Man of facts, and stats, explains the economy and its problems
I arrive at Dr Hafiz Pasha’s house just a couple of minutes after the agreed time for the interview, but he kindly offers a very warm welcome before I can blame Lahore’s rush hour traffic – it always works with the editor!
Starting the conversation, I note that Dr sahib keeps himself pretty busy for what he calls a retired life, teaching and guiding research by postgraduate students at the Lahore School of Economics (LSE) and Beaconhouse National University (BNU). And it quickly becomes clear that of all the positions he has held, some pretty high profile – in academia, government and at the UN – teaching is the closest to his heart. “It keeps you alive and alert”, he says.
Interestingly, the experience of teaching has taught him a few things as well, particularly about the “pure talent” our students possess. He has taught at Stanford, among other places, so he knows what he’s talking about.
“In terms of talent, our students compare favourably any day”, he says, but also regrets lack of proper nurturing and necessary opportunities that separate this abundant talent from achievement.
But the main reason for the interview was getting his views on the economy, especially the new government’s performance in its first year. He starts by explaining the economy’s resilience.
These are, after all, times when the “security shock” has resulted in lost investments and additional costs to the tune of $12-15 billion. The energy crisis, in his estimation, eats away another $12-14 billion a year in foregone output, etc. Add to that the occasional natural disaster, like the ’10 floods that cost the exchequer around $10 billion, and you have average losses of around 10-12 per cent of GDP.
“Most countries would simply not grow in such circumstances, instead record negative growth”, he notes.
But our system has strengths that provide buoyancy and keep our growth rate positive, albeit low.
“Three factors are important”, he says. “The first is the overseas workforce that contributes $15-16b annually. Without this injection the trade deficit would be uncontrollable. The second is the farmer, the hari, providing food self sufficiency and security. And the third is the informal sector of the self-employed in the trade, transport, construction sectors, etc, that keep the economy functioning”.
Yet, sadly, the efforts of these sectors are “pre-empted by a rent seeking elite” who have little stake in Pakistan, and that robs the system of the capacity to improve delivery of basic services and vigorously tackle poverty.
Vulnerabilities
I ask if the present government’s first year has been eventful. He smiles, and explains like a teacher.
“To give credit where it is due, the finance minister has worked very hard over the course of the last year. So much so that his health has suffered,” he says. “But the government’s sense of priorities shows some lack of clarity, and sometimes they end up doing the opposite of what the set out to do”.
The energy and circular debt problem is a good example. Of course it was the government’s number-1 priority, and retiring the debt was essential to provide necessary liquidity. But the manner of tackling this problem, according to Dr Pasha, misses the main point.
“It is a myth that the circular debt was retired in its entirety”, he answers. “According to USAID, it was in excess of Rs800 billion, as opposed to the Rs500 billion figure that was mentioned. There is still a huge backlog, and inefficient management of the system has added to the problem.”
Instead of ensuring smooth running of the system in the immediate term – improving management and addressing “nuts and bolts issues” – the government focused on mega new projects involving huge cash flows and requiring a number of years to come online.
That is unfortunate since production capacity is not the energy sector’s basic issue, but preventing systemic haemorrhaging and payment defaults is, which is where both government departments and influential individuals are holding the whole country hostage, and need to be dealt with.
The existing system also has problems of proper prioritisation, like gas being diverted to fertiliser and CNG rather than the power sector.
“Our research shows that existing power plants can increase overall energy supply by20 per cent. But rather than streamline existing processes, the ruling party’s group of ministers have been chasing mega projects, not addressing immediate needs”, he adds.
But wasn’t it smart to service the circular debt, and why has it ballooned so much so fast?
“It is a myth that the circular debt was retired in its entirety”, he answers. “According to USAID, it was in excess of Rs800 billion, as opposed to the Rs500 billion figure that was mentioned. There is still a huge backlog, and inefficient management of the system has added to the problem”.
So, isn’t the energetic, and belligerent, Abid Sher Ali doing a swell job of ensuring payments are made, losses are removed, and the debt is curtailed?
Well, not quite. “Punjab needs to be particularly careful”, he warns. “37 per cent of Punjab’s electricity is secured from the rest of the country; it is not self-sufficient. Of the remaining 63 per cent, one-fifth is based on gas from other provinces. Also, in disco losses, the largest share comes from Punjab (31.7 per cent)”.
Therefore, Abid Sher Ali must be careful not to antagonise other provinces. There is otherwise the danger that power sharing will become as serious an issue as water sharing and revenue sharing. This is very important, especially since the threat is reduced gas supply to Punjab, which could lead to some deindustrialisation of Punjab”.
Cart before the horse?
The government’s handling of the foreign exchange reserves, rather its efforts to bolster them, have been no less important. Their initial strategy cannot be faulted. Reserves were low, markets illiquid, and the Balance of Payments (BoP) situation simply haemorrhaging, so the IMF deal made sense. But the problem now is that the finance ministry and SBP are relying too much on external borrowing and concentrating too little on structural reforms to improve the economy fundamentally.
