What if Ishaq Dar’s model is the right one and the neoliberals are barking up the wrong tree? Pakistan has had a long history of current account deficits, because we simply do not produce enough of what the world wants and consume a lot more of what the world produces than is our capacity to pay. Home economics is a subject out of fashion today, but ask around and you’ll find numerous women in your family who took the subject back in their college heyday. A subcategory of that subject deals with managing a home’s finances. A very basic tenet of home economics is that the homeowners need to spend less than they earn to make their homes a viable enterprise. The same dynamics that apply to running the finances of a home apply to running the state’s finances because the fundamentals of money never change.
Financing a trade deficit is possible either through a country using up its currency reserves a la home savings, or borrowing from foreign lenders which is self-explanatory, or through a capital account surplus – in other words foreign direct investment into the country. Foreign direct investment is like the breadwinner at home earning an extra paycheck. This is what the strategic community seems to have opted for. Last month, the government opened the Special Investment Facilitation Center, which as the name suggests would be tasked to boost investment into the country by providing tax incentives and removing red tape. In fact, one hears that the Council has already started work on designing certain projects to be marketed to certain Gulf countries to make it easier for them to invest in the country.
We have to do this slyly because guaranteeing free trade is the very cornerstone of any IMF program, but the principles of free trade do not work so well for developing countries such as ours whose currencies do not function as reserve currencies and where an increase in interest rates leads to a further depreciation in the value of PKR as opposed to an appreciation which is what happened with the USD in the last year and a half since the Federal Reserve started bumping the benchmark rate.
This comes after the IMF approved a round of $3 billion of much needed financing for Pakistan to stem its reserves from depleting. This was followed by the KSA, UAE, and China coming to suit. While this has been touted as a victory, the $3 billion, out of which only $1.1 billion has been deposited so far, covers only one month’s worth of our import bills. It has resulted in some economic stability for the time being, and will further furnish the strategic community’s attempt to kickstart the economy through foreign direct investments yet what the powers that be fail to realize is that until there is structural political instability and dastardly levels of education in Pakistan, the impact of foreign direct investment into the country will be close to naught, no matter how good friends those Gulf countries may be. Those good friends after all, refused to replenish our foreign currency reserves until we got onboard a new IMF program.
Another IMF program, which gives us enough to get by until we have to yet again squander our meager reserves to foot our import bill, another program which adds on to our tally of nearly $150 billion in foreign debt – which now takes up more than half our budget to service – is merely a band-aid which cannot stop the economy from bleeding. The bleeding will only stop when we very slyly and yet effectively impose capital controls which prevent outflows of capital from Pakistan. We have to do this slyly because guaranteeing free trade is the very cornerstone of any IMF program, but the principles of free trade do not work so well for developing countries such as ours whose currencies do not function as reserve currencies and where an increase in interest rates leads to a further depreciation in the value of PKR as opposed to an appreciation which is what happened with the USD in the last year and a half since the Federal Reserve started bumping the benchmark rate.
The current administration was hell bent on reducing our import bill, which was the only option in the absence of an IMF program until just this month. Banks refused to open LCs for importers which did adversely affect economic activity in the country, but at the same time, Pakistan recorded a current account surplus for 3 consecutive months in March, April, and May of this year. Detractors claimed that the current account surplus was artificial and rightfully so, but if we are to turn things around in this economy, we would need to become a household which spends well below its level of earnings. Since the level of earnings are unlikely to rise right away until the political house is brought in order and until there is a seismic improvement in our levels of education, the alternative is that whichever new government comes into power, must set on track an austerity program for the next 5 years.
This will be painful and unpopular; a few industries will shutter down – textile mills exporting goods will show a loss for the time being but in the long haul, our shift away from imports besides those of raw materials including commodities is the only viable solution if we are to become a self-sustaining economy.