Daily Times

The International Monetary Fund (IMF) insists that all the structural reforms, designed and shoved by it down the throat of a desperate borrower, Pakistan, are actually making a difference; kudos to the government for successively passing the quarterly IMF exams. On the other hand, even if reforms were failing, the IMF, logically, would be the last people to acknowledge it; after all, they cannot admit to being wrong as they are the illustrious saviours of failing economies. But reading between the lines, however, one has the funny feeling that the IMF is already primed to jettison itself out of the path of the blame game if push does come to shove. Their review comments can as quickly become excuses; reforms failed because the Pakistan government could not increase the tax to GDP ratio, privatise all state owned enterprises (SOEs), increase the GDP or contain the fiscal deficit. Have we not heard all that before?
International rating agencies have improved Pakistan’s rating, acknowledging the latter’s efforts to streamline the economy; apparently, quite impressed with the rising level of foreign exchange reserves of the country, bolstered by the ability to borrow more dollars thereby resulting in a positive balance of payments. But how borrowing dollars to increase reserves and boost the economy is a mystery that perhaps only time will unravel. Let us just hope and pray that borrowing dollars is the solution Pakistan has been looking for all along to improve its economy. But, then again, were not these agencies the very same that were rated mortgage backed securities, which resulted in the financial crisis way back in 2008?
And now the World Bank tells us that Pakistan’s GDP growth will improve to 4.5 percent this year. Which is great, but it would be very useful to also know how and why so that we can make the GDP grow all the time even if we do not know what exactly the GDP is, beyond it being an abbreviation for gross domestic product. But, if GDP is that awesome, how come when the GDP of the next-door neighbour is growing at record levels, more than half of its population is struggling with poverty? Nonetheless, if the esteemed World Bank says that GDP is increasing, which is a good thing, great!
But something is wrong. Remember grandpa insisting that everyone, all these eminent institutions, have forever been saying that Pakistan’s economy is going bankrupt but all that is a load of nonsense; nothing happens, the country continues to move on. Unfortunately, now everyone is convinced that the economy is doing better, which must not be a good sign, if grandpa was right about these honourable economists being forever wrong. If the latter were wrong then what if they are wrong now?
Admittedly, Pakistan has been piling up lots of foreign debt but everybody knows we are never paying it back and, if they continue to lend us dollars, it is their problem, not ours. Look at the history: every time Pakistan could not pay its debts, the lenders were always happy to restructure the debt or give us more debt to pay the previous debt. After all, Pakistan does belong to the venerable nuclear club. But, at the end of the day, there is utter confusion about what happens when a nation like Pakistan defaults; it is not that the lenders can foreclose the country and send an entire nation to jail.
A bit of effort reading the World Bank’s latest report and a shocking fact becomes evident: Pakistan’s expenditure to service its debts, most of which was interest, last year was almost twice as much as it paid for its defence, and these debt service payments have increased over the last two years by more than Rs 150 billion each year. Pakistan’s third largest expenditure, after debt servicing and defence, is the subsidies it pays to cover the losses of the SOEs and on power. Considering that payments for debt servicing are increasing by more than Rs 150 billion every year, the IMF prudently wants the government to stop giving subsidies on power and gas to the common man by ‘regularising’ tariffs and also insists that the government sells SOEs so that their losses do not need to be subsidised anymore. All these savings from subsidies will then also be available to pay debt.
But with an increase in excess of Rs 150 billion in debt service every year, even that will not be enough after two years. Even today, the taxes collected by the government are only enough to pay for debt servicing, defence and subsidies. The government has been borrowing for the past many years to meet all other expenditures, including development, which obviously is the reason behind why interest payments and debt servicing keep increasing. And which is why the IMF wants the government to levy more and more taxes so that there is more money available to service debts in the future.
The myth that debt is not paid back is shattered. After selling all SOEs and eliminating subsidies, and increasing taxes to draconian levels, will there be enough to meet the debt payments and balance the budget? Evidently not. And how are higher power and gas prices, and burdensome taxation good for business and the economy? Well, they are not!
“Pakistan’s economy is on a declining long run trend both in potential and actual growth. Perhaps more concerning than the inability to sustain growth spurts over long periods of time, is the steady fall in the economy’s potential, which would suggest the country has gradually eroded its wealth over time. Low national savings has resulted in low investments. Results suggest that potential growth has been falling over the past 55 years and actual growth is below trend, i.e. the economy is underperforming”, according to the Pakistan Development Update, October 2015, The World Bank.
Dear readers, that part, is just the tip of the iceberg. The report elsewhere finds that, “Pakistan appears to be evolving towards an economy intensive in unskilled labour, which limits its potential for raising its labour productivity.” If the entire budget is spent in servicing debt, obviously there will not be any left for training labour. The report also finds that at 13% percent of GDP, Pakistan has the lowest savings rate in the region and consequently the lowest share of investment in GDP at 15 percent, which impairs the country’s growth potential. If taxes are increased again, and electricity and gas become more expensive, the common man will not have enough to make ends meet, let alone save more. And, dear readers, the report says a lot more.
Perhaps grandpa was wrong; it takes much longer for a country to go bankrupt. Perhaps someone at the top should read this report very carefully and perhaps there should be a consensus on economic policies at the leadership level. Perhaps we should start thinking for ourselves rather than following others’ agendas. Or we can wait for the Chinese to solve everything for us.

The writer is a chartered accountant based in Islamabad. He can be reached at syed.bakhtiyarkazmi@gmail.com and on twitter @leaccountant