Pakistan today is perilously close to declaring its inability to settle its external debt obligations. Default. What has brought about this possible point of inflection? In the opinion of this writer, the situation has come to such a pass both because of long-term trends and recent developments, primarily because our style of governance and economic management has remained more or less unchanged for more than 4 decades.
Growth rates have been stimulated every few years by running large fiscal and current account deficits until the process became unsustainable (widely described as the boom and bust cycle) and needed visits(totaling 22 by now) to the IMF’s assistance parlour for financing the external imbalances.
But, as soon as the IMF help eased some of these pressures, we harked back to these merry ways, which earned us the dubious distinction of being branded a “one-tranche country”. This outcome, abetted by cheap external inflows and rescheduling of debts owing to fortuitous international events in our history (the Cold War, Afghan War, 9/11, War Against Terror), kept us afloat, a host of our luxurious privileges protected, incentivizing poor governance, as fundamental and structural issues remained unattended.
The cumulative costs of our failure to address these weaknesses have manifested in slower economic growth and increased vulnerability of the economy and the currency, feeding other crises. However, until now there was no crisis of such magnitude (by some accounts the worst in our history) and fear of sovereign default.
Throughout this period the entire focus, and tenacity of efforts, has tended to be finding resources to finance the balance of payments rather than boosting the productivity and competitiveness of our exports in particular and the economy in general.
The economy is like a machine. All things within it are interconnected. Fixing a weakness in one place impacts other parts. To this end, donors are also to blame for creating a perception that repairing or removing blockages in one or two areas will set a self-sustaining process of growth in motion. Since they have limited knowledge of local conditions required to tweak interventions and lack the scale of the essential sources resources required for achieving such a grand objective they exaggerate the outcome of their proposals.
This article, after setting out the key challenges, attempts to identify policy measures, actions, instruments and institutional arrangements that can improve prospects of economic recovery and facilitate growth and employment by improving mobility and productivity of the workforce.
Challenges
The incentive structures guided by the systems in place have aided misgovernance by the political, civil and military leaderships, culminating in the confluence of a number of crises (economic, political, regional, ethnic, etc.). This has resulted in Pakistan becoming a highly difficult and complex country to govern, which would be challenging for the most capable leadership anywhere in the world. And we are not really blessed with the quality of leadership that can steer this ship safely to a shore where there would be a brighter future for its 230 million passengers.
Driven by the imperatives of a security state, espousing a self-serving definition of national interest (with the expenditure on defence exceeding the combined spending on education & health), a rational view on engagement with the rest of the world is missing. We seemingly suffer from a victim syndrome, while holding an exaggerated view of our importance (more because of our nuisance value)-mainly because of the fortuitous global events referred to above.
We are not serious-minded people, not willing to accept that we have been living on borrowed time, way beyond our means for far too long. Also, that we are too large a population (230 million) for anyone to be able to help.
We now have a fractured and deeply polarized society - both horizontally and vertically. Furthermore, owing to a host of factors (with varying qualities of governance an important contributory element) disparities in levels and rates of growth and quality of physical infrastructure and social and economic services have widened between Punjab and the smaller provinces.
This has fostered alienation of youth along national/ethnic/values lines, with the space for talks continuing to narrow as social divides get deepened, hampering coexistence possibilities, a critical need for fostering social cohesion.
Then there is the high rate of population growth, with the economy growing at a pace less than half the rate required to absorb those entering the labour force. And this youth is exposed, courtesy internet and cable television, to global developments, laying the foundations of a much more challenging spectre, the management of the ensuing expectations.
Therefore, for a social cohesion to be built around a set of values requires a holistic approach to our socio-political and economic affairs. This needs reconfiguring of State and Society, raising the question whether we have the leadership which can take on this intimidating mission?
This article, however, owing to space considerations, will, going forward, only highlight some of the key economic issues and ways to address them. We have finally hit a road block, a brick wall. Others have lost patience with us, our credibility is in tatters. Even our friends have made it patently clear that they are under no compulsion to sort out the mess of our own creation.
But despite this clear signaling much of our discussion continues to be around symptoms-treatment for blood pressure while problems are deep-seated and structural, requiring fundamental painful reforms.
What is needed is life-saving surgery by local doctors. And this time there is little anesthesia being made available by the rest of the world to lessen the acuteness of pain. There is the challenge of an equitable distribution of this pain - on the ability of different income segments of the population to bear the burden of adjustment - looks gargantuan.
Key Economic Issues
Much of the debate is focused on the low Tax/GDP ratio, rampant tax evasion and differential treatment of same levels of income from different sources. While not disagreeing with the import of these claims, in this writer’s opinion the bigger issue is the expenditure side of the fiscal equation.
