Thursday, April 14, 2022
It won’t be easy to manage the massive economic mess that the country faces. The problems have built up over many governments and can be addressed only with sustained effort. To ward off the economy’s present free fall, I suggest a few areas of focus.
First, revive the current IMF programme. There are many pros and cons to seeking IMF help. But that discussion is for another time. When an economy is in a precarious stage, it is no time to pick quarrels and stop foreign inflows. We badly need foreign exchange to meet urgent debt servicing commitments.
This might leave the government in an awkward position to reverse a few of the concessions announced since passing the ‘mini budget’ in January 2022. But it is a small price to pay for regaining stability. Once the economy is back on track, the government should ease the lives of those most affected by the high prices of essential goods. At the same time, even now the Ehsaas/BISP programmes should be used to help those most in need.
Second, rescheduling of external debt. All our external debt indicators show high risk. Total external debt is 35% of GDP, revised and rebased; $13.4 billion paid in FY21 as debt servicing, principal and interest, was about 4% of GDP, or more than half of our goods export. It was 22% of foreign exchange earned from exports and remittances. Today, we are at a point where it seems that the main business of the government is to borrow from wherever possible to manage the current account and the fiscal deficit. All other responsibilities have become subsidiary.
It won’t be easy. Pakistan has sought rescheduling before, only to find that the economy is back to where it was. Also, our request would be soon after the G20’s voluntary postponement of dues during the COVID-19 emergency. Yet there is no option. The country must use all its political and strategic levers to persuade lenders to do so.
This time our approach must be different. First, we must ask for rescheduling from all lenders, not just the Paris Club and China. About 28% of our total foreign debt is from IFIs. Though their debt is low-cost, the tenure of debt and new borrowing to service past loans builds up the cost of their debt. The government would have to persuade them by contacting major world capitals that have influence over IFIs. Of course, Pakistan has been less than judicious in its use of foreign loans. Lenders too though have funded low-impact projects and programmes, whose ideas often originated with the IFIs. This is clear from their own evaluation reports. While the projects didn’t work, our taxpayers were left holding the bill.
The other, more important, change in approach is that the request for restructuring must have an accompanying economic growth plan. Creditors must know that Pakistan has a plan to pay back. The economic growth plan must have a component to build private productivity and exports. CPEC is a useful vehicle for Pakistan to attract labour-intensive and export-oriented FDI from China. Also, it is time to make SEZs operational. They have been talked about extensively, but with no result on the ground. Exports are the only way to pay back foreign loans. In case rescheduling happens, the government must use part of the savings to return high-cost loans. Partly, the savings must go for importing key equipment for the industry.
Another proposed change from the past is to request that lenders must not charge interest during the rescheduling period. As I said, it won’t be easy, but we must try to gain lenders’ confidence to make the exercise meaningful for us.
Third, re-negotiate IPP agreements. Power-sector reforms of the 1990s, done on the advice of IFIs, have led to a collapse of power supply. Our economy could not support the cost of the ‘reforms’ that were put in place. Also, the sector is too complex to be solved by the simple idea of market economics and private participation.
Having earned massive profits, the original investors have mostly left. It is now clear that the consumer or the government cannot meet the cost of power along with the generous concessions that IPPs avail. In any case, with the build-up of debt caused by non-payment of tariff differential subsidy, IPP profits are more often on books rather than immediately realized. There is no option but to review these agreements.
This will be a test for the government. Decades of preferring favoured sectors over others have brought the economy to this perilous stage. It is time to break the nexus between decision-makers and special interests. We can begin with IPPs and move to other such areas. Done successfully, this would build business confidence by sending a message of the government’s resolve to deal with special interests.
Fourth, restructure the PSDP. Immediately, we do not need fancy studies such as a 25-year vision. What we need is a robust plan to grow exports. The decline in exports from 19% of GDP in 1990 to less than 8% in 2021 is a sad travesty and a major cause of present problems. All public investment must serve the goal of increasing exports.
From now on, one of the government’s main focuses must be to make available public goods that help selected export industries or key import substitution industries. So, the PSDP must make targeted physical and human investments that serve a shortlist of such industries. Under top-level supervision, all relevant parts of the federal and provincial governments must come together. In addition to the main players, they include the HEC, science and technology and its affiliates such as PCSIR, the IT ministry, NAVTEC, FBR, and provincial departments.
We must make special efforts to strengthen the micro and SME sector. It is time to forego the calumny of considering SMEs as tax evaders. SMEs mostly do not receive government services. They are left to access them with their own methods. SMEs have the potential to support LSMs, create jobs and create entrepreneurship.
The State Bank of Pakistan’s recent effort of digitisation of the economy will help productivity. This must continue and other key areas must complement, especially the FBR, where delays often increase cost for business.
Also, to strengthen industrial growth, the government must revive DFIs. Fixed cost long-term project financing was key to the industrial growth of the 1960s. DFIs have been done away with on IFI advice. That has not served us well. The private sector needs predictable and fixed cost project finance. Growth in exports is the outcome of an economy’s total strength. Its decline is therefore a reminder of falling standards and abandoned responsibility.
Lastly, improve governance to support private enterprise. In some areas, the government is no longer a service provider, but an obstacle. If allowed to decline, the country would fall into a morass from which it is hard to recover. The private sector needs timely and low-cost services. The government must make them available. It must improve delivery through supervision, enforcement, and training. We cannot allow civil services to decline anymore.
The writer is chair and CEO Institute for Policy Reforms, and a former commerce minister.
Originally published in The News