A lot is being said and written these days about Pakistan’s national debt and how it has reached a level where it may no longer be sustainable. Meaning in the coming months we either face a default or a re-entry into yet another IMF (International Monetary Fund) program, which by all accounts will not be easy this time around. IMF has its own recipes that in general call for some drastic moves like sudden and steep devaluation (18 to 25%), fast track privatization of the state owned enterprises, pushing up rates of utilities to contain circular debt, capping of development spending to curb fiscal deficit and instant revenue drives that often result in more taxing of the taxed, instead of working to broaden the tax base. Well not that all IMF proposals are bad, but the trouble is that if history is anything to go by convincing IMF on what measures to drop (from its generic list) or momentarily put on the back burner - owing to peculiar ground realities at home - can be rather difficult. Also, a fresh IMF program this time can raise some totally new concerns for Pakistan; mainly on CPEC’s (China Pakistan Economic Corridor) independence and autonomy of decision-making cum its unhindered implementation. CPEC, as we know, is not only being hailed as an economic game changer for Pakistan, but given the current geo-political scenario, has now perhaps become its security compulsion.
As if the economic position is already not precarious enough, the focus or debate has shifted from the real merits or de-merits of prevailing economic policies to frivolous point scoring on whether or not national institutions should be allowed cross criticism. While there is some weight in the argument that public forums or general press releases may not be the right way to give a message to peers on poor performance, as it may send counterproductive signals on Pakistan’s economic health to the very institutions with whom negotiations may be required in the near future, the larger reality is that a nation’s debt performance is always the principal yardstick when measuring the strength of its financial statements and is invariably a public document. Also, international financial institutions like the IMF and the World Bank do not rely on internal criticism to gauge the health of an economy, but rely on their own data and expert analysis. In this case also it is the World Bank’s recent report on the health of Pak economy that provided the initial wake up call. The report pointed to increased vulnerability of external account risk to macroeconomic stability given the widening current account deficit. In addition, it estimated gross external financing needs of Pakistan at 9% of its GDP, i.e. $31 billion in the fiscal year 2017-18. And it is of little relevance whether our finance ministry disputes WB’s observations, because as and when a new program with the IMF is negotiated or additional funding is requested from the World Bank, it is the lender’s assessment of the situation that will hold significance and not the other way around. The real disappointment however is that Pakistan’s economy is turning uncompetitive at a time when almost every major developed and emerging economy is doing well, the first time such a phenomenon has occurred in over 10 years. The annual fall meeting of the IMF in Washington a few days back was unique in this way that from Tokyo to Paris to Washington everyone agreed on upgrading the forecast on growth of global economy – marking it at +3 percent from 2.6 percent in 2016.
Never mind political turmoil, populist uprisings and threats of nuclear war, in its twice-yearly report on the global economy published a few days after the moot, IMF conceded that the current period represents the strongest growth since 2010, in almost all world economies. Number of countries knocking on the IMF door has never been lower! In Japan, a reform minded government and aggressive action by the central bank has pushed growth to 1.5 percent – up from 0.3 percent three years ago. In Europe, strong domestic demand in Germany and robust recoveries in countries like Spain, Portugal and Italy are expected to spur 2.2 percent growth in the Eurozone. That would be more than double its average annual growth in the previous five years. Aggressive infrastructure spending by China; bold reforms by countries including Brazil, Indonesia and India; and rising commodities prices (helping countries such as Russia) have spurred renewed growth in the emerging markets. In the United States, despite doubts about President Trump’s ability, manufacturing output is at an all-time high in 13 years and even Britain with an overhang of Brexit has managed to chug along at almost the previous growth rate of 2%. It pains one to see that at a time when there are good times everywhere, Pakistan’s economy on the contrary is faltering.
So what really are the issues facing Pakistan’s economy and are there any solutions? While the WB has been correct in pointing out the rising risk to macroeconomic stability - especially at a time when debt maturities are approaching fast and the demand on portfolio investment can be as high as $14 billion (4% of GDP) in the coming months – it at the same time has also listed its proposed remedies; pointing primarily to the requirement of a post haste improvement in the our external account. However, the outcome of this warning if any, will of course hinge on how seriously and expeditiously the government takes its advice on revival of exports, curtailing imports and improving business climate to ensure that flow of home remittances remains stable. WB’s report or not, these in any case are all valid points and one fails to see why debate them rather than acting on the same? Further, the ministry arguments don’t carry much weight as they are based on two months data, July & August 2017. Already, in September over August 2017, we are seeing that the trend has again reversed: Exports down by 10.24%, Imports up by 9.67% and the negative Balance of Trade up by 9.33%. The reality is that over the past four and a half years, Mr. Dar’s myopic policies on revenue generation have put Pak economy at high risk by unleashing a culture where: The non-tax payer came at an advantage over the tax payer, in-turn resulting in unprecedented rise in the un-documented sector; imports thrived at the expense of domestic manufacturing and exports; and small and medium sized firms became uncompetitive in-turn retarding job creation and equitable distribution in the economy. In the meantime, the spending binge continued without much accountability. If these trends are to be reversed then some fresh bold reforms on tax, ease of doing business, addressing competitiveness, anti-trust, protecting the home industry and on practically instilling (especially in the public sector) IFC codes of corporate governance will need to be undertaken. The prevalent culture of undertaking poorly prioritized big-ticket projects for self-glorification with disregard to elements of sustainability, transparency and management prowess, needs to be quickly shelved.
With mere 8 months to go I hope the new prime minister – who has a good understanding of business and economy – takes matters into his own hands, sheer rabble rousing against the government’s critics will not solve anything.