The greatest challenge facing the country is how to reverse the direction in which the economy is currently moving.

The economic trajectory was reportedly a significant issue that cropped up in discussions between the Chief of Army Staff General Asim Munir and business leaders held in Lahore on September 3. Various hurdles in economic recovery were identified, including the growth of the grey market, which is squeezing the space for effectively boosting tax revenue.

Elaborating on the general’s remarks on the grey market, the Lahore Chamber of Commerce and Industry (LCCI) offered a strategic solution to combat the issue. It recommended incentivising the grey economy sector to transition into the formal white economy sector.

The expansion of the tax base, LCCI argued, will remain elusive as long as the grey economy remains unincorporated, unable to contribute to the formal economy. While the government is cash and dollar-strapped and some market segments face serious liquidity problems, there is a segment of the market flush with cash.

The expansion of the tax base will remain elusive as long as the informal economy remains unincorporated, unable to contribute to the formal economy

Surplus funds, unable to find productive channels, are flowing into formal and informal speculative economic activities, made possible by the record increase of the rupee in circulation.

Many people invest in dollars to protect the value of their money from the free fall of the rupee. We have an interbank market, an open market, and a more rapidly growing grey market, the last one also impacts the pace of rupee depreciation in the open market.

A crackdown on illegal money changers in Peshawar led to the dollar losing up to Rs7 in the open market last Tuesday. The rupee, however, depreciated 0.48 per cent against the greenback in the interbank market despite the interim government’s assurance of huge investments from friendly Arab countries in the coming months.

“The inflation outlook has deteriorated, and there is a heightened risk to external stability,” said the Ministry of Finance’s Fiscal Risks Statement 2023-24.

Surplus funds, unable to find productive channels, are flowing into speculative economic activities made possible by the record increase of the rupee in circulation

Owing to the low level of capital spending in the stock market, it is no longer very effective in increasing equity investments through the flotation of new listed companies. The volatility in trading scrips in the bourses is governed by investors’ sentiments changing on day-to-day political and economic developments and related uncertainties.

The investment base of the bourses is not expanding. To reduce the high cost of borrowing from banks, many company managements retain their profits by buying back shares of minority shareholders.

Now, the Cabinet Committee on Economic Revival (CCER) chaired by Finance Minister Shamshad Akhtar has reportedly decided to offer tax incentives for the listing of new companies on the Pakistan Stock Exchange (PSX). The minister has directed the Federal Board of Revenue and the Securities Exchange of Pakistan to develop a mechanism for listing the maximum number of firms on the PSX.

The CCER also decided to shift one-third of the borrowings by state-owned enterprises from the capital market. To reduce the government’s bank borrowings, it was also proposed that its securities be auctioned at the PSX.

Provided with incentives, the listed firms’ high cost of bank borrowing may be substituted in certain cases by equity for business consolidation, but capital spending for new projects needs exchange rate stability. Pakistan is seeking $20 billion, $10bn each, from Saudi Arabia and the United Arab Emirates to overcome the foreign exchange problems.

In an article titled ‘Time for caretakers to take care of the rupee,’ independent economic analyst AAH Soomro suggests that firstly, to encourage overseas workers to send their remittances through banks, the dollar returns on Naya Pakistan Certificate should be increased from 2-2.5pc to 9-10.5pc per annum for the short-term.

Secondly, people not travelling abroad or not remitting dollars for educational purposes must not be allowed to buy greenback or any other foreign currency. And lastly, exporters should be prioritised for opening import letters of credit.

On September 4, the army chief’s assurance over transparency in dollar rates and for bringing exchange companies into the tax net was a catalyst for the bullish activity at the stock exchange.

Given the ‘pivotal role’ of the exchange rate in the country’s economic landscape, LCCI called for greater control over the dollar rates in inter-bank and open markets.

Once again, the interim government is reported to be examining various options to curb imports through import tariffs and non-tariff barriers on ‘luxury goods.’

However, there is a strong view that de-industrialisation is a major hurdle in the transformation of the economy. The manufacturing sector acts as the engine of growth because of its high productivity compared to agriculture and services, says former deputy governor of the State Bank of Pakistan Riaz Riazuddin. The share of manufacturing activities in GDP rose from 2.2pc in 1950 to its highest value of 13.1pc in FY71. Since then, it has declined to 11pc in FY23.

Only a small number of entrepreneurs plan to invest in advanced technology, machinery, land, and skilled labour to boost their business prospects, according to the Pakistan Institute of Development Economics (PIDE) survey of the engineering industry in the small and medium enterprises sector.

The PIDE report underlines that a majority of industrial units — 83pc — in the country do not have plans for future expansion, owing primarily to the non-availability of electricity.

We need competitive capitalism that breeds pluralism for its own natural development and creates conditions where people of different beliefs, backgrounds, and lifestyles can coexist in the same society and participate equally in the democratic process.

Economic, political, and social progress can be achieved through unity in diversity and a coordinated, integrated approach with broad-based citizen participation to catalyse rapid socially sustainable economic development.

Published in Dawn, The Business and Finance Weekly, September 11th, 2023