers and consumers.

In their moment of self-belief, they mostly make mistakes because there is no mechanism to centralise information from the market. It is not just about crop size, it is also about expectations of consumers, traders and farmers, which are simply too complex to be understood.

Governments, in general, also believe that if somehow they let these permissions go away, heavens will fall. They see these controls as necessary tools to protect farmers and consumers.

They are sadly mistaken. As Indonesian case of reforms indicate, solutions lie in letting go of these controls, not increasing them.

The impending wheat crisis in Pakistan, as evident from recent price hike and shortage of wheat, is an opportune moment. Let us not allow another crisis. Instead of bureaucrats and politicians, let consumers and farmers make decisions.

The writer is the founder of PRIME Institute, an independent think tank based in Islamabad

Published in The Express Tribune, October 12^th, 2020.

Investing in Pakistan: what are the issues?

Ali Salman

Board of Investment needs to step up efforts to exploit opportunities which country offers

ISLAMABAD: In my last few weeks before I relocated from Malaysia to Pakistan, I spent several hours in conversations on prospects of investment by Malaysia in Pakistan, and for that matter, from any other destination.

I spoke with government officials, businessmen, private equity investors, financial consultants, bankers as well as those associated with investment-related responsibilities within Pakistan.

I am sharing some general issues, which apply to prospects of not only foreign investment, but to a large extent, also domestic investment within Pakistan. By no means, this is an exhaustive list.

Property rights

Pakistan adopted a policy of encouraging corporate agriculture about 15 years ago. When I spoke about the prospects of commercial farming with better productivity gains, the first question I received was about property rights.

Does Pakistan offer secure property rights for large-scale land acquisitions and are large land parcels available easily free of encumbrance? The last thing an investor would want is losing capital investment, which is land purchase in the case of agricultural business.

Missing information

After a presentation I made to a group of Malaysian investors and business community where Pakistan’s Overseas Investors Chamber of Commerce and Industry was also present, SME Corp of Malaysia asked a basic question: where Malaysian companies interested in sourcing products from Pakistan can get data about potential companies and products.

In fact, an explicit reference was made of India, for which such information was readily available. It turned out that neither the government nor Pakistani chambers and business associations are equipped with such credible data.

Marketing

Apparently, Pakistan’s government and business associations have not prepared basic documentaries that can introduce basic features of Pakistan’s economy including challenges and opportunities.

While some videos are available that introduce Pakistan’s scenic mountains, investment angle is missing. I could only find videos prepared by the International Monetary Fund (IMF) and the World Bank, which were focused on structural and institutional reforms as per their mandate. In this age of digital media, this rather basic shortcoming is not understandable.

Missing projects

On its homepage, Pakistan’s Board of Investment enlists nine natural resources under its appeal to invest in Pakistan. These include salt, copper, coal, gold, cotton, milk, wheat and meat.

It also mentions some generic reasons like population, economic outlook and geostrategic location for investment in Pakistan. However, well-researched project documents, which can identify demand and commercial opportunities, are not available.

Investors need to be ready to act on intelligence before considering moving their capital.

Political stability

Pakistan has achieved considerable stability with successive democratic changes over the last decade or so. However, the common perception is contrary.

Investors still look at Pakistan as a country where frequent government changes and military intervention are a norm. On a positive, they view Prime Minister Imran Khan as a sign of positive change where economic governance is improving.

India factor, negative experiences

Pakistan has not gone into a full-scale war with India for the past 50 years, yet the common perception is that it is a country in constant conflict with one of the world’s largest economies.

Potential investors would always ask existing investors about embarking on in a new destination.

While the presentation by the Overseas Investors Chamber of Commerce did communicate that multinationals present in Pakistan have increased their investment considerably, many of the past investment transactions between Malaysia and Pakistan have not been successful. These include investment transactions in areas of telecom, banking and real estate.

While some of these issues do not have an immediate solution, most of these issues are manageable without spending huge resources. Perhaps, the Board of Investment needs to take a fresh look and redeploy its efforts to exploit the opportunities which Pakistan offers.

The writer is the founder of think tank PRIME and has established a platform to promote Malaysia-Pakistan bilateral investment

Published in The Express Tribune, August 17^th, 2020.

Pakistan’s petrol crisis: Structural impediments

Ali Salman

Government should draw right lessons from crisis, improve policy as well as process

ISLAMABAD: Pakistan spent $14.4 billion and $10.4 billion on imports classified under the petroleum group in FY19 and FY20 respectively, according to the Pakistan Bureau of Statistics.

Approximately 57% of petroleum oil is used for transport. Petrol prices in Pakistan fluctuate every month as the Oil and Gas Regulatory Authority (Ogra) recommends prices by following the international oil markets, which are then approved by the government. In June 2020, we witnessed the largest increase in petrol prices, causing agony for consumers but resulting in a windfall for sellers – and the government. Before we go into this, a quick chronology of events need to observed.

On May 31, the government slashed the petrol price by Rs7 per litre, to bring the retail price down to Rs74.52 per litre. A couple of days later, petrol shortage emerged across the country, except for state-operated Pakistan State Oil (PSO) outlets. On June 9, the prime minister directed officials to take stern punitive action against those responsible for the artificial shortage of petrol in the country.

On June 11, Ogra penalised six oil marketing companies (OMCs) with a fine of Rs40 million in total. The supply situation remained unchanged.

On June 26, the government announced an increase in petrol price of Rs25.58, the largest increase ever. Petrol supply returned to normal within hours. As per a statement by an OMC spokesperson, an abrupt increase in petroleum demand was one reason behind the depletion of its stocks. However, Ogra contended that there was no shortage of petrol in the country.

