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Courts & economy

April 15, 2018

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IT was only a matter of time before PIA made headlines again. Yet another suo motu notice by the honourable Supreme Court has put the national carrier in the crosshairs of the higher judiciary. It seems that there is a belief that, where all else have failed, the judiciary can heal the ailments crippling PIA.

In recent months, this activist streak has caused much political instability, leading international investors to raise concerns about Pakistan’s political future. The PIA hearings can add to the concerns and have direct economic repercussions for the country: foreign investors, who have been coaxed and cajoled by the current government to consider investing in Pakistan, are surely going to take a step back and wait a while longer before making a bet on Pakistan’s economy.

Pakistan is competing with other developing economies to attract greater inflows of foreign direct investment. FDI inflows are vital because they help a growing economy meet its foreign financing needs, improve prospects of long-term economic growth, and increase international confidence in the country’s economic prospects. In a globalised world of integrated supply chains, the inflow of FDI helps develop closer economic linkages with the rest of the world and generates economic growth while creating much-needed jobs. However, this FDI only flows to the countries that are politically and economically stable, where the regulatory environment is predictable, and where there is a low risk of institutional overreach.

An activist streak has caused much political instability.

After significant political and economic turbulence in recent years, Pakistan has achieved a greater level of political and economic stability. During this period, however, the country has witnessed an increase in judicial overreach, which has had an unsettling effect on the investment climate in the country.

This era of judicial overreach into the economic affairs of the country began with the June 2006 Supreme Court judgement against the privatisation of the Pakistan Steel Mills. The sale of PSM had been approved by the Cabinet Committee on Privatisation for a price of Rs21.68 billion after a successful turnaround – PSM had gone from having accumulated losses of Rs9.32bn in 2000 to accumulated profits of Rs4.86bn in 2005.

However, the Iftikhar Chaudhry-led Supreme Court decided to declare the agreement null and void, making it the first time the Supreme Court had overturned a government-approved privatisation in Pakistan. This had marked the beginning of the struggle between Gen Musharraf and the then chief justice.

The next major casualty was the Reko Diq agreement that leased out copper and gold mines in Chaghai to Tethyan Copper Company (TCC), a consortium of Canadian company Barrick Gold and Chilean company Antofagasta. Again, it was the Supreme Court led by Iftikhar Chaudhry that voided the agreement, leading TCC to take the matter to the World Bank’s International Centre for Settlement of Investment Disputes.

The ICSID proceedings are ongoing with Pakistan facing a gargantuan penalty of over $11bn. While enforcement of the penalty could take years, the case in and of itself will make foreign investors think twice about signing agreements with Pakistan’s government.

By taking suo motu notice on the state of affairs at PIA, there is a feeling that the higher judiciary has reinforced its overreach in the economy. That the hearings came on the back of talks of renewed privatisation of the national carrier suggests that the judiciary may seek to prevent privatisation of loss-making entities.

Both domestic and international investors with an interest in acquiring and turning around state-owned entities, such as the Steel Mills and PIA, will view these proceedings with concern. They may seek an even lower price for the assets — a riskier asset commands a lower price and higher ex­­pec­­­­­­ted rate of return — or may not participate in future privatisation efforts.

At a time when Pakistan is facing economic headwinds in the wake of a significant current account deficit and declining foreign exchange reserves, it is important for the country to attract FDI. For that to happen, the current government and its successor must be seen to have the capability to make economic decisions.

The honourable court may truly believe that its actions are well-meaning and could improve economic performance. The reality, however, is that the PSM and Reko Diq decisions, through their direct impact, have cost the national exchequer billions of dollars in losses. The PIA hearings will further delay privatisation of state-owned entities at a time when they need to be privatised, leading to the loss of billions of dollars more. One hopes that the Supreme Court exercises restraint and allows the current government and its successor to pursue privatisation as any other approach could only compound Pakistan’s problems.

The writer is a South Asia analyst at Albright Stonebridge Group in Washington, D.C.

Published in Dawn, April 15th, 2018