Economic experts are predicting that the national economy is facing the threat of a serious recession and all the deleterious consequences flowing from the dreaded forecast. Red signals are flashing all around and the doom and gloom scenario is looming large.
There are many negatives in the situation. Ballooning electricity charges have triggered countrywide protests and people are burning WAPDA bills. Petroleum prices have been increased once again, and further hikes are in the offing. This is because international oil prices are projected to rise again in the months ahead. The exchange rate is under pressure and continues to lose its value against the dollar. This is due to the release of pent-up demand for imports which have faced strict restrictions in the previous months. Another factor is the limited supply of foreign exchange in the market since exports are dormant.
Rising inflation is another bugbear for our fragile economy. Declining domestic production combined with inflated levels of global food prices means that prices will further escalate in the coming days. According to the latest media reports, production in the textiles sector has declined by more than 30 percent since March. Similar is the case with the automobile sector which is functioning much below its capacity. Generally, large scale industry is going through the worst patch in its history. The leaders of chambers of commerce and industry are of the opinion that if remedial measures are not taken soon, over 50 percent of industries across the country will close down in the near future. If large scale industries go down, the upstream and downstream sectors such as retail and small manufacturing sectors will also suffer.
This is a hopeless situation which calls for emergency action both at the policy making and implementation levels. An economy in recession leads to increased inflationary pressures as well as widespread unemployment and erosion of real wages. In such a situation the low and middle income groups will be especially hard hit. According to experts, the crisis is rising to a crescendo and will cause serious human suffering across the land, raising the spectre of massive social unrest.
What are the options to deal with the situation? The managers of the national economy are in a quandary as to what to do. They have used the policy rate to curb inflation but have failed. The policy rate is at the highest level and cannot be further raised. Even otherwise, the effectiveness of interest rate hikes is limited as our inflation is entirely supply driven, not demand focused. In the present circumstances, demand cannot be further curbed because it is already at a low level and relatively inelastic because 70-90 percent of household expenditures is being spent on foodstuffs and energy. Raising revenue through more taxes is also no option as they are already on the higher side. Those in the tax net are paying through their noses, while the government has no gumption to impose taxes on the landed gentry and other sectors with a political clout.
In the opinion of some economists, a way out of the situation is to change course and turn from the present deflationary policy to one of stimulating the economy. The government should provide fiscal space to rev up the wheels of industry. Lower taxes will mean more economic activity and more production which will have a healthy effect on the price situation. Lower revenue from lower taxes can be compensated for by curtailing unnecessary government expenditure, eliminating luxurious perks and privileges of the top bureaucracy and cutting waste and flab of which there is too much in our bloated and supine bureaucracy.
Apart from tax incentives, industry should be provided energy at subsidized rates to lower the cost of production. This in turn will give a competitive edge to our exports in the international market. Further, the stimulation of industry will also create new jobs, particularly for those in the low income brackets. Rising exports will also relieve pressures on the exchange rate and prevent the rupee from further losing its value against the dollar. A stronger rupee will lower the cost of imports and have a beneficial effect on the price situation.
Another way to strengthen the economy is to devise a new package of incentives for foreign investors. Special export processing zones should be set up in areas near Karachi and Gwadar ports to attract foreign direct investment (FDI) as has been done by Dubai and other countries. Export or perish. This should be the signature tune of our economy. It is through exports that Bangladesh and India have gone ahead while we have languished behind.