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Economic redemption

Updated July 07, 2019

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The writer is a former Pakistan ambassador to the UN.
The writer is a former Pakistan ambassador to the UN.

PAKISTAN is facing hard economic times. It is vital for its policymakers to seek durable solutions not illusory quick fixes.

Peace with its neighbours is essential for durable development. But Pakistan cannot usher in peace unilaterally. Reciprocal steps to contain terrorism in the region may be a good first step. Yet, bilateral tensions are unlikely to abate so long as Indian repression continues in occupied Kashmir under the BJP’s hard-line rule. And durable peace will require a just settlement of the Kashmir dispute.

In any case, there is no ‘peace dividend’ in the offing. India is embarked on a massive arms buildup to fulfil its great power ambitions. Pakistan cannot disarm unilaterally.

Promoting far-reaching agreements with President Ghani at this time appears counter-intuitive. He is likely to be replaced by a new leadership expected to emerge from the US-Taliban talks and an intra-Afghan dialogue. It would thus be best to negotiate a new relationship with the post settlement power structure and leadership.

Pakistan was preordained to get into financial trouble.

Past governments and leaders, who betrayed the people’s trust and looted the country’s wealth, deserve all the penalties prescribed by the law. Unfortunately, the repatriation of ill-gotten gains is often blocked by ‘safe havens’ where the wealth has been transferred. Net assets recovered are usually a fraction of the stolen amounts. These will not provide meaningful financial relief to the Pakistani exchequer.

Yet, justice should be done if only as a deterrent against future criminal behaviour. It is even more vital for the government to end the rampant exploitation of power and authority that occurs in Pakistan, each day and at every level. Unless honesty and meritocracy are comprehensively imposed, Pakistan will not be able to emerge as a dynamic modern State.

Bad policies are the principal cause of Pakistan’s economic plight. The ‘original sin’ was the acceptance by Pakistan, and most developing countries, of almost total trade and financial liberalisation under the 1994 WTO agreements. The ability to protect nascent industries through tariff and non-tariff protections was removed. Weak and vulnerable currencies were subjected to convertibility. The ladder used by advanced countries to climb their way to industrialisation was knocked away.

Only the largest developing countries — China and India — resisted complete liberalisation. China did not give up capital controls. India retained a highly protective trade regime. The Asian financial crisis of the mid-1990s was an illustration of how ‘liberalised’ developing economies and currencies could be damaged by international speculation and targeted attacks. The story has been repeated in South Africa, Nigeria, Argentina, Venezuela.

Pakistan was preordained to get into financial trouble. It has a high propensity for imports. Domestic demand contributes 90 per cent to GDP. Its domestic manufactures constitute only 10pc of the economy. Exports are stagnant because manufactures, mostly textiles, have remained under-invested, uncompetitive and un-integrated into the global or regional supply chains. Fiscal deficits are endemic. Pakistan’s 10pc tax-to-GDP ratio is half that of most other countries. Apart from the essential defence expenditures, 2pc of GDP is spent on over 300 mostly loss-making state organisations.

The PTI government was faced with huge current account and fiscal deficits because the previous government in its last year spent with abandon to improve its prospects in the national elections. The incoming government had no choice but to seek relief from the IMF, whose mandate is to help countries overcome balance-of-payments problems. Most IMF prescriptions are fairly standard: reduction in expenditures and subsidies, increase in prices for essential goods, and currency devaluation (theoretically, to make exports more competitive).

However, the conditions initially advanced by the IMF for the support facility went well beyond these ‘standard’ prescriptions. It asked for a ‘free float’ of the rupee (implying drastic devaluation). Simultaneously, the US raised unwarranted objections to (non-existent) repayment of Chinese loans. These demands were resisted by the ex finance minister. Presuming indefinite delay in the IMF programme, the ‘markets’ made Pakistan pay a heavy price for its ‘resistance’.

Now, following Pakistan’s cooperation on Afghanistan and the 40pc devaluation of the rupee, a more ‘normal’ $6 billion three-year IMF package has been approved. It will help Pakistan raise substantial additional money from the bond markets to meet the bills for its imports and repay debt.

Yet, Pakistan has undertaken to achieve some ambitious targets: a 30pc increase in tax revenues and 15pc growth in exports. The government will also have to implement some unpopular measures, including sharp increases in energy prices and interest rates and forego many of its social development programmes. GDP growth is projected to slide to around 2.5pc next fiscal year.

The IMF programme should be the start of a process of building durable solutions to Pakistan’s systemic economic challenges. Apart from structural reforms and improved economic governance, the key to economic redemption is massive domestic and foreign investment.

Pakistan’s economy has underperformed because it has been cash-starved and constrained by policy and execution inefficiencies. There is huge pent-up demand for consumer and durable goods and health, education and other services; unexploited domestic and export potential in textiles, agriculture, engineering and electronic goods; opportunities in infrastructure development and in undervalued assets and companies.

Public- and private-sector investors in China, the GCC and elsewhere have indicated interest in these Pakistan opportunities. The government must play an active role in promoting domestic and foreign investment.

An article in the Foreign Affairs issue of July-August 2019 entitled: ‘The Global Economy’s Next Winners’ envisions a “new globalisation” in which “the prospects for low-income countries are growing more uncertain”. Domestic demand will be the main driver of growth. Export-led growth may have room to grow in some low-wage countries, if they invest in the right infrastructure and “eventually in modern high-tech factories that can compete with those of the rest of the world”.

The authors conclude that “technology may enable some people in low-income countries to jump ahead in economic development without retracing the paths taken by those in advanced countries”. That may be the best road to Pakistan’s economic redemption.

The writer is a former Pakistan ambassador to the UN.

Published in Dawn, July 7th, 2019