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LET me try and explain why events like the Greek debt crisis, the Chinese stock market run, Brexit, and most recently, the election of the unpredictable Donald Trump — all of which I see as expressions of a singular crisis that is decades in the making and yet to reach its full apogee — inevitably have profound ramifications for us.
Start with a little perspective. Our foreign exchange reserves hit a high point in 1983, the last time we were entangled in a damaging ‘alliance’ with the superpower midwifed by a military dictator. The very next year, in 1984, they plunged steeply to below three months of import cover as debt-service payments connected with the borrowing in the early 1980s kicked in.
That sharp fall was perceived as a crisis-like situation by some, principally Mahbub ul Haq who served one fiscal year as finance minister in 1985, by when reserve cover had fallen to just over two months of imports. From that point on, reserves coverage fell to almost one month of import by 1990.
What happens if we should find ourselves in a dip at some point in the future, and there is nobody to bail us out?
There was a brief spike in reserve cover in 1994 (again due to IMF-related inflows) but that vanished very quickly to reach less than one month of cover by 1996 with the outbreak of the Asian financial crisis. The sanctions following the nuclear detonations in 1998 found us sitting on reserves so slim that they could not cover potential withdrawals from foreign currency accounts, and these had to be frozen in a panic-driven move. Meaning Pakistan lived, or better still, survived, on foreign exchange reserves sufficient to provide less than two months of import cover almost till 2001.
Following 9/11, our reserve cover climbed to levels never before seen. For the first time, we built reserves capable of providing import cover well past eight months of imports by 2003, but those too collapsed almost immediately as massive debt-service payments kicked in, as well as a mushrooming growth in our import bill, that our rulers of the time disingenuously told us was solely the result of a spike in oil prices. By 2005, we were back down to four months of import cover, and by 2008 this fell to its pre-9/11 normal of two months. Then came another IMF programme.
From here, a racheting effect kicked in. By 2010, reserves climbed to above four months of import cover, only to crash three years later to below two months all over again, with yet another IMF programme under the cover of which reserves rose steadily and will likely touch four-and-a-half months of imports by the end of this fiscal year.
The rise and fall of this graph of our reserves is the first thing to note. Our economy cannot find some sort of steady state growth path where the reserves are concerned. The next thing to note is crucial: at each dip, somebody comes in to bail us out. In none of the dips have we managed to grow ourselves out organically, on the back of our own effort at export diversification, growing trade relationships with other countries, boosting productivity.
So given the growing uncertainties around the world, we now need to ask ourselves a very important question. What happens if we should find ourselves in a dip at some point in the future, and there is nobody to bail us out?
This could happen in a number of ways. The world powers are increasingly turning inward. Fatigue is setting in with countries needing to be bailed out. Global leadership, in the form of a superpower alive to a responsibility to prevent a nuclear-armed country from sinking into default with all its destabilising consequences, is growing weaker. The Chinese have a growing set of challenges before them, both within in the form a slowing economy and without in the form of a belligerent superpower eyeing them with jealous eyes.
Can we count on a balance of payments bailout from the Chinese like we obtained from the IMF in the years 1994, 2000, 2002, 2008 and 2013? Can we count on getting bailouts from America and investment from China given where the relationship between these two countries is going in the near future?
The next important question: what happens if there is no bailout? Where do these episodic dips that keep cropping up in our history really take us? In 1998, it took us to freezing all foreign currency accounts. In 2008, it took us to the freezing of the capital markets and the seizing up of the banking system through massive drainage of liquidity and an abrupt halt in the overnight lending market (meaning, if not averted, the next thing to be frozen would have been rupee deposits in the banking system). In 2013, it shut down our power-generation system. And only a couple of years later, we saw our oil supply chain snap due to the mismanagement of its financials.
So we know that down there, at the bottom of those dips that keep opening beneath us in our economic history, there lies a crisis that can shut down our financial system, our oil supply chain and power generation in one go. That’s how high the stakes are, and that’s why you keep hearing some of us bemoan the growing current account deficits or debt-service obligations — because those are things that these dips are usually made of.
This is why events that roil the world economy, or even large economies in the world, are of supreme significance for Pakistan. Not because they will come directly onto our shores, but because they signify a growing turbulence that is rocking the world with increasing ferocity. Where do we stand in a world roiled by such turbulence? The conduct of our business with the outside world depletes our reserves every few years, and the gap between each dip appears to be growing shorter.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, January 26th, 2017
