The average man on the street, who must have frequently heard the cliché - ‘Pak economy requires structural changes’ - must be wondering what these are and why they are not implemented. The term which has literally become a buzz word these days amongst Pakistani economists refers to the opening up of an economy on market principles. However, going by the classic definition, the endeavor to bring about structural changes in an economy entails much more than mere liberalization, and relates to modifying the underlying composition of the way an economy is structured. To understand it deeply, one needs to dwell in the history of an economy, to correct an ill at the very roots from where an economy evolves. Many western economies, post 2008 financial crisis, are now indulging in this exercise of self-reflection to rectify policies that made them lose competitiveness and allowed their economic managers to amass unchecked cum unrealistic debt levels. Pakistan’s economic managers need to do the same in order to truly grasp why our economy has shaped up in a way where our tax to GDP ratio has gone wavered and the debt burden has accumulated to an extent where ironically, the only consistency that remains is of an ever-looming default!
Sustainable and equitable economic growth takes place on the back of homegrown surpluses and the element of borrowing during the process of growth is meant to primarily serve as a bridge to accelerate the pace of growth – the assumption being that the quantum of growth will ultimately exceed the undertaken liability - hence also the new coined measurement of debt in modern day economics as a fraction or percentage of total GDP. When studying the history of the Pakistani economy, it is rather elementary to ascertain that our GDP growth post 1990 has mainly been on the back of debt or foreign aid. Further, corruption and the inefficient use of debt inflows compounded our problems since the funds borrowed by successive governments were almost never invested judiciously thereby rendering national investments unproductive and in return naturally their failure on re-payment time lines. This, however, did not deter any government from borrowing more and in spite of failures to meet previous commitments the borrowings continued unabated. The result being that while GDP expanded mainly due to debt accumulation, the corresponding growth in the legitimate documented sector of the economy could not keep pace with this GDP’s artificial expansion. The corruption in debt spending coupled with unaccounted-for-inflows - ‘hundi’ whitening schemes and unwise geopolitical services provided by the state – has given shape to an economy where the markets on one hand are flushed with money (from the undocumented sector) and on the other hand the overblown size of the GDP bears no real correlation to the fair potential of the tax base of the documented sector. Reduce the size of the debt-driven-GDP or the annual budgeted overlays based on deficit financing and suddenly the national tax to GDP ratio starts looking very respectable.
If Pakistan’s economy has to truly come out of the woods then its economic managers have to stop fanning this counter productive economic structure and opt for structural changes that will reduce government’s debt footprint and provide more space to the private sector to generate a more productive growth momentum. Real economic activity based on legitimate domestic underpinning is the only way to shore up increased revenues on a sustainable basis, whereas coercive FBR drives to meet wishful tax targets in the present environment will not only backfire, but also be detrimental to future investment.
Having said this, we must remember that the history of present day emerging economies and especially of those in South Asia tell us that an unchecked, over-reliance on the private sector may not be enough to generate desired rates of growth. Large development projects require sizeable conduits and given the size and limitation of private sector in developing economies this function, in tandem, needs to also be performed by well managed state owned enterprises (SOEs). A cursory look at the BRICS nations is enough to determine on how key the role of SOEs is to an economy’s development and equitable well being. Run these state institutions to the ground and the entire economic structure collapses. And this is precisely what happened in Pakistan. The PML(N) government needs to recognize this and concentrate on resurrecting key state owned enterprises rather than endeavoring to sell them off.
In this age of global connectivity where capital transactions eventually culminate on the final returns they yield, governments of developing countries need to be in control of bilateral or even unilateral (primarily regional) transactions that affect economic development work. This helps in both, ensuring that they reap potential benefits and that an investment inflow does not stagnate into a liability. No better example of this than the recent arrangement between China and India under the ‘Open Finance-Open Asia’ umbrella. The Indian government in a state to state reciprocity arrangement directly manages China’s trade surplus by routing them through its state enterprises to ensure that these investments yield a return that meets agreed ROIs with China and also leave enough room to pay back borrowed capital. In addition, there are sectors that are considered vital to national interests and sovereignty and need to be managed as such. One such sector is banking and finance. There is growing concern that allowing foreign intervention and promoting an unhealthy mix between the private and public sector market presence in banking and finance can end up compromising the power of the regulator and exposing the economy to external risks.
For example, today the State Bank of Pakistan (SBP) in many ways has little leverage over the private sector banking players, simply because between themselves they virtually control most of the domestic banking and financial market place in Pakistan. The Indian State on the other hand still jealously guards its control over its banking industry and its power to intervene in domestic financial markets as and when necessary. In fact, even in the developed world we see that governments are becoming increasingly careful on who controls their financial institutions. In Europe for example, we are seeing the ECB (European Central Bank) exerting more control on European Banks.
It is in this context that one finds the recent announcement by the Privatization Commission (PC) to off load blue chip banking portfolios held by the government quite intriguing. The step to sell prized financial equities and that too through the London Stock Exchange is being presented as an achievement, whereas the reverse is true. Before liquidating irreplaceable national investments, they need to answer the following: a) All these financial institutions (UBL, Allied and HBL) are already being professionally managed by the private sector and churning out good results, so why disinvest especially when replicating these portfolios will be near-impossible? b) Where do they plan to invest the proceeds from these sales and what would be the comparative returns of these future investments? c) Why does the government want to exit further from the banking and financial sector? d) Will foreigners and foreign institutions be freely allowed to acquire these stakes and repatriate profits? If not, what precisely will be the limitations? e) Are there safeguards in place that bar purchasing through front companies, to prevent conflict-of-interest concerns about present owners, policy makers, and the traditional ruling elite? f) Are there any precedents where emerging economies or any key global banking houses like Citibank, Barclays etc have sold such high percentages of their banking equity (en-bloc) and that too off-shore and under a foreign hammer? Surely, a more independent central bank with an autonomous governor would have put its foot down!

 The writer is an entrepreneur and economic analyst.

Email:kamal.monnoo@gmail.com