The official narrative presents four developments as government achievements- a reduced interest rate, a more controlled budget deficit, growing foreign exchange reserves and a lower and declining inflation rate However, none of these were outcomes of better economic management. Inflation is lower on account of the high base-effect and for fortuitous reasons; a drop in global commodity prices.
The reference to lower interest rates conveniently fails to mention that commercial bank deposits have actually declined at a time when the Federal Government has increased its borrowings from the commercial banks! The SBP is helping Islamabad raise this money by pumping more than Rs 720 billion into the system, thereby also defending the interest rate that it had reduced, which (with depositors exiting the banking system for better returns elsewhere) would have been higher but for its intervention.
Commentators have presented enough evidence that the government has resorted to window dressing and sleight of hand to show a lower budget deficit, both by manipulating revenue and expenditure numbers. The IMF (for global political reasons and its own need to speedily recover its past loans) has been an active partner in this blatant massaging of data. The progress in improving the tax to GDP ratio over decades has been abysmal, particularly with respect to the equity aspect of the structure-same levels of income from different sources being taxed differently. Successive governments have willfully abdicated their responsibility on fiscal virtue but little is being said about the expenditure side of the fiscal equation. The nation has experienced unfettered extravagance on less productive mega projects while other more relevant development schemes, energy related circular debt issues and the social sectors continue to be starved of funding. And what is being done to address the issue of the budget deficit arising essentially for structural reasons? We are resorting to crazy ad-hoc measures to increase revenues, like raising the GST on diesel from 18% to 37%; yet another dim-witted short-term intervention to meet revenue targets because of governmental failure in attending to long outstanding structural issues.
Similarly, what is there to gloat about reserves built entirely on borrowed money (US$ 2 billion of Euro and Sukuk bonds at extortionary interest rates), one-off flows from benefactors and receipts against sales of government owned shares of banks, while our external accounts continue to be under pressure? Our exports are slowly losing ground because of energy shortages, global economic slowdown, the principal buyer of our yarn, China, no longer having a heavy market presence, exporters not getting timely GST refunds, the overvalued rupee etc. These factors are having a debilitating impact on our exports as well as contributing to a still high import bill.
The manna from heaven in the shape of the dramatic fall in the price of oil and other commodities which has contributed substantially to the lowering of the rate of inflation should have provided us an opportunity to make some long-overdue adjustments. But then given our unenviable record on governance and economic management we are likely to squander this gift. Official efforts have tended to focus merely on financing the budget and current deficits than on reducing their size because of political compulsions and our focus only on the immediate or short-term crises issues.
Inflows from remittances, external assistance and the above referred bonds have resulted in the rupee being overvalued by more than 17%, affecting our export competitiveness and thereby our ability to fully exploit the opportunity provided by our GSP status. These flows have only provided 'temporary' relief, whereas the narrowing of the deficit on a sustainable basis requires a combination of policy decisions and structural reforms that can only be implemented in the medium term. This requires a shift in the current policy bias away from import substitution to exports through a realistic exchange rate, improvement in productivity though better access to technology (supported by adequate public and private investment in high quality education and technical and vocational skills), being part of the global intra-industry value chains and by focusing on markets of dynamic young consumers on our eastern borders.
Contrary to a widely held perception that the technical solutions to our economic travails are well-known, most of the prescriptions tend to be rather broad and general in nature. Not enough serious work has been done on the design of policy instruments, business processes and institutional arrangements (including the regulatory framework and capability) for implementation so as to secure the underlying objectives on a sustainable basis. Even our strategies are poorly conceived. For instance, foreign investment is being desperately sought to jump-start economic growth. Even ignoring critical issues of poor law and order and country image and policy unpredictability, we seem to forget that foreign investors follow a boom, they cannot create a boom. Foreign investment only supplements and complements domestic investment. The experiences of SE Asia and China bear testimony to this. Foreign investment in China is high because domestic investment is high and not vice versa, and also partly because public investment is high. How can, and why should, foreign capital come to a country whose domestic entrepreneurs, being less than sanguine about the country's economic prospects, are reluctant to invest in the local economy. Moreover, there are no examples in the world of accelerated economic growth based largely on foreign capital.
The Pakistan of today has become an extremely difficult and complex country to govern, with huge political economy challenges facing reform. A number of crises have come together, terrorism and sectarianism, weak economic growth, lack of availability of energy at affordable prices, a disaffected Baloch population, etc. Tackling these crises would be overwhelming for the most capable leadership anywhere in the world. And we are not blessed with one with vision and competence.
Our style of governance, however, is to perpetually look towards the international community for handouts to pay our bills, as if we have an open-ended license to mismanage our affairs. Official efforts are geared to simply winkle the next tranche out of the granted loans, especially when it comes to the IMF, with donor rescue packages merely viewed as licenses for fiscal profligacy rather than as temporary relief measures as efforts are launched for fiscal rectitude. The repeated bailouts by the rest of the world have essentially been because of our 'nuisance value'. The dance of one step forward, one step sideways and one step backwards has only succeeded in creating an illusion of forward movement where there is none. How long will this gravy train continue to run smoothly is anyone's guess-will it be sudden jump over the cliff or a slow and painful death?
We may be too big a country to be allowed to fail but we are also too big a country for anyone to help. No one has these deep pockets. The Pakistan economy can now only be fixed and anemic growth restored to health by painful structural reforms to establish a just and fair society in which different groups contribute to the restructuring of their capacity to bear this burden. The sacrifices that will be required for this will have to be more broad based than is widely realized.
Obviously there are no quick economic and political fixes to problems accumulated over decades, especially with the elite unwilling to make some sacrifices in its own enlightened self-interest and seemingly blind to changing realities that have put social cohesion under severe stress. A State under the influence of rent-seekers cannot be expected to suddenly change course and opt for fundamental adjustments. Why should groups controlling the state suddenly stop milking it for their own good? We should, therefore, disabuse ourselves from harbouring notions about serious reforms being undertaken by any dispensation likely to be thrown up by our electoral system in the foreseeable future.
An uninspiring, self-serving and inept national leadership doesn't have the wherewithal to manage the avalanche of expectations and the implementation of fundamental structural reform. It cannot really be expected to a) phase out subsidies on imported fertilizer and subsidies on exports of wheat and sugar which are keeping prices for domestic consumers high but benefitting foreigners; b) levy and collect taxes, especially from those still legally outside the tax net- instead of burdening existing taxpayers; c) divert funding away from unproductive spending; d) downsize the bloated Federal state structure that continues to accumulate (despite the 18th Amendment) on account of the overlap of functions between Islamabad and lower government formations-which will also reduce opportunities for corruption and extracting rents; e) strengthen institutions and confer on them real autonomy; f) change the orientation of government as an employment agency for family and cronies so that they can 'profit' from these positions; g) stop the theft of electricity and gas, etc., etc.
Therefore, perish the thought that there will be any improvement in governance and meaningful reforms, unless our external patrons decide to walk away, compelling us to fend for ourselves. Maybe we will then learn to swim. The default option is 'drowning' that we seem to be unwittingly (or is it wittingly?) pursuing. It appears, therefore, that as the rest of even South Asia bypasses us, we will, at best, muddle through year after year, bumping along at the bottom until we finally hit road blocks that we will not be able to surmount, not having the economic, political and social strength to remove or overcome them.
The Pakistan economy can now only be fixed and anemic growth restored to health by painful structural reforms to establish a just and fair society.