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Some reflections on Pakistan’s economy

This is a high time in the political sphere of the country, where every week is witnessing a convoluted discourse; ranging from political and judicial activism, hectic political activities by all three major political parties, upcoming annual government budget for FY2019 in April and the national elections down the road. Related to this, it is also a more precarious situation for the management of Pakistan economy, in particular, emanating from the laborious task of reversing Pakistan’s growth decline.

The last week of March had been draped with a few important events besides the ‘Good Friday’ for scholarly discourse to gather key insights to boost long run economic growth in Pakistan.

Pertinent to this, on March 28th-29th, Lahore School of Economics held its 14th international conference on the Management of Pakistan Economy, and Business Recorder had excellent coverage for day one (see BR March 29th) for the burning/major issues facing Pakistan’s economy. The key feature of this conference has always been to focus and analyze economic issues related to public policy rather than looking at purely theoretical papers by trained economists living and discussing in ivory tower environments.

Simultaneously, on March 29th-30th, the State Bank of Pakistan held its Monetary Policy Committee (MPC) meeting which occurs every two months to evaluate/deliberate on setting the key policy interest rate which was left unchanged at 6%, despite the fact that Pakistan’s Rupee has depreciated by 4-5% in late March for the second time since the December 2017 depreciation.

Coming back to the events of the Lahore School of Economics Conference, the second day’s papers had an even greater practicality for public economic policies. Out of four sessions, two were devoted to Determining an Industrial Strategy and Optimal Locations for Industrial Clusters and Reviving Agriculture Growth in Pakistan, and one on Innovation and Change in the Financial Services Industry – Implications for Growth.

A common thread in all sessions and papers of the conference was that economic efficiency in almost all sectors of the economy has deteriorated over the last two decades in Pakistan’s economy and its ranking as measured by several indicators was among the lowest/weakest as compared to its peer economies in the South Asia region. Albeit, the most plausible empirical explanation of low performance of key sectors was low productivity, lack of use of technology, its upgradation, cost of capital issues, lack of proper/enabling regulatory environment in the economy.

A look at the composition of Pakistan’s governance indicators show that Pakistan ranks in lower quartile of the countries across the world. Compared to the similar countries (Indonesia, India, Philippines, Egypt, Bangladesh, Sri Lanka) it scores unfavorably, particularly with respect to “political stability and absence of violence/terrorism. This could lead to weak institutional set-up in Pakistan pointing out the need to improve institutional framework for improving Pakistan’s financial development. The following section analyses the discussion that deals with the ‘Role of Financial Services as driver of economic growth in Pakistan’. In so doing, it sheds new light on the relationship between financial sector development and economic growth by bringing into focus a variety of emerging financial sector dimensions such as FinTech and Cryptocurrencies in the context of Pakistan Economy.

To put things in the perspective, notwithstanding the earlier dismissal of the role of finance in economic development by the neo-classical economists, the nexus between financial sector development and economic growth is now widely accepted. Plausible rationale for why well-functioning financial systems matter for growth relate to reducing information cost and allocating capital; monitoring firm behavior and exerting corporate governance; facilitating the hedging, trading, and pooling of risk; mobilizing savings for investment and reducing the transaction costs of economic exchange and activity. The key message for the economic policy makers that emerges from the understanding of finance-growth nexus is that financial development should be a crucial piece in any country’s strategy for economic growth.

In a fast growing digitized world, human organizations need to keep up with the increased efficiency and productivity provided with highly advanced technologies and digital financial service, which are shaping the globe. This was the theme of a paper in Financial Services Session presented by Dr. Kumail and Bushra Naqvi, titled “Is Pakistan Ready to Embrace Fintech Innovation”. The authors remarked that in most developing countries, informal financial tools dominate as the first choice of people, despite the availability of formal finance. Therefore, even with the innovative digital financial products and the improved access to financial services they provide, only a minor fraction of population uses them. Pakistan being an emerging economy is no different from rest of the developing world where people’s first choice for conducting financial transactions is “Cash”. As a result, 85 percent population of the world’s sixth most populated country is financially excluded and the high banking infrastructure cost acts as a barrier in the diffusion of financial services beyond a small fraction of population.

In another paper by Dr. Ayesha Afzal of Lahore School of Economics titled “Cryptocurrencies, Blockchain and Regulation” suggested that there is an increasing popularity of Cryptocurrencies which is a peer to peer electronic cash system that allows online payments to be sent from one user to another, without involving any financial institution or central repository. Cryptocurrencies have become a popular mode of payment globally because of their low cost, high speed transfer ability and a decentralized tracking network that provides secure transactions and a high degree of anonymity. The State Bank of Pakistan, however, does not recognize any digital currency and FBR and the Federal Investigation Agency (FIA) took legal action against local and internationally traded Cryptocurrencies.

To conclude, in countries with good public policy in terms of provision of soft public goods such as property rights, and rule of law, investors utilize maximum benefits since strong institutions provide right incentives to investment. In the same vein, political institutions shape the legal system that defines the rules that govern financial markets. In a political process, different interest groups vie for gaining political power or capturing economic rents within the laws and regulations set up by the legal system. Without an appropriate incentive structure within political institutions, rules may be designed to bestow political advantage to particular groups at the expense of the society, which generally lacks basic legal protections against government expropriation of private property. In such an environment, public investment tends to be unproductive leading to adverse growth outcomes.

At present, though, Pakistan lacks sophisticated financial products such as cryptocurrencies and Fintech related products in its financial products profile. As Pakistan moves up the financial technology ladder, it will be imperative to improve institutional quality and develop conducive environment to put in place a well-diversified and globally competitive financial sector.

, "Some reflections on Pakistan’s economy," Business Recorder. 2018-04-08.
Keywords: Economics , Political sphere , National elections , State Bank , Economic issues , Peer economies , Governance Indicators , MPC