Another bubble of ‘high growth’ has gone bust, the economy is teetering on the brink and the IMF beckons. The current account balance is out of control, there is a wide gap between imports and exports, foreign exchange reserves are dwindling, budget deficits are alarming, state entities like Pakistan International Airlines (PIA) and Steel Mills are facing collapse despite getting billions in state subsidies, and the government is once again reverting to predatory taxation to meet its obligations.
For those not acquainted with Pakistan’s economic history or have brief knowledge of economics, this downward trajectory may come as a surprise. After all, not long ago, ex-finance minister Ishaq Dar promised us heaven and great things to come. We were, for example, told that the circular debt problem was gone and there would be no more load shedding. But the spectre of chaos descended as summer heat peaked. Amidst the darkness came the worrying news that the circular debt has crossed Rs1 trillion and other economic indicators have also taken a nosedive.
“What is going on?” asks the common man. The simple answer is that Pakistan has again gone through its boom and bust cycle, and by now the air out of the boom balloon has evaporated. This latest cycle (2013-2018) is no different than the ones before, and rest assured, that it will not be the last one. Why? Pakistan’s economic booms have never been built upon sustained, home-grown factors but can largely be attributed to luck and external factors. Historically, these have propped up the economy for a while, till strains begin to show and the artificial propping up starts losing steam. The latest episode serves as a good example. It was built heavily upon favourable external factors that were never of our making (low global demand leading to historically low oil prices, leading to low inflation at home), building reserves by contracting debt from wherever possible (Dar’s beloved ‘record reserves’), and few friendly contributions ($1.5 billion ‘gift’ from Saudi Arabia). Meaningful reforms for sustainable growth, meanwhile, remained absent and there was the usual figure fudging in action, which made claims questionable. And as things began to take a turn for the worst (oil prices rising, repayments on debt starting to get bigger, etc.), the façade built over the last five years took a tumble.
Now that we are back to square one, and a new government is about to take charge in the coming months, it is high time that we seriously contemplate the ills that afflict our economy. Since I have written, opined and talked about this topic on many forums, the following lines will contain some major suggestions to help us do that.
The first and foremost suggestion is that policymakers need to move beyond the colonial era economic management policies and mind set. This mind set wrongly attributes economic growth primarily to infrastructure like building roads, bridges, motorways and metro buses. Sadly, this thinking is out of sync with the present time. Although infrastructure is still important, it is ideas, innovation and human capital that are the driving forces of sustained economic growth. In these areas, Pakistan performs abysmally by international standards. Continually building new infrastructure in Pakistan makes little sense since almost half of the available infrastructure is underutilised.
Economic management also needs to move away from its overemphasis on day-to-day expenditures to meet urgent requirements. This daily fire fighting ritual has to give way to emphasis on efficient use of resources, development expenditures and trimming unwanted waste. To understand this, the reader should be aware of a few startling facts: one, government departments (both at federal and provincial level) can hardly utilise even half of their allotted amount, meaning that they are extremely inefficient at money management. Second, 80 to 90 percent of this expenditure is current (non-development) expenditure. Third, of the total governmental outlays, hardly 20 percent of resources are devoted to the cause of development. Yet most of the projects that fall in the ‘development’ ambit are delayed, overstaffed and plagued by incompetence, and mostly devoted to infrastructure. In short, government resources at every level are used very unproductively, failing to maintain and sustain a growth momentum. Simply put, money has to be allocated to its most productive use, especially when resources are hard to come by.
Now to our economic Achilles’ heel, the current account imbalance, which is reflected in higher imports (compared to exports). Let me put a simple question: why do we prefer imported stuff rather than local ones? The simple answer is that the local stuff cannot match the quality of the imports. Does any local firm, for example, manufacture as good a smartphone as the Chinese do? And mind you, Chinese smartphones are not of the same quality as American or European ones. This, to a large extent, explains Pakistan’s current account woes. To enhance quality, a substantial percentage needs to be devoted to research and development (R&D) and innovation. In Pakistan, as a percentage of GDP, R&D is not even 0.5 percent. Consumers want quality, and Pakistani consumers get it mostly through imported items. Putting tariffs will not help as they will be smuggled through the porous borders anyway. Therefore, any future policy has to take into account R&D and make it a pillar of policy.
