In December last year, the government approved Pakistan's National Security Policy, followed by the approval of the International Monetary Fund (IMF)-driven State Bank of Pakistan (SBP) bill by the Parliament. Many consider the bill to be a compromise on our economic sovereignty. This article argues that these bills can in fact help our economy.
Until we secured the ongoing IMF arrangement in 2019, we were accustomed to using the SBP as a funding institution, making it print bank notes without much care for the resultant inflation. No attention was paid towards arranging genuine sources of funding for the state’s expenses. The new SBP bill will force us to control expenses and find more sustainable sources for government funding. There are more options besides more indirect taxes.
Indiscriminately securing loans has already shrunken the country’s margins for development. Similarly, increasing indirect taxes also sets its limits. Thus, instead of mere tinkering with the financial parameters of large-scale reforms and restructuring, the following issues have now become imperative for truly achieving national security.
Vested interests and social deprivation
The United Nation Development Program’s (UNDP) Pakistan Human Development Report 2020 informs us that the benefits and privileges enjoyed by different vested interests amounted to approximately USD 24 billion in 2017–2018 alone. The data provides sufficient room to consider a rational diversion of funds from this source towards accelerated social uplift, development, industrialisation, education, research and development (R&D), etc.
Energy, food security and the public sector
Economic sovereignty and energy supply chain go hand-in-hand. We annually spend around 40 per cent of our budget on energy imports. However, the energy supply chain remains perennially taut. Even now, our energy supply is confronted with a unique hiccup: a furnace-oil glut. A few similar examples include:
i) Circular debt was approximately USD 4.5 billion in 2013 and now stands at approximately USD 14 billion
ii) Failure to organise any robust exploratory bidding exercise for the last eight years. The earlier two attempts failed to attract any multinational corporations (MNC), while the one currently in progress seems to lack a strategy
iii) We failed to upgrade refineries to reduce furnace-oil production; although the economics of liquid natural gas (LNG) were based on replacing oil with LNG for power generation. Thus, while solving one issue we created another.
The common theme running through these challenges is the lack of required capacity in the relevant decision-making forums to think through complex techno-commercial issues and implement effective solutions. We lack the institutions essential for due diligence. For example, in the USA the Secretary of Energy Advisory Board is one such entity and National Petroleum Council another; both are comprised of senior professionals and industry leaders. These critical institutions seem missing from our decision tree.
Similarly, our ranking at 75th place in the Global Food Security Index, with an overall score of 54.7, suffices to give us a reality check. Pakistan’s score is primarily because more than 60 per cent of rural households do not own their own land. The much-delayed land reforms need to be executed as soon as possible.
As for the public sector, it has proven to be a drain on the economy, with persistently mounting losses. In June 2020, the public sector budget was reported to have exceeded our defence budget. We have around 204 public sector enterprises (PSEs) governed by about 1,400 directors. To transform these PSEs into engines of progress, we need to deploy the best possible professionals to these director positions through a transparent, competence-based nomination process.
Because of the primacy of bureaucrats in decision-making and at negotiation tables, often with no professional knowledge, our history is fraught with missed opportunities. I am witness to the havoc caused by the bureaucracy’s capacity gap. The answers to many of our foreign direct investment (FDI) woes also lie in the failure of bureaucrats, instead of our foreign policy.
Human capital
At least 20 million children are out of school, with only 35 per cent of children who finish primary going on to middle school. The national literacy rate is barely 58 per cent. Resultantly, the World Bank’s 2020 Global Human Capital Report ranks Pakistan’s human capital at 144th out of 173 countries.
From 2015 to 2019, the education budget remained only slight above 2 per cent of the gross domestic product (GDP), while in 2019-20 the ratio dropped to 1.5 per cent and for 2020-21 (with revised GDP), it comes out to be only 1.7 per cent. No wonder our illiterate and semiliterate youth become easy prey for extremist agendas, especially without any strong, progressive movements.
