In Greek mythology, Procrustes was a unique character known for his obsession with getting his guests to fit perfectly on his iron bed. But his tactics were disturbingly brutal. He changed the guests, not the bed. If the stranger was too tall, he would cut off their legs. If they were too short, he would stretch them out until they took up the entire bed. Although his method was different, Procrustes achieved his goal, although the welfare of his guests was in doubt.
A similar approach appears to have been adopted by Pakistan’s economic managers, particularly the current administration. Instead of leading efforts to pave the way for sustainable growth and address deep-rooted economic problems, these financial architects took hasty measures to remedy the situation.
This involves implementing tough short-term measures and spotting potential pitfalls. They may have started with laudable intentions, but their approach has plunged the economy into dire straits.
The current PML-N government inherited an economy that was in dire straits, struggling with issues such as current account deficits that have relentlessly drained the country’s foreign exchange reserves. In the year As of April 2022, when the PML-N administration assumed power, Pakistan was bleeding an average of $1.3 billion per month from its current account deficit, according to data from the State Bank of Pakistan for the first 10 months of FY22.
Pakistan has taken a significant reduction in its current account deficit, but it has come at a huge cost to avoid
Fast forward to this year, and that deficit has averaged up to $326 million per month. The country posted current account surpluses in March ($750m) and April ($18m).
However, this apparently positive change has come at a steep price. The PML-N government’s economic team has taken drastic measures by imposing strict restrictions on imports, reminiscent of Procrustes cutting off his legs to make his guests fit into his bed. As a result, the economy is entering an unprecedented crisis.
The government is currently recording a modest economic growth of 0.29 percent in the current fiscal year, and the outlook for the year ahead as of July looks challenging. According to the Pakistan Bureau of Statistics (PBS) report for the first nine months of the fiscal year, a significant decline in business activities was witnessed by an 8.1pc decline in Large Scale Manufacturing (LSM). This is in stark contrast to the double-digit growth seen a year ago.
This will undoubtedly go hand in hand with rising unemployment. That’s against a backdrop of subdued inflation, with headline inflation peaking at 36.4pc in April. It has arrived.
Indeed, Pakistan has taken significant reductions in its current account deficit, but it has come at an exorbitant cost. It is a sad fact that the country could have avoided this dangerous situation.
Pakistan is in a critical economic crisis: limited export growth coupled with rising imports. This imbalance has resulted in a massive trade deficit, putting undue pressure on our forex reserves. An example of this is that in the last fiscal year, imports increased by 42 percent, while exports showed a relatively moderate growth of 26 percent, according to PBS data.
To remedy this problem, strategic emphasis should be placed on import-substitute and export-oriented industries.
Take the oil refining sector, for example, an industry that plays an import role by producing petrol, diesel and other essential fuels. This avoids expensive purchases of imported energy. Pakistan’s refining sector could quickly ramp up production given how underutilized its facilities are.
Some estimates suggest that refineries can generate $1 billion in foreign exchange savings per year, especially when gross refining margins are high.
Another prime example is tar coal projects which have proven to be a reliable and cost-effective source of electricity generation. The use of domestic coal could displace imported LNG, the supply of which is not only expensive but also reliable. This could also result in billions of dollars in annual savings.
Strategic development of import-substituting industries can significantly reduce the current account deficit. And we have not yet considered export industries like textiles, which create massive employment opportunities for hundreds of thousands of laborers across the country, earn foreign exchange and boost our reserves significantly.
Growth and expansion of import-substitution and export-oriented sectors is not a quick process. Indeed, the journey to strengthening these vital industries is long, and there are bumps in the road. However, this is the only sustainable direction for our economy.
On the other hand, the government is looking for shortcuts by imposing high restrictions on imports. This Procrustean approach to addressing the current fiscal deficit has ironically hampered sectors critical to our economic transformation.
Oil refinery manufacturers, coal tar project operators, textile exporters and others have been challenged. Opening letters of credit to import essential machinery and raw materials such as crude oil for refineries has forced many to cut jobs. This is the case with LSM. It played a crucial role in the decline in numbers.
Even if this is not a modest or quick turnaround, it is imperative for policymakers to shift toward strategies that produce sustainable growth. If Pakistan finds itself in its current economic crisis, ill-conceived fixes must be released. It is time to move beyond Procrustian tactics and design sustainable solutions.
The writer focuses on business and economics. He can be reached at sarfarazis@yahoo.com and tweets @sa_cubes.
Published in Dawn, The Business and Finance Weekly, May 29, 2023
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