Economic pressure points

September 01, 2017


TO what extent have Pakistan’s long-term national interests been compromised by poor economic management in the past four years and the resulting vulnerability it has generated? This question has gained increasing urgency as well as ‘legitimacy’ in certain quarters since 2013 in light of the inept manner in which the economy has been managed by the PML-N government, with many in the security establishment believing the finance minister, Senator Ishaq Dar, has been acting as an economic ‘hit man’ at the behest of external powers and their inimical agendas.

This is an extremely serious and non-frivolous charge, but it has gained currency by the manner in which the economy has been handled. By default or design, large and important parts of the economy such as exports and industry have been run into the ground in the past four years (while agriculture has been left to its own devices). A framework of predatory taxation, coercive and intrusive tax administration, perverse incentives and lack of actual, meaningful and timely support has crippled the productive sectors of the economy. At the same time, an import-friendly regime has been put in place underpinned by ill-conceived free and preferential bilateral trading arrangements, with an overvalued exchange rate the coup de grâce.

As a result, imports have shot up to $53 billion in 2016-17, the highest level in Pakistan’s history, and are continuing to trend higher. Investment-related imports for both CPEC and non-CPEC projects have also risen, but account for only 22 per cent of total imports, and $3.2bn of the change in total imports over the last year. Energy imports account for some portion of the rest, while a significant amount of the import surge over the last few years is also caused by non-essential finished consumer products that compete with industries manufacturing similar products in Pakistan.

At the same time, this government has accumulated public debt at a historically unprecedented rate. Since 2013, total public debt has increased from Rs14.5 trillion to nearly Rs22tr, a 50pc increase in four years. Of greater concern from an external vulnerability angle is its foreign borrowing binge. While it has contracted nearly $40bn of new debt, the net position of outstanding external loans (disbursements less repayments) has increased from $51bn to $62bn between end-June 2013 and end-March 2017. A further circa. $25bn of CPEC-related loans are in the pipeline. In addition, the borrowing undertaken since 2013 now includes a greater reliance on short-term commercial loans which are expensive as well as have shorter repayment maturities.

Inept economic management could amplify US pressure.

The net effect of the overall policy framework under the PML-N government has been to exacerbate pressure on Pakistan’s perennial Achilles’ heel and the source of one of its biggest vulnerabilities — its external account or balance of payments. With the external current account deficit rising to over $12bn in 2016-17, and expected to surge a further 50pc in 2017-18 with no change in policies, the gross external financing requirement is estimated to cross $25bn in the current fiscal year.

This is a true measure of the extent of external dependence created by the PML-N government’s policies. The danger is that with the government blissfully unaware of the macroeconomic crisis Pakistan is heading into — which could be very similar in magnitude as well as nature to 2008 — a crisis which could have been contained if not prevented with a forceful course correction, Pakistan is sleepwalking its way to the IMF.

This issue gains relevance as well as importance with the announcement of a ‘new’ US policy on Afghanistan couched in a South Asia context. The administration of President Donald Trump has clearly telegraphed its desire to scapegoat Pakistan and ‘punish’ it for the US military as well as political failure in Afghanistan spread over 16 years. One of the pressure points against which the US can “dial up the pain” is the economy. While the US has much lower direct bilateral leverage on Pakistan than in the past with its dwindled economic as well as military assistance, it can exert substantial leverage via its control of the IMF and IFIs such as the World Bank. The ‘force multiplier’ that can be used to the US’ advantage is the framework of concerted lending whereby all international lending institutions, and the world’s investment hubs, follow the lead of the IMF on a particular country.

While the IMF, under US influence, may play hard ball with Pakistan in 2018, all players in the game recognise that there is limited benefit — and much to lose for everyone — in pushing Pakistan into a full-blown economic and financial meltdown. When the Fund and IFIs finally decide to come to the negotiating table, one of the main ‘pound of flesh’ demanded could be dropping certain CPEC projects.

With the emergence of China-led global financial institutions such as AIIB, the Western monopoly of the IMF and World Bank etc is on the wane. However, these new institutions are still relatively young and may not be in a position to fully replace the traditional IFIs for another few years, leaving Pakistan exposed to potential pressure.

Nonetheless, US-led external pressure on Pakistan’s economy is not fait accompli. The deeply flawed economic policy framework can be corrected on a war footing with traditional crisis-prevention and response policy measures, complemented with longer-term measures such as revisiting the FTAs, especially with China. However, while Pakistan still has policy options, its space to manoeuvre is dwindling with each passing day that is wasted by government inaction — whether witting or unwitting.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, September 1st, 2017