While the present government is nearing to complete its six months in office the Pak economy continues to falter and be on a downward slope. The CAD (current account deficit) as opposed to a surplus of $439 million in the corresponding three-month period of last year, widened to $1.2 billion in the fiscal quarter of fiscal year 2014 (July-September), the Pak Rupee has seen its worst slide (over a less than 3 months period) in a long time, energy woes linger on without any visible and sustainable solutions in sight, investment has failed to pick-up despite whirlwind tours to China, Turkey and the USA, a climbing debt burden that now stands well beyond the statutory limit of 60% of GDP, rising unemployment and a soaring inflation with an incidence unfairly falling on the low income groups. Whereas, no one doubts the intentions of the present economic managers in trying to bring about an economic turnaround in the country, their efforts thus far seem to be out of sync with modern day realities and economic developments. Not only have their policies lacked innovation, imagination or a proactive management approach, but (on an even more serious note) they have in fact also been quite damaging, since the ensuing results ironically have been contrary to what was intended. So the question that then arises is: Why our Economic Managers are failing?
The answer to this of course cannot be described in a single line and has more to do with the preparedness of the current economic team. Though they inherited a perfectly well written PML (N) economic manifesto guiding them in the right directions where fixes were required, the desired results have not been forthcoming because both their policy-choices and implementation-competence have been misguided. What they don’t realize is that economic management has evolved at a very fast pace since the 90s and yesterday’s recipes are no longer valid in today’s modern day environment. An influx of informational technology (IT) has put the pace of management decision-making in an over-drive and at same time has provided the common man with an enhanced level of awareness and exposure, thereby completely altering his expectations and placing them in a significantly reduced time frame. More importantly, the opposing or disruptive economic forces have also equally gained speed due to the IT revolution and hence cannot simply by tackled through outdated management techniques; even a fast horse and a good horseman will not be able to outpace a motored car. This fact visibly comes to light in the province of Punjab when comparing the performance of PML (N)’s governance in the 90s with that in recent years. The Chief Minister may have worked harder this time around than before, but the changed demographic and management dynamics have just put the task beyond the scope of a single man. Ensuring success today requires professional delegation, and institutionalization of the governing systems and of the decision-making process.
Government’s dealing with the IMF in negotiating the latest loan package has also been quite disappointing. Like all global financial institutions, IMF has also evolved in recent years with a more human face and a culture that carries better understanding about the needs and respective peculiarities of developing countries.
It has somewhat learnt from its past mistakes and one believes is now careful on not imposing conditional ties that defeat the very purpose of extending a bail-out facility. However, it is the job of the borrower to present his brief in a manner that convinces the lender to balance financial discipline with future growth when setting the terms of disbursement. There are numerous past and recent examples to learn from, South American countries in the 30s and 80s, Far Eastern nations in the 90s and more recently the troubled countries within the European Union (EU) – namely Greece, Spain, Ireland, Portugal and Iceland – that have succeeded in agreeing to terms with the IMF that simultaneously allow them to gain competitiveness, grow and create employment. Also, one would have liked to see a combination of moratorium on re-payments and fresh funding directed strictly towards key developmental projects (like dams, essential infrastructure, etc) – Pakistan for the time being simply cannot afford to pile up more debt or get involved in fancy endeavors. Further, the principal purpose of an IMF bailout package is, to ensure that we do not default on our payment obligations and to keep the currency stable. Ironically, the reverse has been our case after entering the fresh IMF package – The Pak Rupee has been in a state of free fall since! Nothing can be more damaging than this, especially for an economy structured the way ours is. With oil and related imports forming the main chunk of our imports’ basket, one only has to study the Bolivian example in the 80s to understand that how a sliding national currency can push an economy in the vicious trap of hyperinflation and debt default. The rather simplistic notion that devaluation will help Pakistan reduce its CAD and enhance its export competitiveness does not hold much ground, since we have a relatively inelastic import demand and an export history that does not support volume growth via currency devaluation. And this, not withstanding the fallout that a devalued currency will have on our manufacturing related investment due to higher capital costs and an external debt situation, which will only get worse as the national currency loses value!
Though there has been a lot of noise about a renewed focus on improving national exports, sadly no practical effort can be pinpointed that supports this rhetoric. Any Commerce Ministry official thinking that qualification for the GSP Plus for the European Union (that is if we do indeed qualify) will automatically double our textile exports in the coming months is living in a fool’s paradise. Actually, the government should be embracing itself for some very challenging months ahead vis-à-vis Pakistani exports. With dollar based per kilogram price going down due to devaluation, continuous slowdown in our two main markets of EU & U.S., looming drop in the global cotton prices per se, serious supply side issues exacerbated by unfriendly government policies, and a criminal neglect by the government of agriculture resulting in reduced output of cotton, it would be a good show if we can even sustain the present pace of our exports. What has been missing is a comprehensive and targeted plan to shore up national competitiveness. As recent examples, Spain came up with innovative measures to shore up labor productivity and longer work-hours, Portugal’s government undertook deliberate reforms to help resuscitate global competitiveness of their traditional food product lines and in Central Europe, the Czech Ministry of Economic Affairs with the help of its Economic Council (equivalent of our ECC) went as far as announcing a detailed Economic Plan envisioning conscious attainment of global competitive advantage in sectors carefully chosen to be regarded as ‘Czech Winners’.
Solving an economy’s financial problems should not (especially in Pakistan’s case) be left to central banks alone. The private sector and the civil society should work cum partner with central banks in finding pathways for solving financial problems in an evolving economy. As an example closer to home, an out of box solution on these lines is at present being worked out between China and India. Indo-China trade, which was virtually zero about ten years back has today increased to nearly U.S.$ 100 billion. However, the pattern of this trade is asymmetric, since India in this relationship undergoes an annual $30-40 billion trade deficit putting a heavy burden on its already large current account deficit. At the same time India has large infrastructure requirements and against this backdrop, it has been signing several agreements with China on high speed rail, power and other infrastructure needs. In such a scenario it is only logical that China should be investing in Indian infrastructure in local currency. Keeping to this an agreement is being put in place where China will initiate a long-term debt fund that will invest in India and hence for India local currency lost through the current account can be invested back in India through the capital account transactions. Such a bond will carry a pre-negotiated interest rate, hence also benefiting China, as it will ensure steady returns, whereas, India would get access to long-term infrastructure funds that are not denominated in U.S. Dollars. In sharp contrast to this, our leadership’s recent trip to China lacked in-depth homework and appeared more of a family cum friends business outing than an endeavor by a state to seriously engage the most happening economy in the world.
The story of consistent follies does not end here. Whether it is the policy announcements on privatization or the matter of increasing the tax to GDP ratio through prudence rather than coercion or unleashing transparent cum good corporate governance in the country or forming private-public partnerships to help improve backyard security impediments or striking a balance between industrialization and carbon emissions or finding true equilibrium between private sector freedom and regulator’s oversight, the policy makers have failed to impress. Pakistan’s domestic economy remains shackled by its own rigidities and straitjacketed by bureaucracy, tradition and overregulation. In addition the investors – who are the real drivers of growth and employment – face increasing operational challenges ranging from security, corruption, nepotism, rapidly rising cost of production, draconian regulations and superficially high valuations, which mean that market returns no longer justify the risks in the near term. It is this anomaly that the economic managers should strive to correct. What they need to remember is that the turnaround in the Pak economy can only come about through its own people and they should be concentrating on highlighting reforms and working on innovative solutions that allow investors to find operational efficiencies and generate returns instead of fighting the system.