Please, No panic!

October 11, 2017

One is hearing a lot of noise these days from some anchors, experts and economists on a situation of crisis in the economy and how an economic emergency should quickly be declared in the country with perhaps the establishment stepping in (overtly or covertly) to take the economic matters into its own hands. I am not in any way carrying this government’s (PML-N) brief on its economic performance over the last 4 years – in fact I have been one of its worst critics – but let me assure my friends that the steps like economic emergencies and knee-jerk actions always tend to be bad ideas; that is to say the least! Perception, in any market economy is a key element, damage this and investors’ cum business confidence withers away before you know it, since in modern day economic world information travels faster than one anticipates! Economies and markets need calm and not panic – In not too distant a past, a hasty policy decision on Lehman Brothers brought about a global financial crisis, which has taken nearly a decade to settle and that too not in its entirety. At home, the stock market is the latest victim of an eroding perception on the health of Pak economy.

Further, when evaluating a critique one needs to hold its critic in the ‘objectivity’ perspective. For economists or analysts to be taken seriously they should be apolitical and free from any conflict-of-interest in their analysis. One is not too sure if this is the case with most writers or anchors issuing commentaries on the economy today. One can’t be affiliated with a political party or be playing both sides - running with the hare and hunting with the hound! Even big names like Krugman and Stiglitz recently witnessed a slump in following owing to precisely these reasons. Krugman too closely allied to the Democratic Party and Stiglitz to the Chinese government. It is only after Stiglitz de-aligned himself from the Chinese government that his writings are being taken more seriously again. Still, regardless of the impartiality of the persons predicting a doomsday scenario, one is in no way implying that all is well in the Pak economy. Debt, worsening current account deficit, and faltering exports: all three are serious issues and require immediate attention. Overseeing political and foreign policy decision making is all very well but in reality it is the economic policies that directly touch the lives of 220 million people. In any case the main issues confronting Pakistani economy are by now an open secret quite well known to nearly everyone.

National debt under PML-N has ballooned, within which a significant portion is packed with expensive cum short-term borrowings funnelled into non-productive ventures with scant regard to accountability and social priorities.

The situation on the external liabilities front appears even more severe, as payments become due from as early as 2018 (and onwards). Once they start kicking in, not only will it mount further pressure on the fast dwindling foreign exchange reserves, but will also present a serious challenge to sustainability of real time debt-servicing. This problem stands exacerbated from an unprecedented rise in the current account deficit (CAD) – dwindling exports against rapidly rising imports. CPEC also continues to be a concern. While the magnitude of investment it brings with it can be a game changer for Pakistan’s economic fortunes in the years to come – in ten years, business chambers are assessing just the toll and rentals from CPEC’s infrastructure to surpass 2 or 3 times Pakistan’s total current budget outlay – the challenge lies in managing it professionally. Investments under CPEC are debt based, which will need to be repaid sooner or later.

So what is wrong? Answer: basically three things, 1) Finance ministry’s flawed approach to quick revenue generation: A complete lack of long-term economic vision on part of Mr. Dar and his obsession with quick revenue generation over the last four and half years (advertently or inadvertently) has in essence meant: preference to imports over domestic manufacturing, thereby aiding premature de-industrialization and hampering job creation; squeezing private sector’s credit & its liquidity, especially of exporters; and a general imbalance in taxation and oversight policies that has resulted in promoting the undocumented sector and rendered Pakistan as an uncompetitive destination to do business. This un-competitiveness is being fuelled primarily by two factors: Overvalued rupee and high power tariff rates.

On the exchange rate, given the external debt limitations, this author believes that extreme devaluation of the PRS is not advisable and we do not at present need to go beyond the 5-7% level; recommending an interbank USD rate of around 111 by December 30, 2017. Being pegged to the USD in the currency basket, the PRS already stands devalued against the Euro and Sterling. Some may argue that the IMF has in fact been calling for 18-25% revision, but then IMF recipes in recent times have faltered for many economies, especially the ones on currency devaluation and on raising tax to GDP ratio without first addressing the size of the tax base. Surely negotiating with the next program with IMF is going to be a challenge, a scenario that is increasingly looking likely in not too distant a future!

On the power tariff front, given the limitation of circular debt, the author contends that to address manufacturing competitiveness the industry should not unfairly be made to pay for the theft (line losses), meaning for the corruption and inefficiencies of the utility producer. 2) In general skewed spending priorities: refers to preferring fancy projects while neglecting to spend on social sectors like health, education, housing, poverty reduction, safety nets and social welfare, and 3) Failure to instil transparency and professional management in CPEC’s implementation: On CPEC the concern is not whether it should be undertaken or not, but that its agreements are prudently negotiated. Key here is to place CPEC’s running under a competent and independent cum autonomous apex board comprising of credible members with sound management backgrounds. Today we all know that CPEC is not only an economic necessity but has also become a defence, foreign policy and geographic compulsion for us. Things can go horribly wrong financially if it is not managed professionally.

And finally, what should to be done? Before getting into solutions we first need to understand two essential givens: first, the route to fix economic issues is through gradual policy measures and not by resorting to extreme steps, and second, solutions to Pakistan’s problems lie in resolving long standing management deficiencies. From poorly run state owned enterprises to inefficient utilities’ producers to dismal bureaucratic functioning to faltering institutions like SECP, FBR, customs, and others, all basically suffer from bad management. However, despite this malaise the silver lining is that Pakistan has a robust consumption market which continues to grow. If the policymakers can only redirect their focus to transform their mindset to instead: encourage domestic manufacturing and exports; discourages imports (especially luxury), check under-invoicing and outright smuggling (by unofficial admission of some FBR’s own top officials only 20% of imports are legit), and last but not least endeavour to place state run enterprises either under genuine professional management controls or else sell them to stave off further losses to the national exchequer, the rest with time will automatically fall in place.