Change the direction of government regulations and expenses away from benefitting rent seekers and lobbies towards general welfare of the people. This calls for ending distortionary and illogical policies like subsidies. For example, billions of rupees (taxpayer money) in subsidy are doled out every year for sugar and wheat subsidies. Both end up propping up the already strong cartels, mostly made of a few large mill and landowners.
When it comes to PSEs like PIA and Steel Mills, these need to be immediately privatised without worrying about their worth and market prices. Get rid of them even if it has to be done on a discount. The cost of keeping them on public payroll are staggering and not worth it. As pointed above, their liabilities have now crossed a trillion and their annual running expenditures are above Rs500 billion annually. They impart little advantage or contribute little to welfare. Instead, they are mainly used as job placement bureaus and for instilling blue-eyed boys on top posts. Better to do away with them as soon as possible.
Government policy making also needs to shift its emphasis from supply only towards both demand and supply. For example, as I pointed out in one of my previous articles, when it comes to electricity the emphasis is solely upon supply of electricity rather than efficient use and productivity of electronic gadgets (the demand side).
Last, but not the least, any future government needs to understand the importance of cities and its proper management. Cities are not only the engines of growth, but also helps sustain the growth momentum even without government support. Major metropolises like Karachi and Lahore generate millions of jobs and sustain lives. Yet management-wise, they are a mess and their potential remains unfulfilled. This is certainly true of Pakistan’s other cities, which would need proper government attention if they are to sustain any future growth.
The above were but a few major suggestions to reform Pakistan’s economy in a manner that it can sustain growth well into the future without any external help. There are many other brilliant ideas out there which need to be worked on. These can be found in individual writings or in books like ‘How Pakistan became an Asian tiger’. Suffice to say, economic management in Pakistan has to change for the better. Otherwise, another boom bust cycle is on the way.
For those not acquainted with Pakistan’s economic history or have brief knowledge of economics, this downward trajectory may come as a surprise. After all, not long ago, ex-finance minister Ishaq Dar promised us heaven and great things to come. We were, for example, told that the circular debt problem was gone and there would be no more load shedding. But the spectre of chaos descended as summer heat peaked. Amidst the darkness came the worrying news that the circular debt has crossed Rs1 trillion and other economic indicators have also taken a nosedive.
“What is going on?” asks the common man. The simple answer is that Pakistan has again gone through its boom and bust cycle, and by now the air out of the boom balloon has evaporated. This latest cycle (2013-2018) is no different than the ones before, and rest assured, that it will not be the last one. Why? Pakistan’s economic booms have never been built upon sustained, home-grown factors but can largely be attributed to luck and external factors. Historically, these have propped up the economy for a while, till strains begin to show and the artificial propping up starts losing steam. The latest episode serves as a good example. It was built heavily upon favourable external factors that were never of our making (low global demand leading to historically low oil prices, leading to low inflation at home), building reserves by contracting debt from wherever possible (Dar’s beloved ‘record reserves’), and few friendly contributions ($1.5 billion ‘gift’ from Saudi Arabia). Meaningful reforms for sustainable growth, meanwhile, remained absent and there was the usual figure fudging in action, which made claims questionable. And as things began to take a turn for the worst (oil prices rising, repayments on debt starting to get bigger, etc.), the façade built over the last five years took a tumble.
Pakistan's economic booms have never been built upon sustained, home-grown factors but can largely be attributed to luck and external factors. Historically, these have propped up the economy for a while, till strains begin to show and the artificial propping up starts losing steam
Now that we are back to square one, and a new government is about to take charge in the coming months, it is high time that we seriously contemplate the ills that afflict our economy. Since I have written, opined and talked about this topic on many forums, the following lines will contain some major suggestions to help us do that.
