The two-day visit of the high-powered Saudi delegation last week focused on identifying possible areas of investment that are likely to be translated into binding contracts during the expected and much anticipated visit of Crown Prince Mohammad bin Salman to fuelling optimism in the stock market as well as the currency market.
Independent economists dismissed as doomsayers however warn that a bullish stock market may reflect a sentiment that is not pervasive and a rupee-dollar parity must be market based as agreed with the International Monetary Fund (IMF) reflective of prevailing macroeconomic conditions on the back of politically challenging reforms rather than on pledged investment inflows that are likely to be a lot slower than envisaged.
It is however noteworthy that during his interaction with the media the Saudi Foreign Minister emphasized the Saudis’ considerably higher comfort level with the establishment of the Special Investment Facilitation Council (SIFC) in June last year, envisaging seamless implementation of pro-investment decisions - from the federal to provincial to local level strengthened by the establishment’s concurrence - in the arena of security as well as economic decision-making.
Be that as it may, luring foreign investment is clearly the overarching modus operandi of the current batch of stakeholders to deal with the cyclical economic impasse successive Pakistani administrations have unsuccessfully grappled with to-date; and always dealt with by seeking an IMF programme (Pakistan is currently on its twenty-third programme and has formally sought the next one). This was reiterated in Washington DC last week by the federal finance minister while addressing the US Pakistan Business Council when he reaffirmed the government’s dedication to attracting foreign and domestic investment in key sectors including agriculture, IT, mines and minerals and energy.
It is relevant to note that in recent years Pakistan’s political leadership across the board has been making two assumptions. First, foreign investment inflows must be proactively sought, though to date huge pledges have not materialized.
One would hope that lessons have been learned from China Pakistan Economic Corridor (CPEC) projects, which continue to generate considerable concern amongst multilaterals/bilaterals on the grounds of what they claim is the failure of the government to make the contracts public (which is opposed by China as a world-wide policy) that would have allowed a determination as to whether the investment inflows are debt enhancing and/or whether unfair monetary and fiscal incentives were meted out. Whether CPEC type contracts would apply to Saudi investment is not clear at the current level of negotiations with the Saudis, and will only be possible once the binding contracts are signed.
Secondly, private sector invariably operates much more efficiently than the public sector; therefore, privatisation mainly of loss-making behemoths (Pakistan International Airlines, Pakistan Steel, Pakistan Railways) is the way forward – be it through luring highly successful private sector experts to first improve the entity’s economic health or through sale of shares on the stock market or outright sale to a strategic investor or to the highest bidder. Sadly, none of these prescriptions have a particularly successful record, though the narrative today is that this time around success is guaranteed as the intent of the current players is not in question.
Opting for privatisation without first undertaking a detailed cost benefit analysis may render the entire process open to virulent criticism, with possible litigation stalling its progression indefinitely. Privatisation must not only focus on the budgeted support that an entity may require each year or on generating revenue to meet the budgeted expenditure for one year (though the stated policy is to retire government debt) but on whether the private sector buyer will be allowed to operate in monopoly conditions which would be to the detriment of the consumers, whether all costs including lost revenue stream in future is being taken into account, whether the golden handshake is an economically viable scheme at the present time with the ever rising unsustainable budget deficits this country is being subjected to or whether the market is conducive to get its true value.
There are three mitigating measures that must be considered before embarking on privatisation. First, proponents of turning the entity around before putting it up for sale by hiring experts from the private sector must learn lessons from our past. It would be a challenge to name even one sector expert from the private sector who has not been summarily dismissed for conflict of interest or collusion or simply failure to deliver. Sadly, such charges have never been vigorously pursued by any investigating agency which accounts for many a sector expert being recycled and rehired by a subsequent administration.
Second, data uploaded by the Finance Division in its Monthly Economic Update and Outlook March 2023 shows credit to the private sector (flows) from 1 July to 4 March 2021-22 at 890.4 billion rupees, 393.6 billion rupees in the same period of 2022-23 (55.7 percentage decline) and 180.7 billion rupees in the comparable period of 2023-24 (decline of 80 percent when compared to 2021-22 and 54.1 percent when compared to last year). These figures reflect a steady rise in government borrowing from the domestic commercial banks thereby crowding out private sector credit. The question then becomes; would the sale agreement of a behemoth be accompanied by the stipulation that no credit would be sought domestically?
And finally, even more ironical is the fact that the private sector has been mollycoddled with respect to monetary and fiscal incentives though post 2019 IMF programme loans – 2019 Extended Fund Facility and the ongoing Stand By Arrangement – all incentives be they in the form of cheaper credit or through subsidised electricity or lower tariffs are being vigorously opposed by the Fund with the threat of the programmer suspension. If the buyer requires a surety from the government that monetary and fiscal incentives would continue for a period of time, given that the sale would be of loss-making units that would require time to become economically viable, would the government be able to get a time- based exemption from the IMF?
To conclude, it is critical to carefully navigate through the many pitfalls, landmines, towards privatisation and foreign investment inflows that this country has been subjected to in the past before signing off on binding contracts in future.
Copyright Business Recorder, 2024
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