Definitely not easy

October 08, 2019


The writer is a chartered accountant based in Islamabad.
The writer is a chartered accountant based in Islamabad.

“Now I have come to the crossroads in my life. I always knew what the right path was. Without exception, I knew. But I never took it. You know why? It was too damn hard”: —Extract from Al Pacino’s speech as Lt Col. Frank Slade in the movie Scent of a Woman.

Who said it was easy? But the first step is figuring out the right path at the crossroads of Pakistan’s economic life.

If the authorities, meaning the government of Pakistan, have already agreed with the IMF under the Extended Fund Facility 2019, to eliminate, “regulatory duties on imported intermediate, consumer, and luxury goods, as well as import restrictions for balance of payments purposes and multiple currency practices (MCP) — in the form of: (i) a requirement to fully pre-fund letters of credit, imposed in early 2017; and (ii) restrictions on advance payment for imports against letters of credit, imposed in July 2018” and have also agreed to “not introduce or tighten exchange restrictions, MCPs, or import restrictions for balance of payments purposes”, then obviously IMF will not be happy if we go back with a proposal to revisit free market policies.

If the authorities, meaning the government of Pakistan, have already agreed under CPEC, the terms and conditions relating to debt and equity, neither of which is free money, then obviously China will not be happy if we go back and ask for a discount.

FDI is required to be paid back in foreign currency.

A bit of digression is needed here to explain why foreign equity is not free money. Essentially foreign investors require a higher return, shorter payback period and government guarantees, preferably explicit but at the minimum implicit, for equity investments.

Furthermore, FDI is also required to be paid back, principal and profits, in foreign currency.

The State Bank of Pakistan, according to the regulations, may not be able to stop a registered foreign-controlled private power company in Pakistan from remitting its profits in dollars; irrespective of the sale of electricity to domestic residential consumers being billed in rupees. The State Bank may also not be able to stop repayment in dollars of principal and interest of external loans contracted by such companies and duly registered with the bank.

Since we cannot print dollars, and whether or not we treat such equity as government debt, guess where do these dollars come from in substance?

Remember every time you travel in a foreign airline, you may buy the ticket in rupees, but the airline remits the net surplus in dollars; guess again where these dollars come from.

Those who are still not convinced that foreign equity, conventionally referred to as FDI, is more expensive, a hindsight analysis of the internal rate of returns of power projects set up a couple of decades ago with FDI, might even be enlightening. Perhaps it would have made sense to pay for the project cost outright in cash dollars back then.

Again, what is the amount that the government has to pay annually on account of capacity payments to power projects in the coming years, part of which, by the way, will end up being remitted as profits in dollars?

In fact, even simpler, perhaps the bank can confirm the FDI for the last five years, and also confirm the foreign currency outflows relating to income paid on past FDI over the same five-year period; the result may well be another eureka moment.

To continue, if we have signed free trade agreements with multiple nations whereby we have ended up importing more than we export, and if we now go back to our trading partners and talk about fairness, they definitely will not be very conciliatory; in a nutshell, they will stop importing from us all together.

If we close our skies, most likely than not, there will be severe retaliation from the nations whose commercial airlines get affected; and some of these countries are the primary source of workers’ remittances, the lifeline of Pakistan’s current account.

In summary, what exactly is the problem?

For one it is not quite clear how the conditions set by our creditors and foreign investors, including monetary policy tightening and fiscal measures will help us reduce our external and domestic debt and create employment. If history is any yardstick, that may not happen.

Secondly, the belief that the interests of foreign creditors and investors are aligned in any manner with the best interests of Pakistan is mind boggling; profit/returns are likely their only motivation.

The question then is, is there a different path?

There is always that path which is too damn hard, and the objective is to eventually identify that path. We have a choice either to blindly follow the path laid down by external agents, or the path which is definitely not easy.

The writer is a chartered accountant based in Islamabad.

Twitter: @LeAccountant

Published in Dawn, October 8th, 2019