Time for hard but necessary decisions

With privatisation of sick public sector enterprises (PSEs) off the table and the trade gap widening, the government’s fiscal space is going to come under increased pressure again. Those in charge need to be reminded that the government has no business doing business. Far stronger economies, like Britain and France, that once tilted towards overriding central control have embraced market wisdom that privatisation increases efficiency. Such steps should serve as important lessons for developing economies like ours. Yet we continue on the same old path, sidestepping tough-but-necessary decisions like turning sick and hemorrhaging state owned entities to market forces.
The trend is a reflection of popular politics in our part of the world. These white elephants have long served as ideal avenues to absorb political appointees, an exercise of monumental importance to the political hierarchy. But considering the present state of our economy – mired in chronic stagflation with the growth target revised downward again – kicking the privatisation can down the road means inviting obvious trouble.
It is pertinent to note entities that were in private hands two-to-three decades ago, and measure their efficiency in government hands. KESC is the prime example. Once a blue-chip, it is now struggling to stay afloat, that too after a good Rs150-175 billion in bailouts. PIA ranked among the best airlines in the world in the ‘60s. People prided themselves for associating with the national carrier. Airlines it helped setup – Singapore Airlines, Malaysia Airlines, Emirates – now rank among the best, while PIA struggles with regular flights. Railways, once the transport of choice, is in a ridiculous state of disarray.
The best precedent for successful privatisation comes from our banking sector reforms of the ‘90s. The initiative transformed the entire sector, more than 80 per cent of which is now consolidated in private hands. It turned those banks from loss making institutions to profitable entities. Yet the government remains oblivious of the urgent need to reform loss making entities.
I have often advocated the need to privatise both loss and profit making entities. There is enough empirical proof to back fears that if the latter are left in the government’s hands much longer, they too will be run into the ground. And at the risk of repetition, I must mention that there is a prudent manner in which to undertake the privatisation initiative. There must be a competent, independent Board of Directors, which will chose a proficient chief executive and management team mandated with stabilising all public organisations to prepare for strategic privatisation. However, for the process to benefit the people of Pakistan, it is important not to undertake it lock, stock and barrel, rather do it in a strategic manner. It is much better to offer 26 per cent of companies for privatisation while retaining management control instead of plunging 51 per cent.
As regards the balance of payments (BoP) situation, it is worth noting that practically all our crises – whether the slump of the ‘90s or the downturn of ’08 – have been BoP problems. The problem is that whenever our fiscal mismanagement drains foreign reserves, we obviously cannot print dollars, hence the need for repeated bailouts. Yet the external side has been stable for the past two years, with strong remittances bolstering the reserves position. However, of late, there are signs of dark clouds gathering over the external front again. Remittances have started peaking. Exports are dropping, not the least because the international commodity price hike that bid up cotton has subsided. And imports are rising, predominantly because of high oil and input prices.
The external situation would not have been ominous if IMF pipelines were still open or the international market was conducive to Pakistan. But since IMF has linked grants to performance, which Pakistan has failed to live up to, we can expect bottlenecks from other bilateral and multilateral donors also, since they use the IMF nod as a go-ahead signal for indulging economies like ours. Now, with multilateral donations questionable, relations with the US rocky, $1.2 billion repayment beginning in Feb, and receivables from Etisalat and bond issue also uncertain, reserves are likely to come under pressure very soon. This means the rupee, already hovering around its lowest-ever level against the dollar, will be pressured further to the downside.
Time has come for the government to take prudent steps to improve export earnings and ease its fiscal burden. We need to enhance trade earnings, reduce reliance on imports and ensure public companies bleeding billions every year are handed over to the efficient private sector. Failing this, our position will become increasingly worse. The time for action is now.

The writer is a former finance minister