Finding certainty in uncertain times

Published May 13, 2022
The writer was minister of state and chairman Board of investment. He currently advises the UN and governments as a leading expert on regional economic developments.
The writer was minister of state and chairman Board of investment. He currently advises the UN and governments as a leading expert on regional economic developments.

SRI LANKA is burning as headlines of economic meltdown and political turmoil dominate the news. Pakistan is no exception as the country has remained in the grip of a serious political and economic crisis for the past several months. Market confidence erodes amidst weak macroeconomic stability and continued political uncertainty. It is nothing but natural for businesses to fear unpredictable changes and uncertainty of profitability.

Leaving aside internal political dynamics, recent negative developments like the suicide attack on Chinese teachers in Karachi, Afghanistan’s deteriorating situation, the Ukraine crisis and Sri Lanka’s economic collapse certainly won’t inspire investor confidence in Pakistan. International markets are more interconnected than ever before. Tremors following market shocks in Argentina are quickly felt in Brazil and Venezuela, but they also rumble through Thailand.

In 1997, capital flight from Southeast Asia roiled markets around the world. Most investors carefully look at economic risk analysts like Moody’s or multilateral institutions. However, addressing real economic dangers without understanding the political context is like treating a heart patient without analysing the family history. Data on per capita income, inflation and growth can actually be quite misleading in terms of mitigating real risks in a politically unstable economy. The examples of political riskare broadly defined as the impact of politics on markets, the passage of laws, the follies of leaders, and the rise of popular movements.

The emerging political and economic scene in Pakistan is terribly risky and doesn’t inspire confidence in the future direction. The macroeconomic fault lines will hit us hard as successive governments failed to address structural issues and relied on short-term unsustainable solutions. The fundamental point is to learn from others and immediately install filters to mitigate imminent dangers to funding the current account deficit, the upcoming budget, meeting IMF prior actions and rolling over loans from China and other friendly countries.

The point is to learn from others to mitigate economic shocks.

On a populist note, the risk of reversing subsidies to the people and increasing oil prices will yield a major political cost for the ruling coalition. The politics of coalition always poses challenges of competing ideologies, conflicting interests and different approaches to policymaking. This is not going to work for a country that continues to struggle with macroeconomic imbalances and the challenges of providing jobs to over two million young labour market entrants every year. Additionally, the most important and strategic China-Pakistan Economic Corridor will continue to suffer due to geopolitical pressures and a change of faces.

The political flux is likely to continue in Pakistan; uncertain politics halts timely decision-making and risk-averse bureaucrats shy away from implementing any material interventions. The ultimate sufferers are the poor who end up losing hope that they can break away from the poverty trap.

There are jurisdictions that have developed institutional responses to deal with uncertain times. Even developed economies like Italy and Japan have faced frequent political shifts but have managed to let the markets function and to sustain economic growth.

So, what can we learn from global experiences to mitigate some of the shocks to an already fragile economy? In such a politically tense situation, expecting politicians to develop a ‘charter of economy’ is a far-fetched dream. Pakistan should look at workable ways to insulate key economic priorities from populist and volatile politics. The current structure of the Economic Advisory Council is more of a social tea club that has too little value or accountability to offer substantive policy advice. It will be prudent to set up an economic reform and growth commission with representation from each province and the federation to focus on one or two key reforms needed to ensure macroeconomic stability, cutting down wasteful expenditure of the government and SOEs, and implementing energy sector reforms. The members of the proposed set-up should have a tenure of five years with oversight powers and their advice would have to be binding on the government. The commission meetings should be convened by the finance minister with complete support from the prime minister.

At this point, the current structure of politics and bureaucracy is neither competent nor ready to implement the required structural changes to revive the economy. Failing to put our house in order may lead to a very difficult phase with harsh political and economic conditions by multilateral and bilateral lenders.

The second filter which could give confidence to private investors is to convert the Board of Inves­tment and CPEC Authority into a corporate body on the lines of the Dubai International Financial Centre or the Qatar Financial Centre. This space will give comfort to local and international investors in terms of facilitation of business processes, financing and dispute resolutions. The new set-up should be legally empowered and professionally governed with little interference from the government. All economic zones should be regulated by this set-up.

When I met Dr Mahathir bin Mohamad, former Malaysian prime minister, he advised shifting commercial decisions out of the bureaucracy and quoted examples of Petronas holdings and other interventions that inspired investor confidence.

The ownership of structural reforms is critical for political parties and private sector leaders. For example, structural reforms started in India 30 years ago, with Dr Manmohan Singh as finance minister in the Congress-led coalition government. The country was facing a severe balance of payments crisis and battling a situation where the country’s foreign exchange reserves had fallen to less than $1 billion, an amount barely enough to cover three weeks of imports of essential goods. The then government decided to liberalise international trade, lower tariffs on imports, devalue the rupee and significantly dismantle the licence and quota system. For the first time, political parties tried to compete with each other over economic performance.

All political parties and power brokers in Pakistan want to stabilise and revive the economy. For that, an independent technical space will have to be created to ensure credibility and continuity of structural reforms. Making the same mistakes again and again and relying on rent-seekers and the forces of status quo will only make the economic scene more chaotic.

The writer was minister of state and chairman Board of investment. He currently advises the UN and governments as a leading expert on regional economic developments.

Published in Dawn, May 13th, 2022

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