The first and foremost suggestion is that policymakers need to move beyond the colonial era economic management policies and mind set. This mind set wrongly attributes economic growth primarily to infrastructure like building roads, bridges, motorways and metro buses. Sadly, this thinking is out of sync with the present time. Although infrastructure is still important, it is ideas, innovation and human capital that are the driving forces of sustained economic growth. In these areas, Pakistan performs abysmally by international standards. Continually building new infrastructure in Pakistan makes little sense since almost half of the available infrastructure is underutilised.
Economic management also needs to move away from its overemphasis on day-to-day expenditures to meet urgent requirements. This daily fire fighting ritual has to give way to emphasis on efficient use of resources, development expenditures and trimming unwanted waste. To understand this, the reader should be aware of a few startling facts: one, government departments (both at federal and provincial level) can hardly utilise even half of their allotted amount, meaning that they are extremely inefficient at money management. Second, 80 to 90 percent of this expenditure is current (non-development) expenditure. Third, of the total governmental outlays, hardly 20 percent of resources are devoted to the cause of development. Yet most of the projects that fall in the ‘development’ ambit are delayed, overstaffed and plagued by incompetence, and mostly devoted to infrastructure. In short, government resources at every level are used very unproductively, failing to maintain and sustain a growth momentum. Simply put, money has to be allocated to its most productive use, especially when resources are hard to come by.
Now to our economic Achilles’ heel, the current account imbalance, which is reflected in higher imports (compared to exports). Let me put a simple question: why do we prefer imported stuff rather than local ones? The simple answer is that the local stuff cannot match the quality of the imports. Does any local firm, for example, manufacture as good a smartphone as the Chinese do? And mind you, Chinese smartphones are not of the same quality as American or European ones. This, to a large extent, explains Pakistan’s current account woes. To enhance quality, a substantial percentage needs to be devoted to research and development (R&D) and innovation. In Pakistan, as a percentage of GDP, R&D is not even 0.5 percent. Consumers want quality, and Pakistani consumers get it mostly through imported items. Putting tariffs will not help as they will be smuggled through the porous borders anyway. Therefore, any future policy has to take into account R&D and make it a pillar of policy.
Change the direction of government regulations and expenses away from benefitting rent seekers and lobbies towards general welfare of the people. This calls for ending distortionary and illogical policies like subsidies. For example, billions of rupees (taxpayer money) in subsidy are doled out every year for sugar and wheat subsidies. Both end up propping up the already strong cartels, mostly made of a few large mill and landowners.
When it comes to PSEs like PIA and Steel Mills, these need to be immediately privatised without worrying about their worth and market prices. Get rid of them even if it has to be done on a discount. The cost of keeping them on public payroll are staggering and not worth it. As pointed above, their liabilities have now crossed a trillion and their annual running expenditures are above Rs500 billion annually. They impart little advantage or contribute little to welfare. Instead, they are mainly used as job placement bureaus and for instilling blue-eyed boys on top posts. Better to do away with them as soon as possible.
Government policy making also needs to shift its emphasis from supply only towards both demand and supply. For example, as I pointed out in one of my previous articles, when it comes to electricity the emphasis is solely upon supply of electricity rather than efficient use and productivity of electronic gadgets (the demand side).
Last, but not the least, any future government needs to understand the importance of cities and its proper management. Cities are not only the engines of growth, but also helps sustain the growth momentum even without government support. Major metropolises like Karachi and Lahore generate millions of jobs and sustain lives. Yet management-wise, they are a mess and their potential remains unfulfilled. This is certainly true of Pakistan’s other cities, which would need proper government attention if they are to sustain any future growth.
The above were but a few major suggestions to reform Pakistan’s economy in a manner that it can sustain growth well into the future without any external help. There are many other brilliant ideas out there which need to be worked on. These can be found in individual writings or in books like ‘How Pakistan became an Asian tiger’. Suffice to say, economic management in Pakistan has to change for the better. Otherwise, another boom bust cycle is on the way.