Beyond Default: Tehran via Washington

Beyond Default: Tehran via Washington
Pakistan has suffered from chronic governance issues for the past several decades. Inheriting a post-colonial bureaucracy and with its manageable population of 30 million (West Pakistan, 1947), the country managed to get by in the early days. The population continued to grow to 70 million in 1971, and to 130 million in 1998, but it remained unfashionable and politically incorrect to talk about harmonizing the country’s demographics. We failed to evolve colonial systems in line with the modern world, with result that we stand at around 250 million, with a growth rate over 2% p.a., over 15,000 births every day.

This unchecked growth of the country’s headcount was left at the mercy of meagre investment in education and skills development. The average education budget, both provincial and federal, has hovered around a paltry 4% of outlay, which is close to only 1% of the GDP. But even this 4% was never spent intelligently. Stimulating cognitive thinking in children was never on the cards, and much of this budget was spent towards brick-and-mortar projects, or on politically motivated schemes like “distributing laptops,” and to line the pockets of officials and contractors. As for skills, the country’s total capacity, public and private, to train people, irrespective of quality, has remained close to 500,000 people a year, while those needing skills training number around 80 million!

This has resulted in a decadent society, devoid of any direction and unable to tap into the potential that it could have exploited had this huge pool of people been imparted with education and skills. The outcome is poor productivity per capita when compared with other low to middle income developing countries. This “low productivity” stands as the single biggest reason for Pakistan’s balance of payment crisis, which has now taken precedence over the root crises of governance, whereby the country is unable to earn foreign exchange to fund the imports that it ends up consuming.

On the domestic front as well, the country is in a habit of spending much more than the taxes it generates, with a Rs 10 trillion expenditure versus Rs 7.5 trillion in revenue. The consequence is twin - fiscal and forex - deficits for successive years, bridged through consistent borrowing, which has now reached unsustainable levels, whereby no creditor is willing to lend to us anymore.

As a lender of last resort, the IMF now stands as the only hope that may open the door for us to borrow even more, albeit at great cost and suffering for the hundreds of millions of common citizens who have been subjected to the outcomes of decades of misgovernance and economic mismanagement.

Pakistan’s financing needs for the next 3 years are projected at $25 billion per year, and even with a green signal from IMF, it seems that any relief will last only a few months. There does not seem to be any strategy in place to improve the stented productivity of the nation which, in turn, will lead to balance of payment crises persisting, and could eventually result in the nation defaulting on its debt obligations.

In a doomsday scenario, if Pakistan were to default, how would a common citizen of Pakistan suffer? To get some answers, let us look at Pakistan’s foreign trade profile. The country is on track to import goods worth around $50 billion after severe import compression; imports were $81 billion in 2022. Exports, on the other hand, are slated to be around $25 billion, down from $32 billion in 2022. An expected trade deficit of $25 billion is likely to be funded by workers remittances likely to be in the range of $26 billion, down from $31 billion in 2022.

The biggest import item is oil & gas (34%) followed by agri-chemicals (16%), textile related (8%), machinery (8%), steel and aluminum (7%), edible oils (7%), vehicles (3%), wheat (2%), tea (1%), telecoms (1%). Major exports are dominated by textile products (61%) followed by rice (7%), sports & surgical goods (5%), leather and footwear (4%), pharma and chemicals (5%), cement (1%).

These statistics show that if Pakistan is unable to meet its foreign obligations, it will immediately be faced with a severe shortage of energy. This will lead to a cascade of catastrophic events, where petrol stations will be out of petrol, transport is likely to come to a griding halt, and electricity generation will cease, resulting in load shedding for days. Factories will close, giving rise to rampant unemployment followed by civil unrest similar to what we saw in Sri Lanka, but with a much stronger intensity and consequences. Maritime trade, and domestic & international air travel will also cease, causing hardship to families with loved ones abroad. It will only be a matter of time until the telecommunications sector - mobile and internet communication - gives in.

Pakistan will have to learn to survive on its own. With its vast resources, it should be able to substitute edible oils and agricultural needs. Drinking tea is likely to become a luxury. Given the extremely talented pool of entrepreneurs, industry will survive if the biggest problem of energy is somehow overcome.

It seems that the economic turmoil of Pakistan will eventually turn out to be more of a foreign policy issue, rather than economic. Relations with our oil and gas producing friends will be put on the trial, although, given the recent lack of support from them, it seems unlikely that there will be any substantial help forthcoming.

The biggest opening, therefore, seems to be to look westwards. The foreign minister along with the ministers of finance, energy and oil & gas, will perhaps have to board a plane to Tehran to negotiate supply of fuel from Iran. Our foreign office will need to work overtime with their American and European counterparts to seek a waiver for Pakistan in line with those provided to China, India, Turkey, Japan, South Korea, Italy, Greece and Taiwan, to avoid an embargo as a result of buying oil from Iran. If successful, this will be the single biggest foreign policy accomplishment of Pakistan, to give a breath of new life to its economic revival. Iranian oil will likely reduce the oil import bill by more than half, while different payment mechanisms - barter, respective local currencies etc., can be negotiated with Iran for payment of the commodity.

The Rs 260 to a US dollar parity is likely to shoot up exponentially. But since imports will drastically reduce, it is unlikely to have much effect on inflation, provided that the government is able to control hoarding of food products and to support the domestic agriculture sector on a war footing. Workers’ remittances will continue to flow in, and are likely to start to increase the forex reserves of the country, in the absence of major imports. This will, in-turn, start to stabilize the Rupee.

The scenario imagined above points towards the severe economic vulnerabilities that Pakistan is facing, and their likely outcomes. It may, after all, not be misplaced to start focusing on our foreign policy to shield us from the risks that our economy is facing. Before the ship sinks, it may be worth taking a flight to Tehran via Washington DC.

The author is governance and economics expert, and former advisor to the Prime Minister and to the Chief Minister of Punjab.