Salvation lies in structural reforms

Pakistan’s persistent economic failures, amongst other factors, are the result of constant disregard of the Constitution by the powerful elites, who are not ready to give up unprecedented benefits, enjoyed at the expense of citizens, and successive governments’ ill-directed fiscal policies.

Due to the constant political turmoil and absence of prudent policies/steps by finance ministers of various governments, especially since 2008, we have failed to develop a sustainable model for economic growth.

The economic policymakers of four civilian governments (sic), after late General Pervez Musharraf’s unceremonial exit from the political scene, rather than taking into consideration medium-term and long-term perspectives, have been taking short-term irrational measures, aimed at winning elections.

Their adhoc policies have eventually landed the country in deep trouble, where its economic viability is at stake.

Now without “strategic overhaul”, it is impossible to overcome the prevalent crisis—where political instability is accentuating economic meltdown, taking a disastrous turn.

Even after more than 75 years, we are still dependent on “friendly countries” like China, the Kingdom of Saudi Arabia, the United Arab Emirates and Qatar, for our fiscal needs.

Presently, even this “stop-gap” arrangement is not working, rendering the International Monetary Fund (IMF) hesitant to complete Ninth Review leading to staff level agreement for release of tranche of US$ 1.1 billion as part of Extended Fund Facility (EFF) programme ending on June 2023.

The ongoing political instability leading to precarious economic situation and past conduct of betrayals is the main factor keeping even our “friends” from helping us, as in the past.

Since 2008, successive governments have not ensured that our sources of inflow should be sustainable by increasing exports, investments, and remittances. One main factor for this failure was political infighting between the government and opposition of the day—a classic case of intertwining of political and economic instability.

Pakistan’s economy entered into fiscal year (FY) 2023 in a critical and precarious situation, never witnessed before. The FY 2022 ended up with a current account deficit of US$ 17.4 billion and a trade account deficit of whopping US$ 44.7 billion coupled with foreign debt servicing requirement of US$ 20.4 billion.

During the coalition government of Pakistan Tehreek-e-Insaf (PTI), from August 12, 2018 to April 9, 2022, the external debt increased from US$ 95.23 billion to US$ 130.19 billion, showing an increase of US$ 34.9 billion ,i.e., an annual average increase of US$ 8.7 billion.

Unlike the previous government [from 2013 to June 2018], this increase was not even because of projects of energy and infrastructure.

Despite borrowing huge sums, the PTI government could not add much to the country’s GDP, not only increasing our debt burden but also making it unsustainable, pushing the country towards the risk of external default.

Apart from imprudent economic policy, we have failed to devise an independent and pragmatic foreign policy and resultantly, at this critical time even our allies and friends are refraining to bail us out.

Though our foreign minister, Bilawal Bhutto Zardari, is actively meeting foreign dignitaries and visiting foreign countries to normalize relationship with the international community, Pakistan has so far failed to witness any breakthrough with the United States, our top trading partner.

The all-weather friend China and brotherly countries Saudi Arabia and the United Arab Emirates are also waiting for the fate of IMF’s programme.

The present alliance government of Pakistan Democratic Movement (PDM) is making all-out efforts for resumption of the most critical IMF’s programme, held in abeyance since October 2022.

Our Prime Minister, Shehbaz Sharif, earlier in February 2023, gave assurance to the IMF for implementation of its conditions. Since then, despite considerable progress, the programme is yet to resume.

Critics say that our Finance Minister wasted precious time in taking timely and decisive steps vis-à-vis implementation of agreed policies and also ignoring prior action items like additional revenue-generating measures, reduction in untargeted subsidies, exchange rate to be market determined and managing the energy sector issues, especially circular debt.

Now, he needs to ensure financial commitments from official partners and friendly countries, which is critical for resumption of the programme and macroeconomic stability.

However, even resumption of IMF’s programme and financial support from outside will only be a short-term fix.

The challenge is rather formidable, as our external financing needs have reached gigantic levels. For the next four years, our debt-servicing requirement is estimated to be an average of US$ 25.23 billion per annum. This is exclusive of the additional impact that may arise due to current account deficit, which if added, may rise to US$ 37.5 billion per annum. In view of this, support of IMF and friendly countries is important.

According to an IMF’s publication, based on the Seventh and Eighth Review, Pakistan aims at restricting its current account deficit to US$ 9.28 billion, which is 46% lower than US$ 17.461 billion deficit posted in last year of PTI government. Based on results published for July-2022 to Jan-2023, Pakistan’s current account deficit has shrunk to US$ 3.8 billion, which is 67% lower than US$ 11.6 billion in last year’s corresponding period.

In view of the above, our focus should be to facilitate local industry and encourage exports. Currently, our exports are largely dependent on imported material, and any steps to ban import directly hit our exports, eventually kick-starting a vicious cycle.

Based on FY 2022 data, we exported US$ 5.4 billion worth of food items but imported items worth US$ 7.9 billion. Similarly, we exported textile goods of US$ 18.3 billion and imported goods of US$ 5.7 billion (other than machinery-based imports of US$ 1.1 billion).

Monthly Economic Update & Outlook released by the Ministry of Finance for February 2023 highlights the performance of Pakistan’s economy claiming that targets set for the current Rabi season are achieved at 96% with cultivated area of 21.94 million acres, out of the planned 22.85 million.

The government is expecting to meet the target of 284-million-ton wheat production. The report also claims that Kissan Package left a positive impact on agriculture sector. Credit disbursement increased by 28.3% to Rs. 949.9 billion, compared to Rs. 740.3 billion last year. While admitting that large-scale manufacturing did reduce by 3.7% and it declined by 3.5% in December 2022, it increased by 12.4% in January 2023.

The report reveals impact of import contraction because of which, for example, the automobile industry faced a big hit. Letter of credit-related issues have badly affected both production and sale of cars during July 2022 to January 2023. The report admits that car production declined by 38.6% and sales fell by 43.1%, truck and buses production and sales reduced by 29.1% and 37.1%, respectively.

The government is hoping for economic recovery, but it will take time considering that global growth will remain at 2.9% in current year due to various corrective measures, including higher interest rate etc.

Though the global growth will show increase in 2024, our economic difficulties will persist unless we ensure substantial revenue generation and stop wasteful expenditures drastically.

We should work on formalization of the economy and focus on financial inclusion. The size of informal economy is close to 36%, which is huge.

Concerted steps are required to end parallel economy through strict regulations and their effective implementation. Indeed, smuggling of currency and goods are additional burden, which cannot be stopped without effective border controls.

The government must introduce strict accountability measures for officers appointed at borders to ensure transparency.

Reliance on the IMF and bilateral arrangement on the one hand is putting us under monstrous debt burden and on the other compromising our sovereignty—amendments in the State Bank of Pakistan Act, 1956 is a vivid example.

Unfortunately, our successive governments have left no option but to count on the grey market to drive the inter-bank rate. We cannot reclaim sovereignty unless structural reforms are not undertaken.

Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’

Copyright Business Recorder, 2023