Dire straits

A bailout in the offing?

The second unannounced devaluation of the Pakistani Rupee in the last four months is clearly symptomatic of an economy in dire straits. Unsurprisingly economic pundits are predicting that Islamabad will soon have to negotiate another bail out with the IMF (International Monetary Fund).

Former finance minister Hafeez Pasha some months back while speaking at a seminar had predicted that by September the government would run out of foreign currency. He argued that another IMF bailout with tough conditions would have to be negotiated.

The burgeoning current account deficit (CAD) has now ballooned to $10.82 billion in the first eight months of FY18 (July to February), was $12.4 billion in FY17 ended in June 2017 and was a mere $4.86 billion in in FY16. By the end of this financial year it is expected to be as high as $15.7 billion.

Coupled with depleting foreign exchange reserves, the government’s hand was forced to let the rupee fall. Unlike in the past the State Bank is no longer in a position to throw US dollars into the market to keep the rupee artificially stable.

Thus the myth of a stable and buoyant Pakistani economy has exploded in the face of ordinary Pakistanis long force-fed upon a staple diet of voodoo economic theories of former Prime Minister Nawaz Sharif and his handpicked finance minister Ishaq Dar. Both of them are out of reckoning now. But the ripple effects of their flawed policies will haunt the Pakistani economy for a long time.

Sharif and Dar in unison had assiduously insisted that the value of the Rupee Vis a Vis the Dollar should not be compromised come what may. Thereby the hue and cry raised by the export lobbies fell upon deaf ears.

Several meetings between the finance and commerce ministries and various stakeholders failed to move a recalcitrant Dar.

Last year before Sharif was ousted a high level meeting was convened to discuss the matter of the overvalued rupee. Prominent bankers, economic experts and exporters argued forcefully that Pakistan’s competitors in the field of textile products including China, India and Bangladesh have devalued their currencies. Hence how can Pakistani exports compete in this kind of environment?

Falling exports due to high cost of production and an appreciated Rupee caused a loss of around UD5 billion a year in Sharif’s 4-year term. 120 textile mills or 33 percent of Pakistan’s textile capacity had to be shut down due to lack of viability. Around two million jobs from the textile were also lost during this time.

Naturally owing to such flawed policies – exports remaining stubbornly sluggish – Pakistan is fast becoming an import-based economy. Obviously simply having not enough foreign exchange reserves to finance imports for more than two months, a resource crunch was going to be felt sooner than later. Notwithstanding the long term benefits of the $ 62 billion CPEC (China Pakistan Economic Corridor), in the short run is also contributing to the CAD.

Admittedly the GDP (gross domestic product) has consistently risen. But GDP growth now is estimated to be 5.1 per cent this year and not 6 per cent as was originally estimated.

The tax to GDP ratio remains dismally low, as governments have consistently failed to demonstrate the required political will to tax those who have the ability to pay

Historically, a consistently arrogant and self-righteous attitude of our ruling elite has perennially afflicted our economic policies. There is a yawning chasm between the tall claims made and ground realities.

I quite vividly recall traveling with Nawaz Sharif to Davos in the early nineties during his first term as prime minister. At a thinly attended investment conference in Zurich, finance minister Sartaj Aziz crowed that Pakistan was an emerging economic tiger – a term in vogue in those days owing to the fast growing south Asian economies.

Ironically several IMF bailouts later, successive Pakistani government have failed even to fulfil basic economic needs of its fast growing populace.

The tax to GDP ratio remains dismally low, as governments have consistently failed to demonstrate the required political will to tax those who have the ability to pay. One can draw scant solace from the fact that despite the downside consumer confidence is bustling.

Exponential rise in the demand for consumer goods like cars, motorcycles and electronics goods manages to hide the dark realities of the Pakistani economy. Bustling markets and newly constructed shopping malls are presented as further proof of a resilient economy.

Added to this, the Sharif economic team kept on boasting that the Pakistani bourse was the best performing in the world. Now when it is one of the worst performing stock markets there is only a stony silence.

Ironically despite mammoth progress in the power sector and massive infrastructure projects including metro trains, highways and motorways the outlay on the social sector remains dismal. Although strictly speaking it is not the job description of the CJP (Chief Justice of Pakistan) justice Saqib Nisar, but the apex court pointing out the dismal apathy of the ruling elite towards the basic needs of the common man sticks out like sore thumb.

Practically there are two Pakistans co-existing. One of the poor and dispossessed that can hardly make ends meet. And the other of the elite who pay minimal taxes (given they pay at all), but live a life of relative luxury.

The military is a major stakeholder in the economic growth of the country. In order to combat the threat of terrorism and to effectively defend Pakistan against its enemies it needs resources.

The COAS (Chief of Army Staff) General Qamar Javed Bajwa who privately in meetings with the political leadership in the forum of the NSC (National Security Committee) had been expressing his reservations on how the economy was being run has now gone public.

In a recent conclave with media persons he was quite candid about the misplaced priorities of the former finance minister. He also expressed reservations about the 18^th Amendment of the Constitution giving too many resources to the provinces at the expense of the federal government.

The Army chief has a point. But in a genuine federation, the federating units should be enabled to build capacity to spend resources for the welfare of the people.

The myth of a stable and buoyant Pakistani economy has exploded in the face of ordinary Pakistanis long force-fed upon a staple diet of voodoo economic theories of former Prime Minister Nawaz Sharif and his handpicked finance minister Ishaq Dar

True this is still woefully lacking and would require some time to build. But to roll back financial autonomy guaranteed under the NFC (National Finance Commission) Award will be disastrous for the future of federation.

Similarly BISP (Benazir Income Support Program) has come under heavy criticism as being a wasteful and unnecessary burden on the cash strapped state. Social safety net programs for the poor populace are needed even in developed economies. More so for a poor country like Pakistan!

BISP is a success story acknowledged and supported even by the World Bank. There is not a whiff of scandal about its operations. Why even talk about throwing the baby with the bath water?

The COAS has spoken about the military’s desire for peace in the region. Concerted efforts are being made for rapprochement with Afghanistan.

But unfortunately owing to India’s contumacious attitude towards its western neighbour tensions remain high. Ironically economically driven not purely security ridden policies need to be adopted. For that to be achieved obsolete paradigms will not work, for Modi’s India nor for Pakistan.