Analysis & way forward
The Pakistani economy is in a jam. Debt is far higher than output and this can only be addressed by boosting growth or productivity and preferably both. We are where we are because of chronic loose money going the government’s way, stemming from a lack of bank lending controls on state’s borrowings and no break on trade deficits for a long time. This latter issue has its origins in repeated follies on part of successive Pak governments in signing poorly thought through trade deals and lately owing to this government’s decision to keep the Pak Rupee artificially inflated; at least by 5 to 7 %.
These mistakes stand exacerbated in recent years as the state’s borrowing go into an overdrive – in the process crowding out the private sector – and also due to record low interest rates, a phenomenon that can invariably lead to complacency in debt portfolios. And then there is the external factor: high debt simply being driven from a global trend. This trend mainly developed due to a period of unprecedented growth of the Chinese economy, which was tolerated for long by the developed western world when China was selling goods at artificially low prices during 1990s and 2000s.
Meanwhile, China loaned the money back to the West to fund them to keep on buying more. Some of this cheap credit went into the property market and became the chief culprit in fueling the catastrophic financial crisis of 2008. However, the law of gravity finally seems to have caught up with Chinese growth. The West has run out of money and Chinese exports have slumped and this means that the Chinese economy, as we have known it for the last 30 years, now needs to be totally reengineered.
The worry here for Pakistan being that as our dependence on China increases at a time when the growing weight of global debt is consistently pulling the Chinese economy down, the resultant gravitational pull may just be too strong for the our economy to escape it. And in this the two main adverse affects that immediately come to mind are: a) Pakistan will become an even more dumping ground for Chinese goods thereby further shutting down Pakistan’s domestic industry and b) the CPEC (China Pakistan Economic Corridor) initiative will eventually just end up becoming a China economic corridor with Pakistani private sector having little or no role to play in it. To avoid this from happening, managing CPEC in a transparent and professional way is going to be the key.
While no denying (even slightly) China’s long-standing friendship and its support to Pakistan in difficult times and that investment under CPEC finally puts investment back on the center of our economic plate, especially at a time when most western investors are reluctant to even visit let alone invest, the reality is that at the end of the day CPEC primarily remains a business proposition and needs to be managed as such. The reason, ‘business’, because projects do not involve outright grants or aid, but instead rely on business principles of interest based lending and borrowings underwritten by payback collaterals, which in our case mostly happen to be sovereign guarantees of the State of Pakistan – No real secret that a sovereign guarantee is tantamount to external debt and is a fiscal burden. More critically, these loans under CPEC carry a rather healthy ROI (return on investment) and tend to be front-loaded. Meaning, before we even know, we will be confronted with obligations that will require significant external (foreign exchange) outflows.
So what our economic leadership needs to understand is that a failure to constructively manage CPEC can not only deprive Pakistan of the opportunity cum potential to post significant growth and development, but also instead leave us in a financial quagmire. In-turn putting our very reputation at stake with a big question mark on our very ability to successfully implement large-scale national projects. Implying that a failure to live up to this challenge entails long-term national implications of disastrous proportions.
So what is the solution?
Well, regardless of how we approach the present economic dilemma there are basically three ways to ensure that Pakistan ultimately emerges as a winner from these global and regional trade, investment and debt challenges.
First and foremost, let the CPEC be managed by professionals and not repeat the mistake of allowing politicians and bureaucrats to assume the front seat. Create an independent and autonomous apex CPEC Board in which the members are selected on merit and ones who not only understand the role of board’s oversight in a modern enterprise, but also possess the necessary skills to add value to the overall CPEC vision.
Also, no trophy boards please, an error that over years has played havoc with our public sector enterprises, in the process reducing them to naught.
Second, in our management of the economy, we should urgently adopt measures that stimulate growth of productivity per se and create an environment that promotes entrepreneurialism and innovation. Meaning, we should support research and development and strive to be the best place to do business for our domestic investors – foreign investors will follow automatically once domestic businesses are flourishing. Secondly, we have to revisit trade deals that are not serving the interest of Pakistan. Nothing is more lucrative for an economy and its people than expanding national exports.
In a study conducted by the Department of Commerce, USA, it estimates that every increase of $1 billion in exports sustains or adds nearly 6,000 jobs in a developed economy and as many as 36,000 jobs (6 times) in a developing economy (say in our case) and that export-related jobs pay on average 18 percent more than the jobs that are merely focused on domestic market. Sadly, Pakistan has been rapidly losing its exports since more than two years now and this trend needs to be quickly reversed. Third, our infrastructure development projects should either be led by the private sector or be implemented under the PPP (private-public partnership) structure. Unless the huge infrastructure spending being presently undertaken by the government is prudently prioritised, and made clean (free of corruption) and self-sustainable, its effects will bring more economic pain than joy. Meaning, the sooner we put an end to needless on-going political mileage through inefficient use of borrowed capital the better it will be for economic prospects. The key is that we maintain control of our own affairs rather than leasing them out to others, create better values and behaviors, strive for social equity and fair play, and safeguard our nuclear weapons. Most adverse situations have remedies. Pakistan in order to survive and prosper must maintain control of its investments while reaching out to its global and regional friends – the two are not mutually exclusive.
