Pakistan has been suffering from chronic governance issues for the past several decades. Inheriting the post-colonial bureaucracy and with its manageable population of 30 million (West Pakistan, 1947), the country managed to get by in the early days.

The population continued to grow to 70m in 1971 and to 130m in 1998, but it remained unfashionable and politically incorrect to talk about harmonising the country’s demographics. We failed to evolve the colonial systems in line with the modern world, with the result that we stand at around 250m, with a growth rate of over 2 per cent per annum (i.e., 15,000 births every day).

This unchecked growth of headcount was left at the mercy of meagre investment in education and skills development. The average education budget, both provincial and federal, has hovered around a paltry 4pc of outlay, which is less than 1pc of the GDP.

But even this 4pc was never spent intelligently. Stimulating cognitive thinking in children was never on the cards, and much of this budget was spent towards brick-and-mortar projects or on politically motivated schemes like “distributing laptops” and to line the pockets of officials and contractors.

With Washington’s permission, Pakistan can turn to Tehran for oil in the worst-case scenario

As for skills, the country’s total capacity, public and private, to train people, irrespective of quality, has remained close to 500,000 people a year, while those needing skills training number around 80m!

The outcome is poor productivity per capita when compared with other low to middle-income developing countries. This “low productivity” stands as the single biggest reason for Pakistan’s balance of payment crises, which has now taken precedence over the root crises of governance, whereby the country is unable to earn foreign exchange to fund the imports that it ends up consuming.

On the domestic front, the country is also in the habit of spending much more than the taxes it generates, with a Rs10 trillion expenditure vs Rs7.5tr in revenue. The consequence is the twin — fiscal and forex — deficits for successive years, bridged through consistent borrowing, which has now reached unsustainable levels, whereby no creditor is willing to lend to us anymore.

As a lender of last resort, the International Monetary Fund (IMF) now stands as the only hope that may open the door for us to borrow even more, albeit at great cost.

Pakistan’s financing needs for the next three years are projected at $25 billion per year, and even with a green signal from IMF, it seems that any relief will last only a few months. There does not seem to be any strategy in place to improve the stented productivity of the nation which, in turn, will lead to balance of payment crises persisting and could eventually result in the nation defaulting on its debt obligations.

In a doomsday scenario, if Pakistan were to default, how would a common citizen of Pakistan suffer?

To get some answers, let us look at Pakistan’s foreign trade profile. The country is on track to import goods worth around $50bn after severe import compression; imports were $81bn in 2022.

Exports, on the other hand, are slated to be around $25bn, down from $32bn in 2022. An expected trade deficit of $25bn is likely to be funded by workers’ remittances, expected to be in the range of $26bn, down from $31bn in 2022.

The biggest import item is oil & gas (34pc) followed by agri-chemicals (16pc), textile related (8pc), machinery (8pc), steel and aluminium (7pc), edible oils (7pc), vehicles (3pc), wheat (2pc), tea (1pc), telecoms (1pc). Major exports are dominated by textile products (61pc) followed by rice (7pc), sports & surgical goods (5pc), leather and footwear (4pc), pharma and chemicals (5pc), cement (1pc).

These statistics show that if Pakistan is unable to meet its foreign obligations, it will immediately be faced with a severe shortage of energy.

This will untangle a series of catastrophic events, whereby petrol stations will be out of petrol, transport is likely to come to a grinding halt, electricity generation will stop, resulting in load shedding for days, and factories will close, giving rise to rampant unemployment followed by civil unrest similar to what we saw in Sri Lanka, but with a much stronger intensity and consequences.

Maritime trade and domestic and international air travel will cease, causing hardship to families with loved ones abroad. It will only be a matter of time until the mobile and internet communication sector gives in.

Pakistan will have to learn to survive on its own. With its vast resources it should be able to substitute edible oils and agricultural needs. Drinking tea is likely to become a luxury. Given the extremely talented pool of entrepreneurs, the industry will survive if the biggest problem of energy is somehow overcome.

It seems that the economic turmoil of Pakistan will eventually turn out to be more of a foreign policy issue rather than an economic one. Relations with our oil and gas-producing friends will be put on trial, but given the recent lack of support from them, it seems unlikely that any substantial help will be forthcoming.

The biggest opening, therefore, seems to be to look westwards. The foreign minister, along with the ministers of finance, energy and oil & gas, will perhaps have to board a plane to Tehran to negotiate a supply of fuel from Iran.

Our foreign office will need to work overtime with their American and European counterparts to seek a waiver for Pakistan in line with those provided to China, India, Turkey, Japan, South Korea, Italy, Greece and Taiwan to avoid an embargo as a result of buying oil from Iran.

If successful, this will be the single biggest foreign policy accomplishment of Pakistan, to give a breath of new life to its economic revival. Iranian oil will likely reduce the oil import bill by more than half, while different payment mechanisms — barter, respective local currencies etc., can be negotiated with Iran for payment of the commodity.

The Rs260 to US dollar value is likely to shoot up exponentially. But since imports will drastically reduce, it is unlikely to have much effect on inflation, provided that the government is able to control the hoarding of food products and to support the domestic agriculture sector on a war footing.

Workers’ remittances will continue to flow in and are likely to start to increase the forex reserves of the country in the absence of major imports. This will, in turn, start to stabilise the ruppee.

The scenario imagined above points towards the severe economic vulnerabilities that Pakistan is facing and their likely outcomes. It may, after all, not be misplaced to start focusing on our foreign policy to shield us from the risks that our economy is facing. Before the ship sinks, it may be worth taking a flight to Tehran via Washington DC.

The writer is a governance expert and former advisor to prime minster and chief minister Punjab

Published in Dawn, The Business and Finance Weekly, February 27th, 2023

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