WITH external debt and liabilities of more than 30 per cent of gross domestic product, or Rs10.6 trillion, the question now is when the country will turn to the International Monetary Fund (IMF).
Turning to the IMF never has and never will solve this vicious cycle of debts and borrowings. Austerity measures will follow; the Fund’s suggestions ask too much from the markets that they consider “perfect” and “rational”. The result is lesser growth and more loans.
Before turning to IMF again we should understand the importance of getting one’s own house in order. But what are the measures that we need to take to ensure sustainable growth that requires less help from abroad?
Pakistan needs to work on what in technical jargon is called “sequencing” and “pacing”. Taking loans and brandishing growth rates alone will not help. Ask the poor if they are any better than they were last year? Belief in trickle-down economics is dangerous; it rarely ever trickles downs.
Pro-poor policies and a strong institutional and regulatory framework will help our economy take a real turn— a turn that will prove beneficial for the poor as well. Take for example, the China Pakistan Economic Corridor (CPEC), which has raised all sorts of questions regarding its effects on our local industry.
The project is beneficial for us, but the thing that matters is whether we have taken the appropriate steps? In Pakistan, the safety nets that exist are almost insignificant. Take the recent case of pensions, wherein a private bank was told by the Supreme Court to raise the minimum pension level to Rs8,000, which was around Rs. 1,300 earlier.
In the era of PML-Q, a housing scheme for the clerk-level employees was formulated, but after the transition the employees never received the plots. Pakistan ranks 147 on the Ease of Doing Business Index; we have to make matters easy for domestic and foreign investors so that businesses are certain of the profits and protected by rules and regulations.
Here, it is pertinent to mention the case of KASB bank. Despite the offer from the Cybernaut Investment Group of China of $100 million to bridge the capital shortfall faced by the KASB Bank, the State Bank rejected it and the bank was sold to BankIslami for Rs1,000. Incidents such as these lead to a decline in investor confidence.
When it comes to privatisation, the absence of strong institutional framework, competition policies and anti-trust laws, it becomes harmful for the country. Russia’s “loans for shares” programme is one of the prime examples of how the absence of competition laws and failure to prevent rent-seeking behaviour can result in corruption and cronyism.
Insider trade reigns supreme and investors with small holdings are mostly the victims. The programme entailed that public companies got loans from private banks with their shares as collateral. Then, the companies would default giving the reign of those companies to those company owners.
There is a need to devise new rules for the privatisation process. The Asian Development Bank recently cancelled a loan for restructuring and privatisation of state-owned enterprises for Pakistan. For a sustainable growth trajectory we also need to attract foreign direct investment (FDI). The only way to attract FDI is to gain investor confidence and the only way to do that is to build a strong, transparent and fair regulatory and institutional framework.
A lack of intellectual property rights and cumbersome government regulations have made many international firms leave Pakistan. The recent inclusion of Pakistan on the Financial Action Task Force’s Grey list doesn’t help its case either.
Waiza Rafique, who specialises in corporate law, says that “the Securities and Exchange Commission of Pakistan (SECP) has come up with difficult conditions to establish foreign businesses in Pakistan. The Companies Act 2017 and other regulations have become a bitter pill to swallow for foreign investors.
“Although energy crisis, political instability and security concerns also contribute towards this hesitancy, the corporate laws of Pakistan also have a sound role. This is why Pakistan is lagging behind in attracting FDI.”
Published in Dawn, The Business and Finance Weekly, July 30th, 2018