Economic Head Winds – Are we alone?

2018-06-05T23:49:09+05:00 Dr Kamal Monnoo

The head winds towards Pakistan’s economy are getting stronger by the day, with the country seeming all but trapped in an ever-tightening debt strangle, albeit without really seeing any of the possible fruits of a debt-spend find the light of the day so far. Reason? Because, bulk has been borrowed on the back of developments conducted by the public sector without really paying much attention to minimizing initial project capital outlays nor to self-sustainability. However, for the moment leaving this criticism aside, the larger question perhaps is that is Pakistan alone in this precarious position or are there other developing countries that also find themselves in more or less a similar trap on account of commonalities in their recent governmental policies with ours? A cursory look around the globe and one finds out that we are not alone – in fact there are quite a few. Countries like Turkey, Egypt, Venezuela, Nigeria, Sri Lanka and somewhat Indonesia have pretty much landed themselves in a position like ours – mounting debt; declining competitiveness; and tumbling currencies. And the common ground? Answer: Almost all, in recent years, have run high twin deficits in trade and revenue: Current account deficit and fiscal deficit. Pakistan: -5 & -5.5 percent of the GDP respectively, Turkey: -5.7 & -4.0, Egypt: -4.5 & -9.8, Nigeria: -2.5 & -2.5, Sri Lanka: -3.5 & -5.5, and Indonesia: -3 & -3. So, lesson No.1, to the in-coming government: Austerity, because unless we stop fuelling consumption with imports and curtail unnecessary spending in order reduce our fiscal deficit, the pain is going nowhere. Good examples to follow would be Greece, which from a bankrupt position not so long ago is today churning out a budget surplus of +0.2 percent of its GDP and of India, which also not too far back was flirting with nearly double digit budget deficits has now brought it down to -3.50 percent of GDP.

As per the latest global report released by the IMF (international Monetary Fund), the world’s dollar based borrowing (or in the developing countries what we term as external borrowing) went up per se over the last five years. While on one hand it is may be a good sign, but on the other hand countries that did not either indulge in responsible borrowing or just couldn’t put their borrowings to productive use are now finding themselves in trouble as the oil prices firm up and the Dollar strengthens – meaning these countries who borrowed significantly back then, find themselves unable to meet their debt obligations today. No surprise, that all members of the club that we find ourselves to be in, have been guilty of this. So lesson No.2, for the incoming government: External liabilities need to be tackled on a priority basis whereby a strategy needs to be devised to first replace the current borrowings with cheaper and longer-term loans and that further foreign debt only to be undertaken with clear feasibilities in place on pay backs – ensuring that new borrowings do not add to foreign exchange outflows. For Pakistan, this could essentially mean renegotiating the existing terms of CPEC (China Pakistan Economic Corridor) loans to either convert them to local currency or to spread them over longer-terms with reduced ROI (return on investment) than originally guaranteed to the Chinese. Ironically, Sri Lanka, Indonesia (to an extent) and a number of African countries find themselves in a similar predicament.

Another similarity that we can find between these countries is that nearly all of them liberalized their economies too quickly. Poor trade agreements and a failure to first overhaul decadent, incompetent and corrupt institutions like the FBR (Federal Bureau of Revenue) and Customs before allowing a liberalized import regime are amongst the principal reasons for the ballooning of trade deficits. Add to this a rather callous approach towards safeguarding home industry and the result is an overtime erosion of the national SME (small and medium sized enterprises) sector and a sudden dip in employment generation. Ironically, as the developed world, which was the original champion of free trade, turns towards protectionism to shore up domestic manufacturing, we foolishly continue to open up our markets to dumping by larger economies. So lesson No. 3, for the incoming government: Renegotiate all trade agreements that exacerbate Pakistan’s trade deficit and make policies to improve competitiveness of local manufacturing. We first have to build export surplus to be able to meaningfully increase our exports. Also, 25,000 youngsters enter the job month every month and the economy needs new jobs!

Conceded that going to last resort institution like the IMF has its advantages, as it can help instill financial discipline in a country’s economic management, but there are also some obvious downsides, since the advised recipes not only originate through a generic policy prism, but also at the end of the day its recommended measures are invariably aimed at securing its very lending. One such policy that has been forced down our and the other club members’ throats is the application of exceptionally high rates of VAT (value added tax) or sales tax. For a lending institution it is a sound way for collecting revenues/taxes, but for a developing economy it could mean compromising on the inherent competitive edge of the business itself. Rate of sales tax in Pakistan averages 17%, in Sri Lanka 15%, Turkey 18% and Egypt 14%. Whereas, let’s say in South Korea it is 10%, Japan 8%, Thailand 7% and in Malaysia also 7%. So lesson No. 4, for the incoming government: Rationalize the sales tax by bringing it down. Indonesia has already brought it down to 10% and Nigeria to 5%.

Finally, last but not least, one of the most glaring commonality witnessed between these countries is that as there borrowing increased the footprint of the state/government in the overall economy increased even more. Nothing new in reminding the readers, that capital tends to be least inefficient in hands of the government. In all these countries, we notice, that over the last decade not only all big tickets projects/investments (along with of course the related borrowed funds) went to the government, but also that in the process the private sector got crowded out with its share in lending being at a continuous decreasing trend.

In the process, though the financial institution artificially thrived on the back of sovereign lending, in reality this skewed business model only added to compromising the very underlying sustainability of the overall lending that went into the national market. One glance at the unusually robust results of our national financial industry’s and at their unhealthy lending-mix in this period, and the answer is quite obvious. So lesson No. 5, for the incoming government: Work towards reducing the State’s footprint on the national economy.

 

The writer is an entrepreneur and economic analyst.

kamal.monnoo@gmail.com

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