Daily Times

Economies, especially the sinking ones,are not saved by taking measures that please and appease people. Measures that might irritate the public at large in the present but give them relief in the future are the ones that will work.

Let’s just go through a review of where we stand as an economy before we discuss the solutions.

In my June 2 article Pakistan is heading towards a financial emergency, I had made some bold claims. I had clearly said that I would not be surprised if the dollar to rupee rate crosses 125 within a month – which it eventually did.

What does this mean for the common Pakistanis and the Pakistani economy? Well,to begin with, our external debt is $98 billion. Or it was. I say“was” because we earn in rupees and pay back in dollars.So, an increase in the value of the dollar means an increase in debt. The net reserves with the state bank are just $10 billion out of the $16 billion in total held by all banks. The debtto GDP figures the world and the economists keep giving to all of you are nothing but a fallacy. Debt to GDP means nothing because the GDP is not our income. It’s the value of all services and goods produced in a particular period. If Pakistan had produced $300 billion in the value of the GDP it by no means indicates that the 300 billion dollarsis our income. The amount of taxes we collect is our income. Nothing else. The profits we make as the Government of Pakistan from nationally run companies like PIA, Steel Mills, OGDC, PSO etc. are added income in addition to the tax collection. Our nationally run companies are not only making losses but are being given further money to continue their operations.

Simply put, we have no money left to pay our debts. In addition, our current account deficit has increased to almost $18 billion. Our imports are twice the amounts of our exports, more so than that but I am taking a softer approach. Our circular debt is at $10 billion. Our reserves can barely cover our imports for more than 33 days. That is the biggest sign of worry amongst many signs.

There is no single solution. No panacea. The measures that need to be taken are numerous, multifaceted and simultaneous too.

The first and the foremost solution is to ban certain imports outright,starting from luxurious items. Of course, the objections from world trade organisations will be there but there is a solution to this problem, which is to increase import duty on these items to such a high level that nobody can afford it.

One of the biggest myths is that devaluing your currency will increase your exports. Wrong. Devaluing your currency might discourage import but to think that it will increase your exports in a country like Pakistan is a wish and not a reality. Exports are not just price sensitive. That happens mostly in economies whose exports are already in an extremely healthy state. The cost of production increases in countries like Pakistan for the exporters because of the devaluation of its currency locally. Energy or electricity is one of the biggest cost for exporters in Pakistan. We import furnace oil to produce electricity in most cases. If the dollar is expensive than it means that our energy costs will increase, and this will increase the price of the finished goods to be exported out of Pakistan. Importers in other countries refuse to import such expensive products.

Demand is not price elastic in export industries.

For us to fix the CAD problem, monetary policy will play a better role. The less money available to the businesses and the individuals, the less they will have the disposable income to spend. This is a painful measure and might reduce the expansion process of many business entities because of the higher cost of borrowing.

The deflationary policy will also put extended pressure on manufacturers to reduce the cost of their products.This will not only help the domestic economy but also the export prices will become more attractive to the imports overseas.

I am the biggest proponent of privatisation. Governments should never be involved in the running of businesses. They should only regulate them. It goes against the basic theory of competitiveness in any economy if a government runs a business. The private sector can never compete with government-run corporations because the government makes the policies and if they are running businesses than the chances are that their policies will benefit their own entities more than the private sector.

Secondly, in a country where we have more than 150 government-owned entities with more than 80 per cent of them making losses, it defies logic to continue to run them. These government-owned entities not only make losses that run into billions of dollars a year, but these entities are also given more cash every year to sustain their losses.

To top it all with a bigger irony, these government corporations have become rewarding grounds to show loyalty to their party members by giving them jobs in these corporations.

And once these employees are given a job, they immediately become part of the all-powerful unions that exist in each of these corporations. If you try to downsize the excess, there are public protests, road blockades and even violence.

The popular narrative in Pakistan amongst the people who equate patriotism with having these loss-making entities is that these institutions are our national pride and should never be privatised.Patriotism when it comes to economic matters is seeing the reality and loving your country to the point where you admit that this corporation is hurting the financial health of my beloved country and needs tobe fixed.

