Pakistan continues to burn its foreign exchange at an alarming rate and is exhausting all of its hopes to turn itself around. Heavy handed demands by the IMF to release its funds is adding further desolation in meeting its balance of payments obligations and running out of cash to import food and energy.
With the time, the list of miseries is expanding, leading to no way out to stop bleeding, making the cardiac arrest a strong possible. According to State Bank of Pakistan (SBP), after losing $241 million in a single week (June3-7) alone, the FX-reserves have dropped to $8.99 billion, just enough for 1.5-months imports! This seems to be the same roadmap that Sri Lanka followed just a while ago!
History shows that the balance of payments is deeply ingrained in the DNA structure of every developing nation. Nevertheless, the history also shows that there are blueprints that can be used for successful transformation from underdeveloped to sustainable developing economies. Developing of long-term industrial policy, identifications of the products & markets, building state-supported critical infrastructure and creating environment for the competition through the private participation and encouragements are the fundamentals of the blueprints for the successful transformation of the economies.
There are many examples in Asia who by following this strategy not only have embarked on the journey of transformation of their economies but also have sustained the economic growth and prosperity without getting trapped in the balance of payments and liquidity crises, even during the global financial crises. In the recent history, Singapore, South Korea, and Vietnam are the models that can be used by Pakistan to transform itself into a sustainable economy without going through the choking and resuscitation traumas for its survival by borrowing the capital from the lenders.
Nations who don’t care to put their economies in order or ignore the blueprints either due to misguidance, mismanagement or corruption are left behind; they cannot reach their full economic potentials. The pandemic has pushed many developing and low-income countries into the gallows of the liquidity crises. Sri Lanka has been in the news. By diving deep into Sri Lanka’s current crisis, it becomes very obvious that the recent succession of governments caused gross failures of the economic policies.
Even during the heavy investments by China through its BRI programme, the politicians and the policymakers did not do anything meaningful to developing a sustainable strategy for developing industrial infrastructure for developing and jumpstarting its export led economy. Besides the BRI, the IMF, WB, and other bilateral and multilateral lenders have been offering the capital and technology assistance for many years for transforming Sri Lanka’s economy but the mismanagement, corruption, and lack of political will have created a crisis that is hemorrhaging the economy and looks exceedingly difficult to turn it around.
On the other hand, Singapore, South Korea, and Vietnam are great success stories of our times. All these three nations were completely devastated, and their infrastructures were totally destroyed by their enemies. But after the wars, the founding fathers of these nations followed the path that was very thoughtfully rolled out for rebuilding their nations with great pride and dedication.
The principles used by these nations to excel in their pursuit of revitalization was founded on the pillars of higher standards of education, elimination of corruption from all levels, and production of highest quality of products that meet or exceed the global standards.
The blueprints used completely transformed their economies by uplifting of their nations at an unprecedented rate, improving their living standards, and bringing prosperity to every class of their societies. This transformation is unprecedented in the modern history of nations whereby completely devastated nations not only revived but also uplifted their status from low-income to advanced and high-income economies.
China is another example that has leapfrogged on its development path by following the same fundamental principles of rejuvenation and has transformed itself into a robust economy and an emerging superpower challenging, the US.
Pakistan’s crisis resembles Sri Lanka’s quagmire. One therefor can only wonders that how a country that was a beacon for other nations just a couple of decades ago can deteriorate so severely that now it is battling for its survival? It was just in the early 2000s when Pakistan was reporting accumulation of trade surpluses and foreign currency reserves, and it was cited as the model-developing economy.
During this “blossoming period,” many international agencies and many countries of South Asia and the Middle East had reached out to Pakistan to help assist its policymakers, regulators, and technocrats develop national policies aimed at creating environments conducive for a sustainable export economy.
Fortunately, Pakistan has many close brotherly friends and allies who always come out to help it during its most difficult times when its all other resources are exhausted. Time and again, the Kingdom of Saudi Arabia (KSA) has always extended and given a life support shot to keeping Pakistan.
Besides the KSA, its Iron brother China, the UAE, and Qatar have always helped Pakistan in its times of need by depositing huge amount of US dollars into Pakistan’s central bank (SBP) and by deferring and extending the payments against its oil and gas purchases from them. To date, it has worked well and has proven as the only way for Pakistan to stay away from its economic meltdowns and to make its balance of payments work.
Currently, Pakistan is once again negotiating for another tranche of the funds from the IMF against its $6 billion dollar lifeline support package that was approved conditionally in 2019 under the PTI government. Since then, the IMF has given Pakistan a total of ~$3 billion. Previously, the funds were released after Pakistan was able to comply with the terrorism-related conditions and the tax collection reforms.
Now, the IMF wants Pakistan to remove all the consumer subsidies from the energy and power sectors. The incumbent government is more inclined to follow these conditions compared to the previous government (PTI) as it has already increased the fuel prices and is moving towards to removing the remaining subsidies as well.
According to Ministry of Economic Affairs, PTI government borrowed a total a total of $49.23 billion in its 45-month tenure. In Doha after the negotiations with the IMF, Finance Minister Miftah Ismail stated that during the first four months of the year, the government supported energy and power sectors with $1.5 billion subsidies.
This is unsustainable and the current government is determined to reverse this trend. This is going to put substantial burden on the general public’s pockets and will fuel further inflation that is already one of the highest among its peers and neighbors. During the recent meeting with the IMF, Pakistan has also requested for an additional $2 billion. The IMF has also been urged to extend the terms for another nine months to a year. The original package of $6 billion dollar was negotiated for a total of 39 months.
With this new lifeline support infusion, it is in the best interest of Pakistan to use this period in developing its industrial base to pursue sustainable export economy in order to avoid the balance of payments & the foreign reserves crisis reoccurrence. Pakistan can use the proven blueprint that have been successfully used by other under-developed and developing economies in the recent times like Vietnam, South Korea and Singapore to get permanently out of the liquidity vicious cycle.
Copyright Business Recorder, 2022