The federal cabinet alleged that OMCs pocketed windfall gains when oil prices were high but were reluctant to bear losses when prices went down.

The Federal Investigation Agency (FIA) issued summons to three OMC heads over suspicion of fuel hoarding to create artificial shortage of petrol in the country.

Many believe that the OMCs have colluded. While this warrants a detailed examination by the Competition Commission of Pakistan, it looks implausible as 50% market share in petrol supply is within the hands of the government through PSO and it is also an integral part of price setting as an OMC.

Since the government is part of the sellers, and is the largest market player, the market-wide collusion is impossible. In fact, one needs to consider the windfall revenue that accrued to the government through a sudden price spike and additional tax revenue. Out of every Rs100, a consumer pays today to buy petrol, he pays Rs45 to the government in the form of petroleum levy (Rs30) and sales tax (Rs14.55).

In April 2018, when crude oil prices were almost double the current levels, this levy was only Rs10. Thus, the government, through its ownership of PSO and petroleum taxes, seems to a major beneficiary from the biggest increase in petrol price at the cost of consumers.

What we need to do?

First, any alleged cases of cartelisation, abuse of dominant position and collusion should be taken up by the Competition Commission of Pakistan and not by the likes of FIA.

Second, the government may consider lowering the high incidence of indirect taxes on petrol to provide relief to consumers and a ceiling on the maximum levy should be observed strictly.

Third, as Planning Commission’s former member energy Syed Akhtar Ali argued, the government should allow independent fuel retailers to operate and should bring all outlets under the umbrella of regulation. These outlets should be allowed to either associate themselves with any OMC or to operate as independent dealer-owned, dealer-operated retail stations to boost competition.

Fourth, the OMCs should be given powers to determine their own retail prices. Currently, Ogra imposes cost-plus pricing, where the crude oil procurement cost is determined by the regulator and a fixed profit margin in rupees/litre is added to it. In a competitive market, the OMCs would be incentivised to procure at cheaper rates. Fifth, rather than Ogra determining import costs, the OMCs may be allowed to negotiate their own contracts, so that better-quality oil can be imported more efficiently.

This is not for the first time we have witnessed petrol shortage. What is important is to draw right lessons from this crisis and improve policy as well as process.

The writer is the founder of independent think tank PRIME

Published in The Express Tribune, July 20^th, 2020.

3D printers and national security

Ali Salman

If curbs remain in place, digital divide between Pakistan and world will widen

ISLAMABAD: While the world is fighting a pandemic and preparing for an impending recession, it seems trivial to discuss 3D printers. But this trivial example does indicate bigger issues at work in public policy.

For starters, the 3D printing process builds a three-dimensional object from a computer-aided design model, usually by successively adding material layer by layer, which is why it is also called additive manufacturing.

The world is entering the fourth industrial revolution, which is mostly based on technologies like robotics and 3D printing. Engineers and designers are now already working remotely and making products with high precision using 3D printers.

3D printing offers an excellent avenue to improve housing, food supplies, healthcare and educational facilities. Due to the intricate nature of the emerging trend of Internet of Things (IoT), no country can afford to restrict the use of 3D printers.

Unfortunately, Pakistan has rather restrictive policies for the import of 3D printers, with the procedure being cumbersome and time-consuming. In 2016, Pakistan placed a ban on the import of 3D printers, citing threats to national security as these printers could be used to manufacture illicit weapons.

While it is correct that some components of weapons can be made through this technology, 3D printing of the most important parts like the chamber or the barrel is extremely difficult, requiring high resistance to heat and explosion. It is much easier to make such parts from a milling machine than a 3D printer.

Countries like Jordan and Thailand, which had imposed restrictions, have now allowed the import to kick-start innovation in industries, healthcare and educational sectors. It is high time for Pakistan to take cue from these countries and allow the import of 3D printers with minimum restrictions.

Currently, Pakistan faces an acute shortage of ventilators amid Covid-19 pandemic. In addition, the shortage of other healthcare products such as face masks and personal protective equipment for healthcare workers is also posing serious challenges.

In this regard, the 3D printing technology can play a pivotal role in meeting the high demand for such essential commodities. It will not only benefit the health sector but also other sectors such as academic institutions, industries and housing.

However, this is possible only if the government allows for and streamlines the import of 3D printers.  In Pakistan, awareness of 3D modelling and printing is gradually increasing and members of the academia, along with industries, are now approaching the laboratory.

3D printers are being used in some areas of the educational, engineering and health sectors. For example, a group of volunteers in Lahore, which includes doctors, biomedical professionals, academics and engineers, has used 3D printing technology to design a device that allows a single ventilator to support multiple patients at a time.

It seems imperative that an ease in regulation rather than strict restriction should be the government’s priority when it comes to handling the proliferation of 3D printer technology, and any such platforms which allow more choices, more competition and more innovation.

Recently, the Ministry of Commerce has issued a notification, allowing the import of 3D printers to ensure the availability of ventilators.

However, it would take some time to see its benefits due to the time needed for import and setting up the technology. In fact, given global restrictions on supply chains, this may be already too late.

What are the bigger issues, which we can discern from this episode of myopic thinking?

If we continue to restrict the use of such technologies, the digital divide between us and the rest of the world will accentuate. We will lose many opportunities of experimentation, trial and innovation, which are preconditions for growth. The coronavirus pandemic is also a good reminder that the national security paradigm, which is cited for restrictions on this technology (and certainly not limited to Pakistan), needs radical transformation.

The security should be defined in terms of human welfare, individual freedom and freedom of technology instead of relying on archaic modes of governance that requires a top-down approach.

The writers are associated with an independent think tank, PRIME, based in Islamabad

Published in The Express Tribune, May 4^th, 2020.