Communication, exports and industry
No sustainable economic development can take place without a robust system of logistics and mobility for the masses. However, the World Bank’s 2018 Logistics Performance Index ranks Pakistan at 122. This logistical failure has resulted in the inundation of roads with two and three wheelers, requiring additional energy imports.
We took around 30 years to increase our exports from USD 6 billion to just over USD 28 billion today, reaching a high of USD 30 billion in 2013. India’s exports stood at USD 23 billion in 1990 and reached USD 538 billon in 2018. In Singapore, exports grew by nearly 6 times from USD 64 billion in 1990 USD 390 billion in 2019.
For accelerated development, Pakistan needs high value-added exports based on industrial revolution. This is not possible with the current meagre spending of hardly 0.3 percent of the GDP on R&D. Pakistan should emulate Singapore, which spends 2 per cent of its GDP on R&D.
Rule of Law
The 2021 World Justice Project Rule of Law Index places Pakistan at 130th out of 139 total countries. Pakistan does not rank higher than 89th place on any of the individual rankings of its components, either: Constraints on Government Powers (89th); Absence of Corruption (123rd); Open Government (101st); Fundamental Rights (126th); Order and Security (137th); Regulatory Enforcement (123rd); Civil Justice (124th); and Criminal Justice (108th). No serious FDI is possible with these dismal rankings.
The neighbourhood
Wise are the nations who learn to live in conflicts and still develop synergies with their neighbours, while maintaining their economic interests, such as China and Taiwan or Russia and Tukey. We should explore similar ties with India. As to Kashmir, we may try to pick up the thread where both countries left it in 2007, when, reportedly, India and Pakistan had nearly reached an agreement through backdoor diplomacy. Mending fences with our eastern neighbours would transform the entire South Asian Association for Regional Cooperation (SAARC) region, which is home to 25 per cent of the global population. It would also expand Pakistan’s regional and global manoeuvrability and help balance our current over-reliance on China.
What is to be done?
Our future depends upon how well we integrate these matters into our national security aspirations, along with an effective implementation strategy. I also hope that political parties consider incorporating such matters explicitly in their manifestos for the upcoming national elections.
Until we secured the ongoing IMF arrangement in 2019, we were accustomed to using the SBP as a funding institution, making it print bank notes without much care for the resultant inflation. No attention was paid towards arranging genuine sources of funding for the state’s expenses. The new SBP bill will force us to control expenses and find more sustainable sources for government funding. There are more options besides more indirect taxes.
Indiscriminately securing loans has already shrunken the country’s margins for development. Similarly, increasing indirect taxes also sets its limits. Thus, instead of mere tinkering with the financial parameters of large-scale reforms and restructuring, the following issues have now become imperative for truly achieving national security.
Vested interests and social deprivation
The United Nation Development Program’s (UNDP) Pakistan Human Development Report 2020 informs us that the benefits and privileges enjoyed by different vested interests amounted to approximately USD 24 billion in 2017–2018 alone. The data provides sufficient room to consider a rational diversion of funds from this source towards accelerated social uplift, development, industrialisation, education, research and development (R&D), etc.
Energy, food security and the public sector
Economic sovereignty and energy supply chain go hand-in-hand. We annually spend around 40 per cent of our budget on energy imports. However, the energy supply chain remains perennially taut. Even now, our energy supply is confronted with a unique hiccup: a furnace-oil glut. A few similar examples include:
i) Circular debt was approximately USD 4.5 billion in 2013 and now stands at approximately USD 14 billion
ii) Failure to organise any robust exploratory bidding exercise for the last eight years. The earlier two attempts failed to attract any multinational corporations (MNC), while the one currently in progress seems to lack a strategy
iii) We failed to upgrade refineries to reduce furnace-oil production; although the economics of liquid natural gas (LNG) were based on replacing oil with LNG for power generation. Thus, while solving one issue we created another.
