EAC composition: a step in the right direction – Editorials

EDITORIAL: Prime Minister Shehbaz Sharif formed a seven-member Economic Advisory Council (EAC) under his own chairmanship and, in a significant break with precedent, no cabinet colleague or incumbent bureaucrat was nominated as a member.

This action can be supported by pointing out that in the past the motive for establishing such a council was to prohibit selected prominent members from criticizing government policy in the media, while taking into account a small number of their suggestions.

The Prime Minister-led EAC thus concludes that it can provide the country’s executive with a more impartial assessment of finance ministry policy, who could then engage directly with the finance minister in private (or in public) for timely implementation of mitigation measures.

The composition of the EAC can therefore be fully supported, given that the state of the economy remains a source of very serious concern for all stakeholders despite some visible improvements. The latest data released by the Pakistan Bureau of Statistics shows that the inflow of foreign direct investment in April this year increased by as much as 172 percent compared to the previous year, but the outflow increased by 22 percent.

Inflows in the period July-April 2024 compared to the comparable period in 2023 were 179.3%. higher, and outflows by 709.3%. The total inflow of direct investments in July-April 2023 was 109%. lower compared to the comparable period of the current year; However, the concern is that despite such high percentage increases this year, the actual amount of FDI is alarmingly low – USD 414 million in April this year. compared to $177.1 million in April 2023 with an outflow estimated at $55.2 million in April April 2024 compared to $45.2 million last year. This low amount comes despite the outcry of many foreign companies, especially those established under patronage

China Pakistan Economic Corridor that due to paucity of foreign exchange reserves, they are unable to pass on their profits (to their shareholders) or import key raw materials to continue their operations.

The macro picture is even more worrying because the total inflow of foreign investments (direct, portfolio, foreign public investment and debt shares) amounted to USD 341.4 million in the period July-April 2023 and USD 659.3 million in the comparable period of this year, which represents an increase of $317.9 million. percent.

These data do not actually look healthy, although in percentage terms they are impressive. Comparison with other countries in the region shows how Pakistan actually fares in this respect: India with a net inflow of around $15 billion and Bangladesh with $901 million.

Two South Asian countries, notably Sri Lanka and Pakistan, which were forced to take advantage of the International Monetary Fund’s aid package, have seen low inflows of immigrants for obvious reasons. On May 12, 2024, the relevant minister of Sri Lanka stated that the country is expected to sign a contract worth USD 3 billion with Sinopec China for the construction of the refinery.

Similar reports are circulating in Pakistan with the expectation that negotiations are underway for a contract to build a refinery with inflows from friendly countries – Saudi Arabia and the United Arab Emirates – but so far no such transactions have taken place.

Care must be taken to ensure that deals entered into with an eye towards inflow of foreign funds are thoroughly vetted by a competent legal team before signing as the public pays a very high price for deals entered into under the patronage of CPEC in the form of higher customs duties and relief of burden as reserves are depleted the country’s currency, reinforced by loans, make it impossible to pay in dollars as agreed in the contract. And worryingly, delays in these payments are partly responsible for the current account surplus for April this year compared to the same month last year.

Given the above, it is imperative that the EAC has at least one monetary policy expert who can determine the cost of not importing fuel and not remitting profits as agreed, in relation to domestic production, as well as all future decisions on direct investment inflows foreign undertaken by foreign investors.

One can only hope that this skill set, rare among officials in our Ministry of Finance, will be strengthened to ensure that cost-benefit analysis is carried out on decisions that would have serious consequences on macroeconomic indicators as well as the well-being of society at large.