So the PTI stalwarts are claiming that their policies are working as the import bill is significantly shrinking (has already shrunk by nearly $4.50 billion and on course at this rate to reduce by as much as $7 billion by the end of June 2019), thereby taking the pressure off the external account. Since the data of the touted reduction in imports is not very transparent, the fear is that one hopes they have not ended up eroding productive imports? Already, there is a shortage of industrial raw materials (especially dyes and chemicals) that are key to country’s exports! In other cases the cost of these imported materials, key to making value added exportable goods, has gone up by so much that it is not possible to pass on the entire difference to the end customer. Owing to this, naturally the exports have not picked steam as was being expected. And as for the reduction in unproductive imports (primarily luxury goods, electronics, non-essential food items, etc.) the fundamental question is that could these have been reduced without resorting to such a massive and abrupt devaluation? Once again, there are no clear answers from the government’s economic team and it is quite evident by now that yet again there was no real strategy or method to this exercise - sadly the real stakeholders just continue to bear the consequences of such incompetence. Subsequently, the entire team, finance minister, SBP Governor and the FBR Chairman, stands replaced. Meaning, now one will never know what truly transpired!

Anyway, moving on, the important question is: What next? The thing is that once the new economic managers are finished with sealing an arrangement with the IMF, they will need to look at the economy holistically. Mere quick fixes or cash injections will not do in the long-term, as the overall economic structure today is not sustainable. Over the years the economy has either de-industrialized mainly affecting the SME (small and medium sized enterprises) sector OR has simply shifted to industries that either encourage import based consumption through policy breaks (a legacy of Shaukat Aziz with examples being those of the automobile industry, motorcycles assembly, home appliance assembly, etc.) or to the ones that primarily thrive on rent seeking (IPPs, Fertilizer, Sugar, Banking, etc.) or some with a combination of both. Automobile or motorcycle assembly, for example, has been a futile cum costly exercise, which mainly promotes sales of vehicles in the domestic market through long standing duty breaks. Sadly, in all these years they have done scant little in achieving the desired deletion targets. In contrast, all over the world, such assembly plants are installed with permissions based on strict targets on exports and on achieving almost full indigenous manufacturing in the stipulated period. As an example, the Czech Republic produces as many as 1.50 million cars per annum and its next door neighbor, Slovakia, produces another 1.3 million cars per year, but more than 90% of these cars in both cases are meant for exports. In addition, between 80/90% deletion has already been achieved for foreign vehicles such as Volkswagen, Audi, Hyundai, BMW, Land Rover, and others. On the contrary, in Pakistan, these subsidized import oriented industries not only add to a huge import bill, but also stoke many other issues such as negatively affecting the delicate trade-off between public and private transport preferences; environment and pollution; safety; distorted urbanization; and last but not least, enhanced household petrol consumption that otherwise could have been avoided - Oil imports as we know constitute the largest chunk of our imports.

So the challenge is not just to re-start the process of industrialization in the country, but (through visionary policymaking) to redraw the future industrial map in a way that places reliance on home grown industrial solutions in a competitive manner; encourages exports; and promotes the SME sector, the engine of growth and employment generation in any economy. Needless to say that this will be a slow, tedious and a delicately timed process and will take some doing. Also perhaps, to achieve this, services of an astute industry & business captain will be required rather than merely relying on imported expertise with no real practical experience in the Pakistani environment!

Fiscal deficit - and within this the case of SOEs (State Owned Enterprises) and the IPPs - is the other main area, which the new economic team will need to address quickly. SOEs account for a deficit of nearly 1.6 trillion rupees every year while the skewed IPP contracts add a burden of another 100 billion rupees per month on the national exchequer. Ironically, since a big chunk of this deficit comes from the power sector (Discos contribute the most in the total SOEs losses), the burden ultimately gets intertwined with the external account woes, since oil is imported and as already mentioned carries the highest weightage in the national import bill. So, in essence, going forward, unless sustainable solutions to the operations of the SOEs (in shape of privatization or turn-around strategies or management lease options) and on the IPP bottlenecks are not quickly devised, it will be even more difficult than in the past to continue to finance these shortfalls. Now some may argue that fiscal deficit is an area that has been sharply increasing in the developing economies worldwide and is not a phenomenon peculiar to Pakistan, so why unnecessarily worry about it? However, of late a number of studies originating from the IMF, the WB, Kennedy School, Harvard, and more pertinently from Fudon in China, NUS in Singapore and Ho Chi Minh City Open University, in Vietnam, all have examined the effects of fiscal deficit on economic growth. For example, HCM & Fudon studies took Vietnam as a test case to examine the effect of fiscal deficit on economic growth in Vietnam. The country, as we know, is today one of the most dynamically emerging countries, but its government has instead been facing large fiscal deficits for many years running by now. The study applied the Error Correction model on the quarterly data of 2003- 2016. Importantly, the empirical results strongly indicate that there is a distinct co-integration relationship between fiscal deficit and economic growth in Vietnam, in which fiscal deficit had harmful effects on economic growth in both short and long run. In particular, the correlation analysis has confirmed that fiscal deficit can hurt not only the gross output, but also private investments, foreign direct investments, and net exports. Almost all the results of such studies provide evidence for policymakers, and not only in Vietnam but also in other emerging countries which are in need of urgent solutions so that to reduce the fiscal deficit rate and have more sustainable growth in the future. The question is that will this new team be able to successfully take the kind of pressure unique to Pakistani brand of politics, and deliver? Let’s try and help them as best as we can, because make no mistake, the current state of the economy does indeed pose an existential threat to the country!