How can Pakistan balance foreign loans with sustainable growth?

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|Shahid Sattar and Emaan Ahmed

In order to achieve debt sustainability, improve living standards and absorb the growing labor force, Pakistan’s economy must grow at a rate greater than 8 percent for a minimum period of 30 years. Given these high expectations and the conundrum of circular debt, Pakistan’s perpetual BOP, fiscal, and debt issues must be catered to with export enhancement rather than more IMF loans. IMF loans are accompanied by countless conditionalities that are not conducive to economic growth.

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To finance a current account deficit, policies include:

  1. Reducing domestic consumption and expenditure on imports
  2. Supply-side policies that can enhance the competitiveness of exports and domestic industry.

Yet the country has persistently sought loans that have been accompanied by a fair share of conditionalities. IMF loans and bailouts are short-term solutions that can not amount to the long-term growth needed in Pakistan’s economy. Conversely, exports are key in not only effectively strengthening the current account but also in serving as a holistic and viable solution to Pakistan’s debt crisis.

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The trend from 2007-2018 was not conducive to export growth, thereby leaving Pakistan far behind its regional competitors. Pakistan’s negative export growth over this 10-year period is shown in the graph below, in contrast to Sri Lanka, India, China, and Bangladesh.

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The blooming textile sector 

Competitive inputs for Pakistan’s most productive export-oriented industries must be a priority measure in targeting economic growth, as the impact of competitive input pricing has been proven time and again. During periods where regionally competitive energy tariffs were provided to Pakistan’s textile sector, there was an immediate upward trend in production, with all mills becoming operational and most reaching full capacity.

Read more: Textile industry’s export orders booked for the next six months

The textile sector reached a new peak, recording $1.49 billion during the first month of the current fiscal year 2021-22. The rise in exports demonstrates the role of energy pricing in trade competitiveness: when inputs were provided at regionally competitive prices, exports potential was fully realized in spite of an unfavorable international environment created by the pandemic. The trend in 2021 so far is shown in the graph below:

The most recent data has shown a 46% increase in textile exports for the month of August 2021 as compared to August 2020. We are currently seeing the highest ever Textile Exports in August, and at this rate exports for FY22 will be $20 billion without any additional output from new capacity under installation. This is estimated to add at least an additional $1 billion to exports for FY21-22.

This expansion is attributed to unprecedented investment in expansion and new projects – a direct consequence of the government’s regionally competitive energy pricing policy. With this evident correlation between energy tariffs and the country’s investments and exports, it cannot be emphasized enough that the continuation of this policy will be critical in maintaining the momentum gained so far.

How can we work towards sustainable economic growth?

Enhanced value addition, competitive inputs, and trade competitiveness lead to sustainable economic growth. As unlike aid, these measures are free of any liability. Earnings through enhanced exports serve as a valuable inflow to the economy and can pull Pakistan out of its current account deficit and economic stagnation. Job creation is another crucial metric for an economy in the growth stage, as yearly increases in unemployment must be catered to.

Read more: Strengthening Cooperation in Trade, Industry: Leveraging CPEC to Double Textile Exports

The private sector provides us with a viable means to achieve this, as export-oriented sectors are highly labor-intensive. The textile sector in particular creates jobs in every tier of the economy. Different skill sets are required at each stage, be it cotton picking, ginning, stitching, designing, innovating, or strategic planning. The expansion and development of exporting industries thereby reduce unemployment in the long term in addition to being essential for a healthy Balance of Payments.

Sustainable development and economic growth necessitate export-led growth, as a strong export base serves as a self-sufficient and highly beneficial method to strengthen the economy without conditionalities. In Pakistan’s context, the textile sector provides a reliable pathway to counter the debt that has accumulated from back-to-back loans and relief packages.

The most effective mechanisms to sustain export-led growth include product and market diversification, improvements in quality, and integration into global value chains. Support from the government is an absolute requirement to make these policy measures possible.

Read more: Skills development for inclusive and sustainable growth – M Zafar Khan Safdar

Mr. Shahid Sattar, now Executive Director & Secretary General of All Pakistan Textile Mills Association (APTMA), has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power. Eman Ahmed is a Research Analyst at APTMA. The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy

How can Pakistan balance foreign loans with sustainable growth?

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