MUHaMMaD MoHaD ZULFIQar Last Thursday, the UAE decided to roll-over an existing $2 billion and pledged an additional $1 billion loan to Pakistan. Similarly, the Saudi Fund for Development is considering bumping its deposits in our central bank to $5 billion and injecting investments of up to $10 billion. These developments come in the wake of the PM, and the Army Chief, touring several friendly nations; ostensibly, to garner money for cash-strapped Pakistan.But, none of this is new; every five years or so, a new government is sworn in, it proclaims economic woes, blames it on its predecessors and looks to the world for loans and economic aid. Increasingly, it has morphed into a cyclical affair. But, what does our debt look like, exactly? Our debt repayments are astronomical, to say the least. In total, we owe roughly $100 billion to the world; we have to pay the bulk of this, almost $90 billion, in the next four fiscal years. Ominously, the State Bank’s foreign reserves have plummeted to a nine-year low of about $4.3 billion; this is a cause for serious concern.Sadly, over the years, we have done very little to fix our economic maladies. Ready to fulfill all preconditions, govt tells IMF
It reminds one of Einstein’s Parable of Insanity: we do the same thing over and over and yet expect different results. Most reforms have been cursory at best, but window-dressing cannot solve our problem; we need a serious overhaul of our economic attitudes. So, the burning question is: how do we alleviate our economic miseries. Fundamentally, our problem arises out of an economic misalignment: every year Pakistan runs into twin deficits - a current account deficit and a fiscal deficit; in order to resolve our economic complications, we need to divert our attentions to balancing these deficits. The first, our current account deficit, is rooted in our spending attitudes: we consume more from the world in imports than we produce and export to it. So, if we spend more dollars than we make we run into a deficit which we need to finance some way or the other. Over the years, we have turned to the IMF and other foreign lenders. This is where we run into an awry cycle: when we subscribe to these loans we pledge to return them at a mark-up; to cover these additional costs we need to make more dollars. PML-N's supremo meets political leaders in London
However, we are still running more current account deficits; so, we end up borrowing from other lenders to pay back our previous lenders, and to finance our neverending current account deficits. According to the Pakistan Bureau of Statistics, in November 2022, we ran a current account deficit of $2.7 billion. However, much of our deficit is unavoidable. A bulk of our import bill is comprised of necessities, and as such has relatively inelastic demand; for instance, 62 percent of our imports are either critical energy fuels, agricultural and chemicals products or food items. The most pressing concern, however, is the bill raked up by energy fuels. Pakistan has no natural oil reserves so, currently,we have to import to meet our domestic needs. In the long run, we can endeavor to find cheaper substitutes abroad or mitigate our dependence on non-renewable energy sources. Cheaper alternatives are available in Iran or Russia. However, unless the United States lifts sanctions Pakistan is not in much of a position to resort to these countries. India and China are buying oil from Russia at discounted rates. However, they are not as reliant on US backed organizations like the IMF as we are. Lyari gangster Uzair Baloch acquitted in another case
It would be prudent to shift to renewable energysources like solar or nuclear. Unfortunately, our current infrastructure cannot support base load i.e. the minimum level of demand in our electrical grid. So, the shift would have to be gradual, and over a longer time frame. Crucially, we need to build capacity for exports in the long run. Our biggest export is textile, accounting for roughly 59 percent of our total. Textile alone cannot balance out our import needs. We need to diversify our export base to include industries that push non-traditional items. Other reforms might include: aiming for value-added exports, reaching economies of scale in our manufacturing process and reducing bureaucratic procedure. The second part of our problem is our fiscal deficit. This means that the government spends more than it collects in revenue. Over time, the government should cut its fiscal deficit. In reducing the fiscal deficit the government achieves two goals: one, it can carry debt at levels that are sustainable, and in line with our growth and foreign exchange earning capacity; and, two, it also reduces inflation by curtailing the money available to people to spend, generally and especially on luxuries and imports. To reduce the fiscal deficit the government can either cut spending or raise taxes. For instance, a major contributor to our governmental spending is our expenditure on stateowned enterprises. We should aim to privatize a number of these SOEs. This is necessary for two reasons: one, the proceeds can be utilized to pay off some of our debt; and, two, it will considerably reduce our expenses since most SOEs are consistently running losses. In the last fiscal year alone, DISCOs i.e. our power distribution companies added 536 billion rupees to our circular debt. In comparison, the 67 billion rupees losses run by the PIA seem trivial. Additionally, our DISCOs, on average, lose about 34 percent of electricity produced, either to uncollected bills or line losses during distribution. So, privatizing loss-making SOEs is a necessary economic reform for which political will must be mustered up. Similarly, the government should reconsider untargeted subsidies; these are when the government artificially lowers the price of a staple good – such as food items or fuel – for all consumers in the country. Maryam Nawaz scheduled to land in Lahore on Saturday afternoon
However, this approach is inefficient and relatively regressive since it extends uniformly to all consumers, regardless of their income level or social class. Alternatively, the government should shift to targeted subsidies where itallocates funds to uplift citizens that are more vulnerable to rising commodity prices. Moreover, the governmentshould broaden its tax base by taxing the untaxed; for example, it can impose a fixed tax on agricultural land, tax on real-estate capital gain or a wealth tax. The situation is not as dire as it seems. In the long run, our underlying economic indicators are extremely promising. According to Goldman Sachs, Pakistan is poised to become the world’s sixth largest economy by 2075, with GDP clocking in at an astronomical $12.7 trillion. Most of our growth is predicated on rapid population growth. In the coming decades, much of the developed world will face a population crisis: their low birth rates today will translate into a workforce shortage in the future. This will enable Pakistan, and other developing countries, to rise to the top of the economic pyramid. FM Bilawal meets Turkish counterpart in Tashkent
However, all of this is contingent on whether Pakistan can ride out its current turmoil. It is now up to our decision makers, civilian and otherwise, to seriously reconsider our priorities, and rescue Pakistan from looming economic disaster. — The writer is a student at LUMS. He is currently serving as the General Secretary of the LUMS Law & Politics Society. The Nation, 25 Jan, 2023