LOOK at the state of Pakistan’s economic conversation in the run-up to any major economic crisis and you will notice something. Very few are willing to talk about the real problems. Most of the conversation is saturated with politics, with those who are fishing for government posts or the attention of the overseers in Rawalpindi, directing all their attacks at the incumbent finance minister as if it is he who is personally responsible for structural defects in the economy that are decades old.
Of course, successive finance ministers should be accountable for their inability to act on the core dysfunctions in the economy. But at some point, the conversation has to move past the personal towards the larger picture.
Look at the reports of the State Bank, as an example, in the run up to the crisis of 2008 and 1998, the two most serious economic shocks to hit the economy in decades. One finds hardly any language to suggest that pressures of such enormous magnitude are building up in the economy. To some extent this is understandable, because the months leading up to these crises were enormously tense and any hint from the central bank of an impending disaster would aggravate these tensions. But then when the crisis does hit, it kills the credibility of the central bank, which has ramifications for its ability to manage speculative pressures, as well as assuage foreign investors and creditors, who look to the IMF instead for their view on where the economy is headed.
The Fund is no less complicit in this. For one, Pakistan is an especially complicated case for any mission chief at the IMF, because the country is caught up in a massive geopolitical game involving the Americans, and there are instructions to not cut the country off until told to do so. Usually that instruction comes when the level of the reserves is deemed to be sufficient for a couple of years, with that calculation being made by some young officer at the treasury department.
We have had only one economic conversation in this country since at least the 1960s: guns versus butter.
Within these confines, the mission chief is hard-pressed to point out that the country’s economic managers are not serious about addressing any of the underlying structural problems, and appear to be content taking superficial action to control the macroeconomic framework while trying to create the space to ramp up development spending and encourage consumption, particularly of imports.
These are the only markers of economic progress in this country, roads and malls, and rarely has a government had an economic agenda that goes beyond these.
The net result is that we have had only one economic conversation in this country since at least the 1960s: guns versus butter. There was a brief period in the Ayub era when it can be said that there was an economic conversation in the country. This was when a group of economists within the Planning Commission, from the eastern wing, were repeatedly trying to highlight the regional disparities in the resource allocation of the first three Five-Year Plans.
It would be generous to describe that episode, which spanned more than a decade, as a conversation though, since those raising the objections were largely ignored, and after the 1965 war, began to be labelled as ‘enemy agents’ in radio broadcasts. That conversation ended in blood and tears.
In the run-up to the crisis with the foreign currency deposits in 1998, when all withdrawals from this scheme were frozen, then governor State Bank, Muhammad Yaqub, had written a paper about the growing risks posed by the funds in these deposits since they were being treated as foreign exchange reserves under the assumption that they are here for good. Once withdrawals began in the wake of the nuclear detonations and the imposition of sanctions, and it dawned upon the government that there are not enough dollars in the country to honour all the withdrawals, the accounts had to be frozen.
That paper, which received a hostile reception wherever it was presented, was subsequently inserted as an appendix in the State Bank’s annual report of the year, and stands more as an epitaph to the tremendous folly that the FCD scheme became rather than a serious warning of trouble ahead.
I am not aware of any document from 2008 that can be said to be a reflection on the weaknesses and vulnerabilities that brought Pakistan so close to such a massive calamity. That event has been suppressed in our memory, but it is worth recalling that the financial system was shutting down more comprehensively than it had in 1998.
The stock market was already shut, flight of capital from the country was under way in huge quantities, and rupee withdrawals from the banks were at such a level that the State Bank actually mentioned in one of its reports that companies were withdrawing their working capital deposited with banks to hold it in cash.
Yet not a single serious study has been done of that crisis, how it grew and what vulnerabilities in particular lead to it. The IMF has its take on what went wrong, which is heavily skewed to protect the interests of foreign creditors because that is largely what the Fund is tasked with: ensuring that the creditworthiness of the country is not damaged through its cycles of boom and bust. The State Bank’s working paper series does not contain anything, nor did any independent economist or the myriad ‘think tanks’ that claim to work on economic policy produce a single study.
What happened was simple: we got a bailout, got up, dusted ourselves off, and went back to business as usual. One more time the cycle repeated itself, with reserves hitting an all-time-high peak within a few years, the finance minister boasting about this accomplishment, followed by a rapid depletion.
Back to bailout in 2013. No wonder there is a sense of déjà-vu today. What exactly have we learned from the many crises we have already been through?
The writer is a member of staff.
Published in Dawn, October 26th, 2017