Roadmap for Economic Transformation launched

December 10^th, 2021

The Economic Advisory Group (EAG) has launched a document “New Vision for Economic Transformation”, which analyses the factors hindering the efficient allocation of resources hence contributing to the economic slowdown, and presents practical suggestions. The document was presented by Mr. Javed Hassan, Chairman EAG, and Mr. Ali Salman, Executive Director PRIME.

Mr. Asad Umar, Federal Minister for Planning, Development, Reforms, and Special Initiatives expressed his views at the launch as,

In Pakistan, we lack discourse on economic transformation among the intelligentsia. EAG is a good initiative and you are making a really good and tangible contribution by putting specific ideas on the table for discussion. This vision document is a good start to translate that from global learnings to what has happened in Pakistan. The more competitive landscape we create, the more chances there are for transformation.

He cited an example of transformation in the telecommunication sector where investment has contributed to a local assembly of mobile phones in the country.

Ms. Shandana Gulzar, Member National Assembly, commented during the panel discussion that

The markets and firms in Pakistan are not adhering to the international standards, which has resulted in a decline in exports. The sugar industry is highly protected in the distribution and production phases, through tools such as special regulatory duty and minimum support price, but the benefits have never reached farmers. We have selected winners and losers. The federal subsidy is directed more to the industrial sector and less to the agriculture sector despite having a lesser contribution to the GDP. This illustrates distortions from the misallocation of resources. We not only have to ensure efficient allocation of resources and better implementation but also build an expeditious judicial system.

Dr. Muhammad Ahmed Zubair, Chief Economist Planning Commission, stated that this vision document presents suggestions that can become the basis of further research to support the transformation agenda and contribute to policymaking.

Dr. Ali Hasanain, Head of Economics Department LUMS, congratulated EAG for putting ideas of transformation in one document at the launch. According to him, the core strength of this document is that it articulated economy is not about production but productivity and how contestable markets are. The contestability comes from creating a level playing field, which has not happened in Pakistan. Therefore, we have to provide a level playing field for which institutions are important with the core responsibility of security of life, property rights, and contract enforcement.

The suggestions put forth in the document are organized under four themes: revisiting pricing regimes that currently govern agriculture and commodities sectors; revamping of the education system with the aim to introduce and mainstream pathways for vocational training at the level of higher and post-secondary education; reduction in tariff and non-tariff trade restrictions and greater integration with regional trade blocs; and, finally, rethinking industrial policy with special emphasis on moving away from picking winners to rewarding innovators, improving land-use within cities, and simplification of the tax code.

EAG Vision for Economic Transformation launched

EAG's New Vision for Economic Transformation

The Economic Advisory Group is an independent platform of individuals drawn from economics, policy, and the private sector, formed in January 2021, under the auspices of PRIME Institute, an independent think tank, which serves as its secretariat.

For media inquiries, please contact Afzal Khan at afzal@primeinstitute.org or 0333-0588885.

EAG concurs with interest rate hike, cautions on price control

The independent Economic Advisory Group (EAG) convened a meeting to assess the latest economic developments and concurred with the government’s decision to raise the policy rate and allow markets to determine the exchange rate. However, it noted that a prudent mix of monetary and fiscal policies is needed to keep prices in check. Furthermore, distortionary regulatory policies should be avoided to enable market forces to operate in a sustainable manner.

The government has pursued an expansionary policy in the wake of the pandemic to keep businesses afloat, and to expedite the economic recovery by decreasing the policy rate, which has resulted in a fairly rapid recovery and surge in domestic demand. The rise in domestic demand and subsequent rapid increase in imports, as well as imported inflation, is indicative of an overheating economy.

Among other measures, the government has indicated that it plans to regulate prices through price controls. The EAG believes that there is ample empirical evidence that such administrative measures are rarely successful, and also lead to supply side distortions, such as hoarding and subsequent shortages, smuggling and price discrimination. The EAG also views the government’s decision to raise tariffs in order to reduce imports of what it considers as ‘luxury goods’ as counterproductive as it is difficult to define ‘luxury goods’.

The underlying cause of inflation is an output gap, which should be addressed by fiscal policies to dampen excessive aggregate demand, and long term growth should be catered for by augmenting supply instead of state intervention in the market price signalling mechanism. The market determined exchange rate policy and policy rate hike are sufficient to signal market players to adjust their business policies without the creation of any distortion. Furthermore, an indication has been given in the monetary policy statement that”the MPC expects monetary policy to remain accommodative in the near term, with possible further gradual tapering of stimulus to achieve mildly positive real interest rates over time.”

The monetary policy statement highlighted the disbursement of 44 percent of the total PSDP funds in just two and half months, which indicates that the fiscal stimulus is contributing to the surge in domestic inflation. The government spending pattern needs revision to keep fiscal deficit in check; otherwise, higher government spending will translate into higher government borrowing from the commercial banks, and lead to private sector crowding-out.

In conclusion, the EAG agreed with the adoption of a market determined exchange rate, and the gradual move towards positive real interest rate to keep the growth momentum sustainable. But it expressed serious reservations on the distortionary price control mechanism adopted by the government, and expressed concern that it will prove to be futile like in the past.

The Economic Advisory Group is an independent group of individuals from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.

For media inquiries, please contact Afzal Khan at afzal@primeinstitute.org or 0333-0588885.