We continue to have a large Federal Government even after 18th Amendment, under which a host of functions were transferred to the provinces.
And despite this division of responsibilities there are 43 Divisions at the Federal level, with an additional 400 Attached Departments of 650,000 personnel and autonomous orgs with 520,000. Just drive down Blue Area in Islamabad to see buildings housing government funded organizations sanctified with exotic names, with few in the Secretariat knowing what functions were mandated to them, let alone those they actually perform.
A reduction in the number of Divisions at the Federal level is opposed by both politicians and bureaucrats, the former seeking ministerial positions and the latter positions as Secretaries and the perks and privileges, influence and power that come with the post and the generous retirement packages.
The case of the provincial governments is even more disconcerting. They are not only doling out all kinds of allowances to those on their payrolls, they have also become huge employment bureaus, engaging a veritable army of unskilled peons, chowkidars and clerical and supervisory staff, while lacking personnel with adequate domain knowledge. We therefore find that, for example, the Punjab province which had 22 Departments it in 2000, now has 48!
A consequence of the above is that the pension liability of the Federal and Provincial Governments, excluding such liabilities of several other State sponsored entities (e.g. public universities), is more than Rs 13 trillion.
This structure has contributed to the State having a huge footprint in the economy. According to a PIDE study, it is almost 67% of Economy, although through price setting by government of some goods and services, requirements of NOCs, legal and judicial intrusions and a variety of regulations, checks and inspections it makes it significantly bigger.
This has distorted markets while the excessive, obsolete regulatory system presided over by more than 120 regulatory agencies has, by constraining economic activity, raised the cost and ease of doing business. Lest we forget, GDP is the sum total of number and size of transactions in the market. Hence, the smoothness or otherwise of the process to undertake transactions affects cost of carrying out transactions.
Reducing the number of agencies and the several layers of processing approvals for policy actions and conducting activities and transactions will help optimize the organizational structure of government, thereby modernizing the governance system and its capacity and improving resource and functional allocations and administrative efficiency, leading to lower costs of management.
Then there are the growing losses of SOEs (Rs 143 billion just in 2018/19). In the case of PIA, Steel Mill, Railways their accumulated losses have crossed Rs 2.5 trillion (with the top 10 SOEs accounting for close to 90% of the cumulative losses). Then there are the Electricity & Gas circular debts which had hit Rs 4 trillion mark at last count. It’s another matter that those making profits are generating returns much lower than their potential.
Whereas the Planning Commission should, in principle, be designing policy measures, instruments, institutional structures, etc. to stimulate growth, setting priorities and sectoral approaches, its role has been reduced to supporting the enlargement of the size of the PSDP, with limited influence on the need and design of schemes and assessment of institutional absorptive capacity.
The result is that we now have a PSDP of more than 1,700 projects, with a throw-forward equivalent to 16 years of present levels of allocations, implying that there will eventually be huge cost and time overruns.
State policies have supported a rentier economic structure- protecting a wide range of sub-sectors from competition- e.g. sugar, motor vehicle assembly, polyester, electricity meters, fertilizer and even segments of the textiles sector.
The growth of one industry created a market for another (e.g. the vendor industry for automobiles), each operating at different degrees of efficiency. And once vested interests got created it became politically difficult to withdraw these concessions, especially with the economy growing at anemic pace.
Moreover, the structure of economy has changed over the last two and a half decades, with the sharp increase of the GDP shares of the Financial, IT, Telecom, Automobiles, Oil and Gas Sectors. These sectors tend to be capital and skill intensive. These developments have widened the inequality of incomes and wealth, further amplified by the taxation structure.
This has determined the composition, the size of economy and production technology (more imported inputs) and level and skill mix of employment. The free play of market forces then reinforced these inequalities.
The less affluent segments of the population, endowed with limited education and skills, are unable to participate meaningfully in this configuration of growth, thereby disenfranchising the vast majority of the population, with all its social and political implications.
A Possible Way Forward
Right-Sizing of the Federal and Provincial Governments
As implied above, we need to start shrinking the over-staffed Federal Government by more than two-thirds to reflect the transfer of functions post 18th Amendment.
Next we need to finalize the list of several attached departments, agencies and autonomous organizations to be wound up (because of the redundancy of purposes or uses for which they were initially established), since there would at best be a handful that could be candidates for privatization. And then for the two proposals above we should:
a) Retire those who have completed 30 years of service (protecting pension entitlements attained to date). If it becomes politically difficult to retire them they should be placed in a “surplus pool”, thereby saving on rent, utilities, maintenance of cars, etc.
b) Surrender all vacant posts and all such positions (banning new recruitments)
A similar exercise needs to be conducted for the provincial governments.
(To be continued tomorrow)
Copyright Business Recorder, 2023
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