THE present government has been roundly criticised for its handling of the economy ever since it took office over two years ago. In rich irony, the sharpest criticism has come from PML-N, which bequeathed the largest economic crisis in Pakistan’s history and left behind a trail of policy lapses and disastrously inept decisions.
With public memories dulled by constant ‘noise’ in terms of politics and social media discussion, it will be useful to review the abysmal economic management of the previous PML-N government that is likely to continue having serious and severe consequences for the economy in the medium term.
The cornerstones of PML-N’s economic management from 2013 to 2017 were to overtax the formal sector, borrow massively from both domestic as well as external sources, incurring mainly high-cost commercial debt, and keeping the exchange rate overvalued.
With the country’s export sector massively subsidising imports, the basis for the 2018 balance-of-payments crisis was laid. While imports in US dollars surged by over 35 per cent between 2013 and 2018, exports declined by over 5pc. This was at a time when international oil prices had fallen from a high of $118 to a low of $34 per barrel.
The track record of all governments since the 1990s has been poor.
By 2018, exports were paying for only 38pc of our rapidly rising import bill, from around 55pc earlier. As a result, Pakistan recorded its highest current account deficit of $20 billion (6.3pc of GDP).
At the same time, the borrowing binge by the PML-N finance minister Mr Dar meant that Pakistan was being sucked into the vortex of a full-blown debt trap. Inevitably, this has shown up in the soaring debt servicing the country has had to undertake. In 2012-13, budgeted interest payments were Rs991bn. By 2017-18, interest payments had risen to Rs1,500bn — an increase of over 51pc. This dynamic has continued since due to the sharp increase in the policy rate and the rupee devaluation under IMF programme.
Not surprisingly, the result of these policies was that the country’s industry suffered while traders, importers, stock market investors and real-estate speculators prospered. (For more on the critique of PML-N’s economic policies, readers can refer to my opinion piece “Burying ‘Dar-nomics’” in the Aug 19, 2017, edition of this newspaper).
As an aside, the PML-N government also presided over the worst petroleum shortage in the country’s history in January-February 2015 when it mismanaged the oil stocks.
PML-N’s catastrophic policies were not restricted to macroeconomic management. It handled the flagship CPEC project in an equally incompetent and inept manner. There was little or no technical spadework that went into preparing for the project. The Planning Commission did not produce a holistic plan for CPEC that looked at, among other things, the prerequisites required to undertake the project successfully, the sequencing of the projects, the sectoral implications of the investment, ramifications for domestic industry — or indeed even the debt implications.
In fact, in an egregious display of poor understanding, the PML-N mandarins insisted that even though the projects will directly generate revenues in rupees while the liabilities were in foreign exchange, it will not create payment stress for the country. The reason advanced was half-witted — that the projects were in the private sector and the contracts were not sovereign. Irrespective, as I wrote on several occasions then, the fact remained that the external debt servicing of the projects would tap into the same foreign currency pool of exports and remittances that both the private sector as well as government use for debt servicing.
The silver lining of sorts for PML-N is that poor economic management has not been restricted to their own most recent stint in government. The preceding PPP government had botched the seventh NFC Award and was even unable to (or perhaps unwilling to?) put together the 18th Amendment in any sensible, workable or feasible manner.
Going further back to the Musharraf period, which had been touted as a ‘golden period’ for the economy, the growth model pursued was fatally flawed — relying on debt-financed, credit- and consumption-driven growth that once again saw a surge in imports. The overvalued exchange rate back then once again meant that growth in imports outstripped exports by a wide margin, laying the basis for the 2008 crisis.
Unfortunately, it does not end there. This pattern of weak economic management has been repeated since the 1990s. Issues of competence aside, political expediency, short-term thinking, inordinately large lags in policymaking leading to a delayed response, combined with coordination failure at different levels have been responsible.
There are institutional factors at play as well. The brain drain Pakistan experienced for decades, combined with declining educational standards, has reduced the ‘institutional bandwidth’ and competency levels across government. A large part of the short-term thinking is a result of the Ministry of Finance in the economic policymaking driving seat, having displaced the Planning Commission under the litany of IMF programmes since 1988. As I have written before, the Planning Commission with its longer planning horizon gave way to the finance ministry with its ingrained 12-month budget cycle thinking which was made even shorter by Fund programmes’ framework of monitoring conditionality on a quarterly basis.
The current economic policymaking framework is deeply flawed as well as inadequate, with a transactional approach to economic issues at the ECC, and an exclusively project approval emphasis at the NEC/ Ecnec. Parliament is almost completely missing in action in terms of debating or giving direction on economic issues. There needs to be greater structure and purposeful process in the policymaking framework, moving away from a piecemeal, ad hoc and transactional approach.
One silver lining is that over the past decade or so, Pakistan has produced an excellent crop of younger economists. While too few are macroeconomists (or monetary ones), this younger crop should be inducted into policymaking roles. Finally, there is a dire need to educate parliamentarians (as well as the honourable judges) on economic issues.
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.
Published in Dawn, December 4th, 2020