Out of these 150 corporations, the ones that are listed in Pakistan Stock Exchange alone are worth more than $30 billion. Add another $25 billion at the least as the value of other 150 corporations.If we begin the process of selling them today, within the next five years, we can retire 70 per cent of our external debt. And in addition, we can save another $3 to $5 billion a year that we keep funding them to cover their losses.

Once these corporations are privatised,the chances are, based on the evidence on hand of the banks that were privatized a decade ago, they will turn profitable.And with huge profits come huge tax collection. So, it becomes a win-win situation for any government.

Pakistan is losing its metaphoric job if it has not lost it already. We need to cut any extra expenses from our budget. We need to bring austerity measures willingly before we are forced to face them without a choice

Capital markets, especially in Pakistan, are a representation of an economy more on the perception than through a direct link. Anywhere in the world, people usually watch the closing numbers of the index as news. Then they draw a perceptional inference if the economy is doing well or not. This may be the most primitive or the naive way of looking at an economy’s growth or the lack there of,but this perceptional microscopic observation by the masses of the markets is a reality.

But once a perception is accepted as a norm around the world, then it becomes the duty of the government plus the regulatory authorities to create a benefit out of it for the public at large and the economy in particular. If you hear that the stock market is dropping 10 days in a row, you immediately start to think that the economy of the country might be in trouble. Political upheaval also comes to mind,but economic upheavals are more reality-based, linked to the markets and the perceptions.

Pakistani market has gone from being the best-performing to the worst performing Asian markets within 14 months. To go from the best to the worst within this short period is a feat accomplished by very few governments in the world.

What is done is done. How do we fix it? If perception is one of the major key points of a stock market, then let’s fix it. Capital gains tax plays one of the biggest catalysts for a stock market’s growth or vice versa. Instead of being penny wise and pound foolish, we need to lower the capital gains taxes immediately. It will give a boost to the confidence of the investors especially in an economy where I foresee interest rates to climb continuously in the next few monetary policy meetings of the State Bank of Pakistan. Higher interest rates can further kill the prospects of any gains in the stock markets bar a few banking stocks.

It will also help the foreign investors who will get an indirect message once the stock market stabilises and starts to go on a positive trajectory that the economy is getting back on its tracks. That would give confidence not only to the foreign portfolio investors in the stock market but it might also give some confidence to the foreign direct investors.

Another thing that needs to be done to create huge number of jobs through the stock markets is to provide a mechanism for the young companies and the ideas of the youth of Pakistan to raise funds through the listing of their companies onto the exchanges.

Our stock exchange listing requirements are simply the most aristocratic and rich-people favouring. We talk about technological innovations needed in Pakistan. We talk about IT exports, uplifting the youth and bringing them into the realm of entrepreneurship,but the reality is that not a single company with their founders being under 25 listed on our exchange. Why? Because the listing requirement dictates that your company must be worth Rs 250 million for it to be qualified for a listing.

If we lower the requirement to Rs 50 or even Rs 30 million and create an altogether new small exchange, then we can see hundreds of new technology companies getting listed on exchanges, raising funds from the public for their operations and expansions and creating thousands of jobs in the process.

Another possible way to revive the economy in protectionism. Before you jump out of the chair and begin to believe that I am suggesting taking the same route as Donald Trump, there is a flipside to protectionism based economic policy as well. And it’s beneficial rather than damaging.

America and its protectionist economic approach is damaging because America has a vast number of countries that it imports from. Items that Americans have become dependent upon and cannot live without. Pakistan has no such problem. Our imports are largely ostentatious based, and luxury driven.

Protectionist policies will force consumers at large to buy domestically provided goods. That will increase economic activity and decrease imports further,giving us an immediate relief on our current account deficit front.

Pakistan is losing its metaphoric job if it has not lost it already. We need to cut any extra expenses from our budget. We need to bring austerity measures willingly before we are forced to face them without a choice.

The writer is an investment banker, founder of Islamic bank of Wall Street, author of four books and chairman of an advisory company

Published in Daily Times, July 28^th 2018.