Social unrest and economy

LAHORE: Employment, rather than growth, is a key determinant of the growing social unrest in the country, which has increased income inequality and the perception of injustice.

Over the past two decades, we have seen a decline in the share of income going to work, as real incomes of employees and the self-employed have, on average, increased less than productivity gains would have justified.

The increase in unemployment is also due to the failure of the private sector, especially small and medium-sized enterprises, to modernize technology. SMEs regularly lose their national market share in favor of imported finished products which are invariably of better quality.

SMEs fail to upgrade because they do not have access to credit. SMEs are the main providers of jobs and hold a nominal share of bank credit.

It is unfortunate that the state itself is the main borrower of the commercial banks which crowd out credit not only for SMEs, but also for large companies.

Bank loans to the government are risk-free and charge a premium of around 2% on the central bank’s key rate. Loans to large corporations carry certain risks, but these entities have huge assets which they provide as collateral to banks against the loan.

The corporate sector is doing well even in cycles of recession and expansion in Pakistan. Corporate profits in Pakistan have shown robust growth, but instead of translating them into higher real investments, those profits have increasingly been used to pay dividends.

The profits did not create any job opportunities. The pro-employment approach, focusing on cost-effective measures, will help to avoid a further deterioration in employment. Carefully designed employment-friendly programs support demand, while promoting a faster return to pre-crisis labor market conditions.

The government simply needs to create the right conditions for labor-intensive sectors like construction and clothing, which it has done recently. The employment programs are not costly in the public purse, although the amnesty granted to the builders has diverted the treasury of enormous revenues.

SMEs, especially smaller ones, have no other strengths than their dilapidated equipment. Commercial banks are reluctant to sanction unsecured loans.

Another problem with SME loans is that the loan amount is small, which in many cases can be 50 to 100 times less than the loans approved for each of the large companies. Commercial banks promoting automation can manage large accounts with a small staff. SMBs lack automation and keeping track of their accounts requires more manpower.

The central bank has recently made efforts to eliminate these drawbacks faced by commercial banks. SBP has developed a generous program to attract banks to SME financing.

According to SBP, a circular on the SME Asaan Finance (SAAF) program, the central bank asked FIs to submit expressions of interest. Banks interested in SAAF will be offered both refinancing and a three-year credit guarantee.

A generous offer, because overall one or the other of the two is offered. Both incentives are available for working capital as well as term financing.

This is the first program in Pakistan (excluding exports) where refinancing has been proposed for working capital. Hope this scheme works.

The banks are however still reluctant because of the greater human resources required for this purpose. It was better if these programs were limited to various SME banks operating in the country.

They have experience working with SMEs and they charge a higher mark-up on SME loans to meet greater human resource needs. SMEs finance themselves almost exclusively from informal lenders at an extremely high margin rate.

Job opportunities are also linked to investing in new infrastructure and upgrading existing infrastructure. On both fronts, the performance of this government is dismal.

Given the resource constraints, infrastructure projects could have been launched in partnership with the private sector.

It is possible to broaden the tax bases, in particular on property and certain financial transactions. Such measures would enhance economic efficiency and help to distribute the burden of adjustment more equitably, thereby helping to ease social tensions.

It should be noted that much of the increase in profits over the past few years has occurred for a few major players in the financial industry. These profits were paid to shareholders and no jobs were created in this sector.

The real challenge for both planners and entrepreneurs is to rely less on exports to advanced economies and more on domestic and South-South sources of growth. This transition would require new investments.

The ever-growing social unrest in the country is due to income inequality, rising food prices and a heavy state that favors the exploiters over the oppressed.

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