Wise are the nations who learn to live in conflicts and still develop synergies with their neighbours, while maintaining their economic interest
The common theme running through these challenges is the lack of required capacity in the relevant decision-making forums to think through complex techno-commercial issues and implement effective solutions. We lack the institutions essential for due diligence. For example, in the USA the Secretary of Energy Advisory Board is one such entity and National Petroleum Council another; both are comprised of senior professionals and industry leaders. These critical institutions seem missing from our decision tree.
Similarly, our ranking at 75th place in the Global Food Security Index, with an overall score of 54.7, suffices to give us a reality check. Pakistan’s score is primarily because more than 60 per cent of rural households do not own their own land. The much-delayed land reforms need to be executed as soon as possible.
As for the public sector, it has proven to be a drain on the economy, with persistently mounting losses. In June 2020, the public sector budget was reported to have exceeded our defence budget. We have around 204 public sector enterprises (PSEs) governed by about 1,400 directors. To transform these PSEs into engines of progress, we need to deploy the best possible professionals to these director positions through a transparent, competence-based nomination process.
Because of the primacy of bureaucrats in decision-making and at negotiation tables, often with no professional knowledge, our history is fraught with missed opportunities. I am witness to the havoc caused by the bureaucracy’s capacity gap. The answers to many of our foreign direct investment (FDI) woes also lie in the failure of bureaucrats, instead of our foreign policy.
Human capital
At least 20 million children are out of school, with only 35 per cent of children who finish primary going on to middle school. The national literacy rate is barely 58 per cent. Resultantly, the World Bank’s 2020 Global Human Capital Report ranks Pakistan’s human capital at 144th out of 173 countries.
From 2015 to 2019, the education budget remained only slight above 2 per cent of the gross domestic product (GDP), while in 2019-20 the ratio dropped to 1.5 per cent and for 2020-21 (with revised GDP), it comes out to be only 1.7 per cent. No wonder our illiterate and semiliterate youth become easy prey for extremist agendas, especially without any strong, progressive movements.
Communication, exports and industry
No sustainable economic development can take place without a robust system of logistics and mobility for the masses. However, the World Bank’s 2018 Logistics Performance Index ranks Pakistan at 122. This logistical failure has resulted in the inundation of roads with two and three wheelers, requiring additional energy imports.
We took around 30 years to increase our exports from USD 6 billion to just over USD 28 billion today, reaching a high of USD 30 billion in 2013. India’s exports stood at USD 23 billion in 1990 and reached USD 538 billon in 2018. In Singapore, exports grew by nearly 6 times from USD 64 billion in 1990 USD 390 billion in 2019.
For accelerated development, Pakistan needs high value-added exports based on industrial revolution. This is not possible with the current meagre spending of hardly 0.3 percent of the GDP on R&D. Pakistan should emulate Singapore, which spends 2 per cent of its GDP on R&D.
Rule of Law
The 2021 World Justice Project Rule of Law Index places Pakistan at 130th out of 139 total countries. Pakistan does not rank higher than 89th place on any of the individual rankings of its components, either: Constraints on Government Powers (89th); Absence of Corruption (123rd); Open Government (101st); Fundamental Rights (126th); Order and Security (137th); Regulatory Enforcement (123rd); Civil Justice (124th); and Criminal Justice (108th). No serious FDI is possible with these dismal rankings.
The neighbourhood
Wise are the nations who learn to live in conflicts and still develop synergies with their neighbours, while maintaining their economic interests, such as China and Taiwan or Russia and Tukey. We should explore similar ties with India. As to Kashmir, we may try to pick up the thread where both countries left it in 2007, when, reportedly, India and Pakistan had nearly reached an agreement through backdoor diplomacy. Mending fences with our eastern neighbours would transform the entire South Asian Association for Regional Cooperation (SAARC) region, which is home to 25 per cent of the global population. It would also expand Pakistan’s regional and global manoeuvrability and help balance our current over-reliance on China.
What is to be done?
Our future depends upon how well we integrate these matters into our national security aspirations, along with an effective implementation strategy. I also hope that political parties consider incorporating such matters explicitly in their manifestos for the upcoming national elections.