Our economists, mostly retired from IMF or other multilateral agencies, are mouthpieces for these entities. They are joined by other Pakistani economists of international repute, who like to sit in their cozy offices in London, New York and DC, but claim to know the streets of Pakistan more than those on the ground connected to the pulse of the economy.
The total debt of Pakistan as of December 2022, according to SBP, was around $284 billion (Rs 64,000 billion), made up of $126 billion of foreign debt and Rs 36,000 billion of domestic debt. While domestic debt consists of 56% of the total debt, it makes up 85% of the debt servicing expense due to the high cost of domestic borrowing. Every 1% increase in interest rate results in an increase of Rs 360 billion in debt servicing. The goal of the IMF is always to stop the economy from overheating, to be able to control inflation. For this, the IMF demands increases in the policy rate, which has crept up from 14.75% to 21% this fiscal year. This increase has caused debt servicing costs to expand by Rs 2.25 trillion in the first 9 months of this fiscal year. In a tough economic situation where imports are being compressed and businesses closing, it is unrealistic to expect the government to increase tax revenue to pay for the increasing debt servicing cost. The only remaining choice is to print notes which, in itself, causes inflation. Consequently, the IMF’s rationale of demanding policy rate increases to curb inflation and perhaps make PKR an attractive currency to help ease devaluation, needs to be seriously revisited.
Our economists, mostly retired from IMF or other multilateral agencies, are mouthpieces for these entities. They are joined by other Pakistani economists of international repute, who like to sit in their cozy offices in London, New York and DC, but claim to know the streets of Pakistan more than those on the ground connected to the pulse of the economy. Our media, brazenly thirsty for any news involving personal criticism, leaves no stone unturned to drumbeat these foreign based illusionary assessments as being authentic due to the stamps these virtually operating economists are wearing. The fact is that the only solution these economists have is that Pakistan must continue to sleep in the lap of IMF, and every time it wakes up, it should take the IMF pill again and go back to sleep. This prescription has brought the country to where it is today, and we must get out of the mirage created by these economists and start focusing on home grown practical solutions that are being advocated by people like Dr. Ashfaq Hassan Khan and Dr. Nadeem ul Haq.
For now, yes – the ship is not sinking. But this is not sustainable. In a heavily import reliant economy, continuous import compression will result in an export tailspin, factory closures and massive unemployment.
Rather than the conventional bookish demands that have landed most countries in serious financial trouble, the IMF must ask for structural changes from the government that could possibly unlock the entrepreneurial potential of Pakistan’s economy, overshadowed by a broken colonial system of governance clogged with red tape and the horrors of the status quo. Demands for interventions like meaningful civil service reforms, the replacement of the FBR with a professional entity, reforms in the judicial system to overcome pending cases and enforcement of contracts, a reduction of expenditures starting from squeezing the size of the cabinet are all interventions that could perhaps achieve better outcomes than the “do more” mantras requiring increases in interest rates or taxes, which end up squeezing an already vulnerable public.
The 2017-18 Labor Force Survey by the International Labor Organization measured over two-thirds of Pakistan’s employment to be in the informal economy. While there are no credible numbers about its size, it is widely accepted that the informal economy is at-least as large as the documented. The result is pretty evident on the streets of Pakistan where, despite the recent shocks of pandemic, climate crisis caused disasters, post-Covid inflation, a foreign reserves crisis, and the unrelenting political logjam, it seems like business as usual.
The government’s strategy of severe import compression was a decision of last resort, when the lender of last resort – the IMF - decided to pause any further assistance until a never-ending list of action items was fulfilled. The government data for the first 8 months of the fiscal year shows $38 billion of imports, down 21% versus last year, and $19 billion exports, down 10%. The net $19 billion trade deficit was financed by the $18 billion in remittances, also down 10% year-on-year. The government has seemingly managed to control the foreign exchange crisis somewhat, while continuing to service, through its meagre reserves, the commercial debt (22%) as well as the, otherwise, soft terms of multilateral debt (48%), while negotiating with different countries for a rollover of the bilateral debt (30%). For now, yes – the ship is not sinking. But this is not sustainable. In a heavily import reliant economy, continuous import compression will result in an export tailspin, factory closures and massive unemployment.
While we generate around 40% of our energy indigenously, the best solution to address possible disruptions in oil and gas procurement is to open lines with Iran.
There is no doubt that the most vulnerable in the society are feeling the pain caused by the consistent inflation, currently at 35%, with food inflation around 47%. This has caused an estimated 4 million people to fall below the poverty line. While one cannot do enough to ease the plight of the poverty-stricken people, it is absolutely vital that the government, while carrying on engagement with the IMF, prepares for a fallback option whereby war footing actions are taken for innovation in the fields of agriculture to increase yield per acre, and cultivation of oil seeds and pulses for import substitution. Similarly, handholding is needed in the IT sector to create an enabling environment for the sector to start earning much-needed export dollars. The infrastructure and housing sector needs policy interventions to kickstart the economy. These three sectors, which are not reliant on imported materials, have the potential to create 4 million jobs, enough to absorb the unemployment feared to be generated as a result of import compression.
Another area much dependent on imported fuel is our energy sector. While we generate around 40% of our energy indigenously, the best solution to address possible disruptions in oil and gas procurement is to open lines with Iran. A swift diplomatic initiative is needed to convince the USA to allow a waiver from the Iranian oil embargo. Irrespective though, in the absence of such a waiver, the century old trading routes continue to operate and Iranian oil is being smuggled into Pakistan and is openly available throughout the country in small mom and pop outlets in drums and in unauthorized pumping terminals. Local administrations do take occasional action to close down these outposts, but the smuggling and sale continue to quinch the demand of oil on Pakistani streets. A similar story is in vogue for edible oil products being smuggled through Iran. Why not formalize trade with Iran, and pass on the benefit of affordability to consumers rather than allowing smugglers to profiteer?
Blessed with 55 million acres of arable cultivable land, four seasons, an unmatched topography, and a huge talented labor force… solutions to Pakistan's crises do not lie in the hands of the bureaucrats of multilateral agencies. The country has all the ingredients for it to become the next hub of growth and prosperity in the region. We just need the leadership that understands how to mix these ingredients to untap the massive potential awaiting to be exploited. The nation decries leadership. For once, we need to look inwards.