There are reports that an agreement with the IMF to support Pakistan with a ‘bailout package’ in the range of $6 to $8 billion is imminent. As is normal in such assistance, strict conditions are imposed on the borrower. These call for enhanced fiscal discipline requiring the government to increase revenue and cut back on expenses.
The PTI government has pinned its hopes on salvaging its reputation, and possibly its skin, by securing this package. But has any thought been given to what happens next? Getting the package is not an end in itself. The objective of such assistance is to allow us some financial breathing room so that we can set our house in order. This calls for deep structural changes to the economy with the objective of boosting exports, reducing imports, improving tax collection, cutting back on wasteful government spending and jump starting investment.
Should these structural changes not be made the country actually will end up in worse shape than before. Our total external debt will rise from an already unmanageable $97 billion to $105 billion. We’ll be saddled with additional interest payments and debt repayment that will play out over many years.
History may not always repeat itself. But the past sometimes does shine a light on the future. And if we look to the past, this bailout if it materializes, will be the 13th such package the IMF has given to Pakistan. All of the previous twelve such packages had the same requirement to make structural changes to the economy that would obviate the need for further such bailouts. In each case we failed to do so.
There are reasons to suspect that this 13th bailout will be no different. The numbers are bracing: As per State Bank projections our exports in fiscal year 2019 will be $16 billion and imports $35 billion. This leaves an annual trade deficit of roughly $20 billion. So the IMF $8 billion, if applied to the trade deficit, is good for about 5 months.
Look next at the government’s budget numbers for FY 2019: Expenses are projected to be about Rs 6 trillion. Of this Rs 1.1 trillion will go to defense, Rs 2.2 trillion will go to debt servicing (of which roughly Rs 1 trillion are for servicing of external debt). The remainder, Rs 2.7 trillion is what we have left to run the whole country.
On the revenue side the government is expected to pull in Rs 3.8 trillion. So this leaves a deficit in the budget of Rs 2.2 trillion – exactly the same amount as what we pay for debt servicing.
Any rational observer looking at these numbers will realize quickly that the IMF’s $8 billion is no panacea. In fact it will be blown away quickly and we will inevitably end up worse than we were before.
There is a simple solution: The heads of all ministries should come from the private sector. They should be professional managers hired on contract and given the full authority of the secretaries. And to make this work all ministers must be kept out of the loop
So what to do? How can we put our derailed economy back on track? The only way to do this is by taking extreme, unprecedented, and hitherto untried measures. These are not for the faint hearted or for those who believe that the international rules of the game are sacrosanct.
Here is what a ‘package’ that could put things right would look like: First, we need to repudiate all foreign debt. Foreign lenders need to understand that every penny of their principal will be returned to them based on a schedule to be worked out with them. But the government will no longer make interest payments. The argument is simple: They, the bankers, chose of their free will to make loans to past corrupt regimes. Why now should the poor people of Pakistan be burdened with the sins of past rulers? This debt repudiation alone will save in the short term Rs 1 trillion annually. Money that we can use to restructure the economy.
And there is a precedent for this. Ecuador’s president Rafael Correa defaulted on the country’s external debt in 2008 claiming that it was ‘illegitimate’. In the end in worked out well for the country. All measures of economic well being improved over time. It’s worth mentioning here that Mr. Correa has a PhD in Economics from the University of Chicago – the bastion of the ‘Washington Consensus’ and the altar at which IMF and World Bank economists kneel.
Second, we must bring down imports from the present level of $35 billion to the level of about $20 billion. This will not happen without pain. There will be screams mostly from the privileged classes. This is to be expected and should not deter us from doing what is right and necessary. Protocols should be set up to determine what to allow and what to deny. Many of our imports are ‘luxury’ goods that are used by less than 1% or our population. These can easily be stopped. More care is needed with industrial raw materials. But even here hardship will only serve to spur innovation. There is truth to that old banality – no pain no gain.
Third, and this ties in with reducing imports, is an effort at massive indigenization. The policy should be: If you can’t make it in Pakistan, you can’t have it. We have talent, resources and knowledge. Let’s put these to work. There is no problem that we cannot solve and nothing that we cannot build. Those who study the post World War II miracle of Japan’s industrial renaissance know that this is precisely the approach that the country took: It was decided that only raw materials and industrial machinery could be imported. Everything else had to be made locally.
Finally, and perhaps most importantly, we must realize that no change can occur if those entrusted to bring it about are the bureaucrats – the secretaries, additional secretaries, joint secretaries – who run our ministries. These are people who simply cannot think out of the box. It’s not their fault. Their training has encoded into their DNA that the ‘book’ is the only way to do things. Whereas what we need at this point is basically to throw the book out the window.
There is a simple solution: The heads of all ministries should come from the private sector. They should be professional managers hired on contract and given the full authority of the secretaries. And to make this work all ministers must be kept out of the loop. By and large they know little or nothing of the generally highly technical nature of the work done at most ministries. The ministry head should report directly to the Prime Minister.
Let’s be clear. What we confront today in the shape of impending economic meltdown is a threat to national security more substantial than anything we’ve ever faced on our borders. We cannot confront this threat with business as usual. Exceptional circumstances call for exceptional steps. Do we have the courage, the determination, and the will to do what we must? Or, will we, to paraphrase Shakespeare, ‘lose our ventures’?
The writer is the Chairman of Mustaqbil Pakistan and has served on the board of Pakistan Petroleum Limited