Fixing a failing economy | Pakistan Today

Fixing a failing economy

  • An uphill task

An ostensibly flustered Asad Umer sounded a bit sheepish announcing the government’s decision to finally request the IMF (International Monetary Fund) for a bailout package. But more embarrassed should have been his boss, the Khan who had been crowing at the top of his voice during his concerted campaign against the Sharifs that he would rather commit suicide than indebting the country any further.

Now with the PTI (Pakistan Tehreek e Insaf) in power, the shoe is on the other foot. The newly elected government’s decisions (or lack of them) in slightly less than two months of its tenure have been a mixture of naivety and blunders.

Why did the worthy finance minister, a former CEO of a large corporate entity, take so long to formally ask the IMF for a loan? Perhaps the prime minister wanted to try his hand at first seeking help from Pakistan’s traditional friends Saudi Arabia and China.

Welcome to the real world, where unfortunately there is no such thing as a free lunch. Khan visited Riyadh with high hopes. But the Saudis threw cold water on them.

Islamabad’s three demands including supply of oil on deferred payments, parking Saudi money in the coffers of the State Bank and promise of any direct infusion of petro dollar, simply did not materialise. According to the information minister, Fawad Chaudhry, the price of getting Saudi largesse was too high. He did not spell out Riyadh’s wish list.

It is not hard to guess though that Saudi Arabia would want a bigger security commitment from Pakistan in its ongoing war against the Yemeni Houthis. Pakistan failed to oblige, as living in a volatile neighbourhood it is its oft-declared national policy not to directly involve itself in intra Islamic conflicts.

Sharif, while he was prime minister, visited Riyadh along with the then army chief General Raheel Sharif and was badly rebuffed on this very count.

Unlike in the past the present civilian and military leadership is on the same page. This is a golden opportunity to reset the economy on solid foundations

China is perhaps the only reliable friend of Pakistan. The relationship is both economic and strategic.

The government has somewhat belatedly realised after a lot of damage done to this relationship by intemperate statements of some of its senior ministers and advisors. The Planning Commission has finally stated in unequivocal terms that outflows under CPEC will begin in 2021 and peak in the next two years without creating a debt trap.

Understandably such clarifications needed to be made in light of the US administration’s apprehensions that the IMF loan will be used to pay back CPEC debts. The IMF’s Managing Director Christine Legarde — while formally announcing the request made by the finance minister Asad Umer for a $8 billion loan package to address Pakistan’s economic woes — without actually naming CPEC observed that the Fund would demand absolute transparency about all (Pakistani) debt.

The US administration, reacting to Islamabad’s request for a bailout from the IMF, has reiterated its position that “part of the reason that Pakistan found itself in this situation is Chinese debt.” Washington is the largest contributor of resources for the IMF. It controls 16 per cent of votes on the Fund’s board followed by China with six per cent of votes.

In this sense the present IMF negotiations will be different from the past when the US supported Pakistan’s case. The US administration has already shut the tap on Pakistan; with President Trump questioning the logic of financially supporting Islamabad, claiming that it was using American money to finance those that kill Americans.

This is not the first time that Pakistan is negotiating a bailout package with the IMF. Nor will it be the last unless we are willing to tackle the structural problems perennially plaguing the economy.

To brazenly claim that the economy can be fixed by bringing in looted money stashed away in foreign banks is a gross over-simplification. Without addressing some basic fundamentals Pakistan will remain a basket case.

Take the case of free fall of the rupee. Last Monday the local currency fell by almost 10 rupees to a dollar, not only manifestly increasing foreign debt but also giving rise to a sure inflationary spiral. Unfortunately the finance minister was either clueless in this case or deliberately let the rupee slide so rapidly.

This was diametrically opposite to the obstinate approach adopted by Ishaq Dar when he was Sharif’s finance minster. He kept the rupee artificially shored up against the dollar for too long rendering Pakistani exports uncompetitive in the international market.

Resultantly Pakistani currency became the most expensive in South Asia. Now it’s the cheapest.

It is stating but the obvious that negotiating a new package with the IMF mission will be a tough call. The wish list of the international lending agency is well known by now.

Most of the expected preconditions to be spelt out by the mission are in any case necessary for a stable and vibrant growth oriented economy. But successive governments for far too long at the altar of political expediency have avoided most difficult decisions.

Pakistan’s tax-to-GDP ratio, at around 10 per cent, is too low for any growth-oriented economy. A paltry 800,000 are in the tax net. Many sectors including agriculturists and traders hardly pay any tax.

Similarly state enterprises like railways, the national airline, or the steel mills that should be in the private sector are perennially hemorrhaging the exchequer. They have become a sinecure of cronies of successive rulers.

The power sector, despite having enough capacity, is in disarray thanks to corruption and an antiquated distribution system. A burgeoning circular debt has hamstrung this sector and the economy as well.

Pakistan has become an import-oriented economy with an ever-increasing current account deficit that is no longer sustainable. Apart from textiles and a few agriculture produces it has been unable to build a manufacturing base.

The insatiable hunger of consumerism is being fed by expensive imports. Thanks to an over-valued rupee exports that were $25 billion in 2013 actually plummeted to $19 billion during the Sharif regime.

After defence and debt servicing nothing much is left for the social sector or development. That is why in sharp contrast to its belligerent neighbour the cash strapped Pakistani economy is unable to finance its outdated defence equipment.

In this sense accepting tough IMF conditions in good grace might be good for Pakistan in the long run. Islamabad has the unsavoury record of not completing IMF programs, the last PML-N government perhaps being the only exception.

Unlike in the past the present civilian and military leadership is on the same page. This is a golden opportunity to reset the economy on solid foundations.

But unfortunately the ruling PTI coalition has developed a frayed relationship with the opposition parties. Without consensus building fixing the economy will simply remain elusive. It is another matter, however, whether the PTI leadership including its economic team has the necessary vision to reset the ailing economy.