Failure to build internal capacity, he says, and continuing to rely on external flows, amounts to taking the easy way out of a very complicated situation, and will raise the debt burden substantially.
The government’s initial tax strategy, presented in its first budget, was impressive. It entailed some bold and difficult decisions for which Dar sahib should be credited. There were provisions for broadening the tax net and impressive anti-evasion mechanisms, at least on paper. But, again, four months into the fiscal year and there was backtracking on practically every front.
“It seems the powerful businessman/trader lobby got its way eventually. They are the government’s prime lobby, and washed away all crucial reforms before they could be implemented”.
Dr Pasha complains about counter signals being sent, about tax incentive schemes that run counter to efforts aimed at greater documentation and less evasion, and how “the whole model changed”.
The Fund (IMF), too, suddenly began showing extraordinary and unprecedented generosity towards Pakistan, agreeing to revise the FBR revenue target down on a couple of occasions.
“The reforms aimed to increase tax revenue by one per cent of GDP – from 9.6 to 10.6 per cent. But now there is only a 0.2 per cent increase likely, washing away 80 per cent of the effort”, he says.
But the government’s strangest stance has come on the BoP issue, which is perhaps the most important, “since we can print rupees but we cannot print dollars”. And Ishaq Dar’s obsession with strengthening the rupee has ended up putting the cart before the horse from the macro economy’s point of view.
“The Saudi gift may have provided unprecedented uptick to the rupee, but I believe it was too much too soon, and led to a state of some disorder”, he explains. “One of the most influential lobbies, the APTMA, is sending out an SOS daily in the newspapers”.
The rupee has strengthened, or rather was made to strengthen, he points out, just when Pakistan finally secured the GSP-plus privilege, opening the possibility of access to the EU’s large market. But it bears remembering that Europe continues to suffer from the recent recession’s overhang, and their textiles imports, our prime market, have recorded a reduction of 12 per cent over the last two years.
Therefore the market is intensely competitive. One of our biggest competitors is our good friend Turkey, which has a Free Trade Agreement (FTA) with the EU (which goes far beyond GSP-plus), and to preserve market share the Turkish lira has depreciated by 20 per cent over the last year. And the simplest lessons of economics suggest that as the trade deficit widens, benefits of the ‘gift’ will shrink.
The stock market bull run, too, is more façade than fact. For, even as the market rose to break records, portfolio investment actually declined by a whopping 40 per cent. In India, however, $15 billion dollars of portfolio investment flowed in over the same period of time, even though Dalal Street has not been nearly as bullish as its counterpart in Karachi.
Abid Sher Ali must be careful not to antagonise other provinces. There is otherwise the danger that power sharing will become as serious an issue as water sharing and revenue sharing.
“Investment is not coming in, it is going out”, Dr Pasha adds. “Notice the quiet exit of multinationals from Pakistan, which started with ICI, spread to Arab companies, and now leading banks are packing up as well. They are liquidating reserves and repatriating profits”.
What is worse, according to his research, while we receive around $800 million annually in new FDI, we remit almost twice that amount, which will make managing the BOP a persistent problem.
However, macroeconomic concerns notwithstanding, the common man’s most pressing problem is inflation, which is where our good doctor expects some relief just around the corner.
When the present dispensation took office inflation had been kept artificially low at five per cent. It soon picked up with the unprecedented rise in industrial tariffs, an initial decline in the rupee, record borrowing from the SBP, and neglect of the agriculture sector.
Now, however, that the rupee is strong, sooner or later prices of crucial imported items will recede, including petroleum, consumer products like edible oil, tea, vegetables, pulses, etc.
“I am optimistic that inflation will come down to around seven per cent in the next six months, making life somewhat more manageable”.
The government?
The tea and biscuits ended, and so did the discussion on the economy, and the doctor dwelled on his experience of government as I prepared to beg leave.
“Government was a mixed experience. I learned very quickly that implementing theory or abstract principles just does not work” he says. “You have to be sensitive to the political economy. Only then do you understand intentions of different players, and can subsequently build coalitions of support”.
One thing he is not very optimistic about, though, is the bureaucracy. It used to be a different breed altogether till the early ‘90s, but now it has collapsed qualitatively.
“Back then Secretaries were sharp and up to the mark, but now there is clear professional degeneration”, he says. “Now there is more corruption, people are insecure about tenures, and the better minds simply opt for industry or go abroad”.
Such was not the state of the Pakistan of his youth, of which he talks fondly. The ‘70s are especially dear to him, when the country was more progressive despite having lost the eastern wing. And this was when, back in the day, he used to be one of Zulfi Bhutto’s minor speech writers.
From there he rose, in the academia, in government, and also at the UN. He has been invited to join governments now and then. Years of being on the move have taken their toll; diabetes hurts him now, and his heart is not as strong as it used to be.
Still, he takes great pleasure in teaching, which was evident in the depth and detail he would go into when explaining sensitive subjects. Just as gracious in farewell as in welcoming, he came across as the supreme teacher of the old school, for whom imparting wisdom acquired over long years is a continuous process, not just a classroom thing; someone the books refer to as the quintessential teacher.
