Where did the money go?

2018-05-22T22:54:08+05:00 Dr Kamal Monnoo

A lot of analyst these days are writing about how our external debt increased by almost $55 billion during the period 2008 to 2018, essentially in the democratic period after the end of Musharraf’s tenure. Well it may be worth mentioning here that ironically, most of these writers in one way or another were a part of the government during this period, so why moan now? Back to the debt - Before we get into the details of why this escalation in external debt is happening and what may be the possible remedies to arrest this trend, let’s try and work out that where mainly did this borrowed money go. An analysis, in this regard, if nothing else, can provide us with some clarity on at least, what we should not be doing in future! The break-up we see is as follows: A big chunk was spent on covering for the losses in the energy sector. On an average, during the period under study, Pakistan built up a circular debt of approximately $2.5 billion/annum, and given the approximate weightage of oil in the cost of production mix, it means that on average we had to fund ‘anew’ approximately $1.50 billion of oil imports every year in order to sustain the same level of consumption, meaning about $15 billion in 10 years – Notes: Incidence of this would tend to be higher in PPP’s government since oil prices peaked in 2008 and this number could be under reported as electricity demand consistently went up during this period. Second, a significant part of borrowing was done to shore up reserves that are not only essential to ensure a stable currency but to also allow the government to have a comfortable import cover margin and to meet its external obligations. With imports ballooning over these ten years, it meant that fresh induction was necessary to maintain a reasonable level of reserves, which in-turn meant an additional replenishment ‘expense’ of about $20 billion over 10 years. Add to this the infrastructure and project related government loans of about $20 billion in this period, and you can see that you are almost left with nothing.

Now, I know a lot of people will argue that what about the ‘debt servicing cost’ and the ‘military budget’, as these are also two large components where borrowings must have been spent? Answer: Yes, agreed, but I have deliberately chosen to not mention them because the former is partially embedded in the replenishment cost and the latter I feel should not overtly be correlated to external borrowings. Pakistan faces an existential threat and is in a state of war on various fronts in a region that seems to be paying for India’s sins – A story of un-willingness to co-exist, a notion now fully manifesting itself in its current national leadership – and therefore this allocation should be treated as a mandatory part of any revenue generation within the economy.

This takes us to the next question, that what then are the fundamental lessons we can learn from the above? Well, basically the obvious lesson is that we have pursued a wrong policy direction all this time that has invariably driven us to such enhanced deficit levels. Management-101: Unless your borrowing can lead you to higher profits, after accounting for the borrowing costs, the exercise will instead be counterproductive leading to bankruptcy. Knowing where lost money went is a good indicator for the next government on how to plan its financial priorities. Primarily, Pakistan’s public sector affairs are in a mess and need to be quickly fixed. The power sector is churning out an annual loss (or circular debt issue) of around Rs300 billion/annum and this despite our national electricity tariffs being uncompetitive regionally.

To make matters worse the oil prices are climbing and touched $80/barrel mark, last week for the first time in 5 years. In addition, though no clear figures are available, it is being understood that State Owned Enterprises (SOE) are collectively (other than the power plants) posting a loss of as much as Rs1 trillion per year. Obviously, the government is not professionally equipped to run these businesses and should be looking to get out of the business of running these. On the contrary, in the last 5 years we have instead seen the footprint of the state to expand rather than contract. In modern day economic management, government facilitates businesses instead of running them and focuses mainly on maintaining an oversight to ensure a free and fair operative environment; an endeavor that also forms the underlying strength of a well oiled market economy. For the incoming lot, this mean ringing power & energy sector reforms that break the monopolistic stranglehold of the governmental apparatus (including WAPDA) in this sector and opens up the operating space by allowing the private sector a level playing field to compete freely. Of late all big-ticket power projects, especially in Punjab, have gone the government’s way, meaning more losses and perhaps a much higher initial capital outlay than was needed. Also, now with oil prices on a rising trend, the quicker the government realizes the imprudence of unnecessarily passing (to direct consumers) fuel adjustments owing to any oil price dips, the better it will be for the fortunes of the economy. All around the world petroleum prices are a good way for governments to make money and Pakistan need not be an exception – Even today our petrol prices/liter are lowest in the region. We saw that in order to gain political mileage the domestic fuel prices for the direct consumers were lowered unnecessarily in the last 5 years, resulting in loss of precious revenue to the national exchequer. All it did was to raise petrol’s domestic consumption in cars and motorcycles – tantamount to smoking away our dollars!

This then takes to the second most important thing for the next government to ponder upon: Re-think the Industrial Policy. The seriousness of this government towards industry can be gauged by the announcement of closing it down for 10 hours in the month of Ramadan so that domestic consumption can be sustained, and this then will be followed by a nearly week long Eid break – No where in the world can one find a parallel to such luxury! Pakistan’s core industry is dismantling and only the undesired manufacturing operations are thriving on the back of mere rent seeking. Take the automotive and motorcycle industry for example, which has failed to meet all its deletion targets, continues to bank on imports for assembling its cars and motorcycles and in the process makes artificially high profits by selling at prices, which tend to be the highest in the region for like-to-like models. The same saga more or less gets repeated in Pakistan’s electronics industry operational model. To make matters worse: Pakistan’s SME (Small and Medium Size Enterprises) sector stands completely wiped out owing to an influx of unbridled imports from China and a rampant culture of under-invoicing and outright smuggling prevalent at our entry points; and the looming free zones and duty free industrial estates under the CPEC umbrella pose yet another threat since main investors there would be the Chinese and if history on Afghan Transit Trade is anything to go by, our oversight agencies do not have a stellar record in checking any illegal spillover (into the local markets) of goods meant strictly for exports.

Finally, within our national industrial base, our second largest budgetary expenditure is incurred on meeting the losses from the Public Sector Enterprises like PIA, the Pakistan Steel Mills and the Pakistan Railways. Either there should be a clear roadmap to privatize them or an innovative out of box solution should be evolved to turn them around. In wake of constant political challenges to sell them, perhaps a good compromise would be to give them out on a 10-20 years’ management lease. A strategy that has been previously tested in Pakistan during Zia’s time, which not only partially achieved its objectives of curtailing institutional losses, but also ultimately paved the way for example of disbanding the State Cement Corporation, leading to the privatization of the cement industry in Pakistan.

Lastly, who is going to do it? If it will be the lot of political parties (PTI included) who have been ruling the roost since the last ten years, then the success looks highly unlikely. Lesson, Management-102: If you have managers who are rewarding themselves despite mounting losses then a completely new team is required to bring about an effective change – The tragedy is that our Pakistani lawmakers while piling up this debt started to also reward themselves (in wages, perks, allowances and access to funds) – today they get nearly 3 times more than their entitlement in 2007. In setting wages, comparisons are made to India and UK rather than to Bangladesh, Sri Lanka or Nepal. The official budgets of the President House and the Prime Minister’s Secretariat today stand at nearly Rs1 billion per year each, and by conservative estimates our assemblies and all resultant office bearers cost us directly and indirectly close to half a billion dollars per annum. – This will have to go!


The writer is an entrepreneur and economic analyst.


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