Daily Times

The PM of Pakistan has created the Economic Council to find solutions to the tremendous debt Pakistan has accumulated over its life, especially during the last ten years of democratic governments. The total debt as of 2018 was Rs. 33 trillion ($201 billion at the current exchange rate) of which Rs. 3.4 trillion was borrowed in just the last six months. The total debt is 86.4% of the GDP and 36% of the budget paid in interest. The depreciation of the rupee adds to the debt and so does the increase in the interest rate, which increases the cost of borrowing. Unfortunately, the rupee has depreciated tremendously and the interest rate has increased, causing the debt situation to worsen.

I read in DAWN (June 20, 2019) that some senators want to peg the exchange rate at Rs 150 per dollar and want to set the interest rate at 12 percent. This idea shows how naive these politicians are. I hope they understand that setting interest rate is the job of the State Bank of Pakistan under the economic system called monetary policy, and no one can set the exchange rate. The exchange rate is determined by the market. In addition, these politicians do not understand the basic principles of economics (supply and demand) and markets, which is why they think that they can control the economic conditions. If they are so smart, then why not dictate to set prices of products people buy everyday? I mean this sarcastically because they obviously cannot do this. Regardless of what the PM’s Council does, the government can do nothing to solve the debt problem. As a matter of fact, if the council does come up with solutions, they will exacerbate the problem. Because solving a problem requires understanding its causes, which they may not be able to determine.

Let us look at the government budget for 2019-2020. The current budget indicates that the government will incur a 45% deficit(expenditure of Rs.7,036 billion minus revenue of Rs. 3,462 billion equals the deficit of Rs. 3,151 billion).The current budget requires borrowing Rs. 1.3 trillion domestically and Rs.1.8 trillion externally, both of which may go up. That means that the government is financing 45% of its budgeted expenditure( Rs. 3.15 trillion) through debt.

The outflow of money is not due to lower interest rate but because many bureaucrats and politicians are misusing money or dishing out large contracts with a cut (bribe) for themselves; to hide their money, they open secret accounts in foreign banks

No country can have a yearly deficit of almost over 45%of its budget and expect to grow economically and maintain its independence. The blame lies with the bureaucrats and the politicians. Many bureaucrats want to have more money at their disposal so they have more money to misuse and waste. Many politicians want to have more money at their disposal so they can have more money to misuse while claiming that they are spending on projects for the people. All of this deficit spending and waste will make Pakistan bankrupt and vulnerable to more shady deals with IMF and the World Bank, whose main purpose is to claim that they are saving Pakistan by requiring more stringent conditions for loans, thereby causing worse problems for Pakistan and jeopardizing its future.

For example, one of the demands of the IMF in 2019 was to increase the interest rate from 6.5% in 2018 to 12.25% in 2019. The logic given for this increase was that it will curb the outflow of money and reduce import. Obviously, this action will hurt the economy by discouraging investment and making buying machinery and material more expensive for businesses to import, thus reducing economic growth. Accepting these conditions shows that Pakistan’s leaders do not understand economic principles or are desperate to get the loans, which it was begging for, thus causing more problems for the country. Unfortunately, either the IMF or the Pakistani bureaucrats do not understand the basic economic principles and human greed. The outflow of money is not due to lower interest rate but because many bureaucrats and politicians are misusing money or dishing out large contracts with a cut (bribe) for themselves; to hide their money, they open secret accounts in foreign banks. Thus, they buy foreign currency in Pakistan causing the exchange rate to go up. But raising the interest rate will not prevent these politicians and bureaucrats from misusing the money. Instead, it will raise the cost of borrowing and make the debt situation worst.

To prevent politicians and bureaucrats from misusing or wasting money requires better control of the expenditure, which currently does not exist. That is, the Pakistani system has no accountability. Further, one cannot control import by raising the interest rate. As I have indicated, raising the interest rate will only hurt investment and lower economic growth. The reason imports are so high is that many politicians and bureaucrats have misused so much money that can afford to buy foreign luxury goods. Imports can be controlled in two simple ways without hurting the economy. First, impose a higher import duty on all luxury goods or completely ban them. Second, require every Pakistani who wants to import anything to get the government permission and to show how they are paying for it, including the source of that money. In addition, no government official and politician should be allowed to import any item unless they can prove that their own salary is sufficient to pay for the imported item.

A well-known principle of problem-solving it that to solve a problem, one must know the cause of a problem. To find the cause, one must analyze the current relevant data. This article may help make the Pakistani bureaucrats including politicians realize that the obvious causes of the problem, and unless they understand these causes, they will never solve the problem. Even if they are intelligent enough to understand the basic causes of the debt problem, they still will not be able to reduce debt until they control the expenditures, making sure that every rupee at the disposal of a department is used efficiently, and not being misused by the bureaucrats and politicians. To control expenditure, bureaucrats and politicians need to follow the basic management principles of authority, responsibility, and control.

Therefore, to control expenditures, the government must hold every bureaucrat and politician who has the authority to spend money responsible for proving how the money is spent. However, to make sure these bureaucrats and politicians have properly spent the money for the purpose for which it was allocated, they must show a record proving that. It requires a control system that will assure that every rupee is properly spent. If anyone fails to show the proper use of the money, the person must be penalized double the amount wasted or misused. In addition, every department should have clearly defined goalsand should be evaluated on these goals. No bureaucrat should get a raise or promotion unless his/her department meets the goals. Transfer of any government official should be prohibited unless the transferee has exceeded expectations in their job by meeting their goals for at least 10 years. This will require auditing each department and each person that has the authority to spend money.

In addition, all the departments should be subjected to zero budgeting. That is, each department must prove why it needs to exist and provide justification for every budget request. I believe that every department could be cut by 50% without affecting its operation. Further, most departments have too many incompetent, unneeded employees who were forcedinto these departments by ministers and politicians by either getting bribes or being related (i.e. nepotism) causing a burdensome bureaucracy that does not work. The government should ban all the ministers and politicians from recommending anyone for a job unless he/she is selected through the normal recruitment process. Further, the government should require every politician or minister who has put anyone into any job to pay their salary for the time in service and the job holder should be fired.

Finally, if Pakistan stays on its current path, the debt will continually increase every year and a time will come to declare bankruptcy with disastrous consequences for all. As I was finishing this article, I saw a news item in DAWN (June 25, 2019) quoting the finance ministry official, who said that “it was unclear how much the Qatar bailout would ….” I guess Pakistan is heading toward bankruptcy. It is just a matter of time before countriesstop lending money to Pakistan. Now the clock has started ticking toward a bankruptcy much earlier than I thought.

The writer is Ph.D. (USA), Professor Emeritus (USA)