A false sense of optimism seems to be growing on the state of the Pakistan Economy, a notion being consciously promoted by the economic managers, which if not checked can have larger long-term negative implications. First, complacency can set in and the much awaited economic reforms, necessary to correct the underlying malaise of the economy, will once again be put on the back burner. Second, once the present geo-strategic cum military need of Pakistan tapers off (as has invariably happened in the past) and when this low commodity price cycle begins to reverse, we will yet again find ourselves at point zero, confronted by our age old problems of poverty, inequity and unemployment. Soft corner of the major global lending institutions (International Monetary Fund - IMF, World Bank –WB, Asian Development Bank – ADB, etc), aside, the reality is that the Pakistani economy continues to go through a very low period where growth is amongst the lowest in the region; investment levels, domestic and foreign, embarrassingly down; national unemployment high and rising; falling exports; the strong arm of the economy, agriculture, being depressed; and last but not least both manufacturing and productivity are sliding. And amidst all this the national debt has been rising at an unprecedented pace which in simple terms means that money being borrowed is not being put to productive use.
Also, the important question that arises here is that are we really benefiting from the low commodity price era? A glimpse of trade data is showing a rather widening deficit. From July to February, exports were down by 5 percent while imports were up by 4 percent. Thus the gap increased by 16 percent to $12.5 billion in first eight months of the current fiscal. The situation worsened in February as, on monthly basis, exports fell by 9 percent while the imports increased by the same percentage to widen the gap by 46 percent. Further, the policymakers may brag all they want about 78 percent tele-density and the 3G/4G auction they conducted last year. But it seems that the country’s technology, communications and media ecosystem is not really egalitarian. Many ICT experts have in fact been voicing concern over the yawning digital divide, now that there are some numbers available to reflect on that problem. Even the success in the country’s life insurance sector - now moving at a faster pace than the non-life sector - can be interpreted in an entirely different manner. Here, the manifestation lies in the bolstering financial footing of life insurance companies. The concern is that while the non-life sector (one that depicts investment, buoyancy in manufacturing and employment generation) is struggling with muted top-line growth, the life insurance sector, partly at former’s expense, is rejoicing double digit premium growth on a year-on-year basis.
To further simplify the analysis: the trouble is that our economic mangers over the last two years have failed to allocate the borrowed capital to optimal use, have shied away from taking difficult economic decisions, and as a result have not been able to improve the “competitiveness” of the Pak economy. Interestingly, there are some good lessons to be learnt from the present day ‘Greek-Tragedy’ where everything seemed hunky-dory till the German and European funds were flooding Greece’s markets, but the moment they closed their fist the Greeks rudely woke up to a situation where they are now paying the price for the sin of their complacency when (at least overtly) the going was good – and if Pakistan is not careful it may also find itself in a similar situation. Little wonder, that at the very top of the economic wish-list of Syriza is to improve Greece’s competitiveness. Their game plan being: to make life easier for Greece’s businessmen and the genuine investors; to remove problems with its bureaucracy that the businesses are unhappy about; tangibly encourage or reward job creation; and work towards disconnecting politics from business. A cursory glance at home and we seem to be endeavouring to do the very opposite!
Our other concern is of high debt. Again, the post 2008 Euro-zone experience tells us alarming stories on hardships that high borrowings can bring about on people of that country. The lesson though being that while the global financial crisis or poorly planned borrowings have left many developed and emerging economies heavily indebted, there are ways and policies that can help repair the damage provided of course there is a will to do so. Greece with 174% government debt as a percentage of GDP is still struggling despite debt restructuring whereas Portugal with 131% government debt as a percentage of GDP appears to be successfully limping out of the bailout program extended to it. Portugal’s predicament is also a vivid example of a longstanding conundrum of economics: when is a country bankrupt? At what point is government debt simply too great to bear? Unlike for companies, there is no clean answer for countries. From Adam Smith (in his Wealth of Nations) to modern day Kenneth Rogoff (in his This Time is Different), economists are unanimous on the point that there are likely to be “multiple equilibria” points for dangerous debt levels. In the canonical model, if a country’s fundamentals are sufficiently strong, it is at no risk of debt crisis, and if the fundamentals are sufficiently weak, it is almost certain to happen. And this is precisely why even if the economic managers feel overly confident due to being flushed with the out-of-the-ordinary revenue currently flowing Pakistan’s way, they must bear in mind that it would tantamount to criminal neglect if they do not focus on addressing today’s weak ‘fundamentals’ of our economy.
Growth – the simplest solution to excessive debts – cannot be conjured up by magic, and often proves stubbornly elusive when it is needed most. And no one knows this better than the Turks. Back in the 2000s, it was only through concentrating on the basics of the economy by their Economic/Finance Minister, Kemal Dervis, that Ankara was able to pull back from the brink. Likewise, it will be a welcome sign if we also realize this necessity sooner than later. In the long-run trying to solve deep rooted management problems with mere accounting solutions will just not work!