Daily Times

It’s the economy stupid, was the cri de coeur of the campaign strategist, James Carville of the Bill Clinton in 1992 who coined the term to highlight the centrality of the economy in the everyday life of the voters. Leaving everything aside this is the ultimate reality that impacts the lives of people, more than the grandiloquence of geopolitics and geo-strategy. Pakistan has to step out of her geo-political planet onto the hardscrabble world of geo-economics in order to minister to the human security needs of the 200 odd million, eking out a bare subsistence due to bad policies of their governments in the past. Never before in Pakistan’s history has the economic situation been that bad as of now. The reason for this unsavoury situation is the expedient policy policies of past governments, relying on short term palliatives instead of the real economic nostrums.

The governments in the past confronted with defence and debt servicing liabilities have resorted to IMF prescriptions 21 times. The propensity to splurge when the going was good and to scrimp when the going was tough has been the roller coaster ride of our economic management relying on foreign borrowing. Had this borrowing been used for productive investments in industrial development and economic uplifting of the country we would have made it to the elite club of the economically developed nations. No such luck here however. Our loans were used mostly for wasteful administrative expenditures and pork barrel projects of the rulers. The result is the increase in cumulative public debt burden from Rupees six trillion in 2007-8 to 25.5 trillion in 2017-18. The external debt liabilities that have climbed up to $95 billion in 2017-18 from $46.2 billion in 2007-8 are also a source of worry. With a debt to GDP ratio of 73.5% and the GDP rate plummeting to 3.3% in 2018-19 from5.5% in 2017-18 the situation is far from rosy.

The present government came unprepared and inexperienced in the economic arena despite the big electoral promises and rhetoric. After wasting one year the country had no choice but to go to the IMF for the 22nd time under the most inauspicious of the circumstances. IMF being the economic and political handmaiden of the dominant global powers’ interests is not expected to pull our economic chestnuts out of fire without its pound of flesh. In these politically charged times where the Sino-US rivalries are being played out on the CPEC front in Pakistan IMF would levy tough conditions on Pakistan to extract concessions for the US like slowing the pace of CPEC projects, an orderly withdrawal of US forces from Afghanistan and safety of the US residual presence amidst the refractory Afghans. The four fold debt burden added by the civilian political governments from 2008 to 2018 has made the present government’s job a real big challenge.

Now the government after having wasted vital six months woke up to the reality of burgeoning debt, rising unemployment and fiscal imbalance especially after the Trump administration stopped the economic and military aid to Pakistan including CSF reimbursement. The IMF in its 22nd reincarnation was not ready to do something that had not been done in its previous engagements. IMF was there to extract its pound of flesh. PTI government was the most unlucky to have been handed out the toughest of the IMF regimes compared to 21 previous attempts. What however could have given a breathing space to the economy was a better deal from the IMF on fiscal, monetary, and real exchange front. The abject capitulation to the fund and the heavily frontloaded terms of the program have made the job of a political government surviving through a thin majority extremely difficult. The disbursement of $6 billion is spread over three years while the conditions to be met are mostly in the first year.

What needs to be understood is that there are some structural deformities that hamstring any meaningful reform. The gap between the exports of $24.8 billion and the imports of $ 56.6 billion indicates the basis of our perennial balance of payment issue. Our exports have not picked up despite the currency devaluation to facilitate the exporters who complain of rising input costs like electricity and gas rates besides suffering from insufficiently trained human resource. Relying in the past on government’s protectionist policies and refusing to go for value addition and innovation our exporters have developed a habit of rent seeking. The reliance on few sectors like textile, sports, and surgical goods to the exclusion of values added sectors has prevented our export sector from actualizing its true potential.

On fiscal front the government needs to freeze the current expenditure which is up by 30% compared to last year and progressively reduce the budget deficit to 4% of GDP

The profligate spending on non- development expenditure to bridge our perennial balance of payments and fiscal deficits has earned our economy the sobriquet of “one tranche economy”. The civilian governments that are supposed to be more fiscally responsible and accountable to the electorate have added more debt burden compared to military dictatorships. The civilian decade of governance from 1990 to 200 resulted in addition of $17.4 billion while the decade from 2008 to 2018 added $49.1 billion to the national debt. The two main reasons for the economic troubles are our balance of payment and budgetary imbalances resulting in unsustainable rise in external and public debt. The reasons for balance of payment challenges include declining exports, increasing imports, and low inflow of foreign direct investment. The budgetary imbalance is due to low revenue, profligate expenditure, circular debt and NFC award commitments.

As per economists like Dr Ashfaq the IMF program could have been avoided or if unavoidable could have been made more palatable through aggressive import compression policies of banning luxury goods imports, promotion of exports, floatation of sovereign bonds and seeking assistance from friendly countries. Focus on sectors like agriculture, dairy & livestock, construction, and tourism could have jumpstarted our economic renaissance. Structural reform in economy as against cosmetic surgery is the need of the hour. Broadening of the tax base and simplification of the tax payment regime where the 50% of our informal economy could also be tapped is a dire necessity. The NFC award that has serious issues also needs to be resolved to reduce the fiscal pressure on the central government for its essential expenditures.

The devaluation of the rupee any further would add to the woes of the people. The deleterious effects of IMF prescriptions are already visible. Due to IMF driven exchange rate devaluation a debt of Rupees 3.2 trillion has been added from July 2018 to June 2019. With 90 billion of debt servicing combined with an increase in debt payments by 1.02 trillion because of discount rate enhancement to 6.75% has resulted in a cumulative cost of Rs 4.3 trillion to the economy that in recent exchange rate means a whopping debt increase of $27 billion. With steep increase in gas and electricity prices to the tune of 176% and 26% respectively there is no way our industrial products could compete regionally or globally. There is a dire need therefore to keep our discount rate low to prevent the inflow of what Chary and Kehoe call “hot money”.

On fiscal front the government needs to freeze the current expenditure which is up by 30% compared to last year and progressively reduce the budget deficit to 4% of GDP. Currency devaluation should be stopped and the interest rate reduced to achieve above targets. On revenue side the government needs to restructure the tax collection apparatus and methodology so that an equitable and tolerable tax burden is imposed on each according to one’s ability to pay. The government should give priority to second phase of CPEC to create SEZs aimed at promotion of industrial development with the concomitant strengthening of Board of Investment and Ministry of Finance. Our economic options can be significantly enhanced by sincere pursuit of above measures; contrarily the breathing space would be further restricted in view of tough IMF conditionalities.

The writer is a PhD scholar at NUST: email rwjanj@hotmail.com