A mismanaged economy

The present government has completed its two years. The democratic era has now completed seven years. Both major political parties have run the country, along with the smaller parties. Through their performance both parties have clearly demonstrated that they neither have the aptitude nor the competence or governance skills to effectively manage the affairs of the country.
In the economic area the last seven years have seen dismal growth rates averaging around three percent a year compared with seven percent growth rates achieved by the Musharraf regime in its last four years. Foreign investment, which had reached $8.4 billion in 2007, has slumped to less than a billion dollars a year. Domestic investors are sitting on the sidelines with declining access to bank credit while the government has appropriated bank credit for its own financing. Investment-to-GDP ratio has declined from 23 percent in 2007 to an average of 12 percent thereafter.
Public debt has gone up from Rs6 trillion in 2008 to Rs17 trillion in 2015. The youth bulge is throwing up around two to three million youngsters in the working age group. The economy has failed miserably to accommodate them. The inflation index has grown by 235 percent over the last seven years, while incomes have remained stagnant.
There have been seven budgets, given by the two parties, since 2008. The cumulative combined provincial and federal budget expenditure outlays have been to the tune of around $350 billion. This colossal amount, if invested in wealth generating programmes, would have generated prosperity in the country. But unfortunately gross mismanagement has pushed us in the opposite direction.
If we take a look at the ‘Efficiency of Public Institutions’ sub-index published in the 2015 Global Competitiveness Index (GCI) by the World Economic Forum we will understand our failure. Our global ranking in this index is 125 out of 144 countries. This is a shocking rating for the sixth largest country in the world – which also aspires to be the new ‘Asian Tiger’. India’s rating in this index is a respectable 69 that gives Modi the confidence to project India to be the new global growth champion.
Further subdivision of this index is highly instructive. In the ‘wasteful government spending category’ we are at 103 compared with India at 49. In the ‘burden of government regulation’ category we are at 103 versus India at 59. In ‘transparency in policymaking’ we are at 118 and India is at 57. In ‘ethics and corruption in government’ we are at 112 versus India at 65. Coupled with our ranking of 142 in the terrorism category, our predicament is clear and spells out clearly our sources of economic failure.
Lack of vision, strategy and policies to take us out of our economic stagnation coupled with pork-barrel politics, rigged bidding systems, commissions, nepotism, expensive and non-productive investments, ghost services, inefficient white elephants. Non-targeted subsidies, heavy-handed regulations, lack of regulatory and governance reforms and lack of transparency in decision-making are all hallmarks of a system designed to extract the maximum from the public exchequer for personal gains.
Recent examples include rental power plants, sasti roti schemes, the Nandipur Power Project, the Bahawalpur Solar Power Project, the metro bus project, the Danish school project, etc. The PML-N has a particular penchant for razzle-dazzle projects with dubious and negative economic outcomes. The public sector development programme has a throw forward of almost Rs4 trillion. It means that these projects will never get completed and will be wasted. The energy sector continues to plague our economy and has made our private sector non competitive in the world markets. In all this mess steps in the 15-year China Pakistan Economic Corridor (CPEC) project.
Will the CPEC turn out to be another drain on the economy or will it be the game-changer the government is claiming it to be? Let’s examine some of its features. First of all, it lacks transparency; nobody knows the finer details of the project and opacity is the rule of the game. We are told that $33 billion will be earmarked for the energy sector. Out of which $4 billion will be for coal power based on the Thar coal fields, $3.5 billion will be for hydro power and the remaining will be for projects based on imported coal and imported LNG. A small amount will be for solar and wind power.
Consider the thermal projects based on imported coal. The national grid will buy this power at around 10 cents per KWh. In China power from such thermal plants is connected to the national grid at three to four cents per kwh. The coal power plants are reportedly guaranteed a return of around 30 percent. All the special economic zones along the corridor for Chinese joint ventures will become unviable because of this expensive power.
Why should Chinese manufacturing invest in a high energy cost country when they can invest anywhere in the world? We currently have 23,0000MW of power capacity which is being underutilised. The furnace oil power plants at current oil prices can deliver power at eight cents a unit to the grid. So why not use the existing furnace oil capacity to its maximum and divert this $25 billion investment into hydel power?
This amount can build all the mega dams that Pakistan needs. Investment in these dams will give us 30 million acre feet (maf) of water. This water can turn the Thar, Cholistan, D I Khan, Balochistan deserts into thriving agriculture production centres. If we manage it right it can contribute up to $90 billion per year to our GDP (three billion per MAF). In addition we will get around 15000MW hydel power as a by product at two cents a unit.
This is Pakistan’s last chance to build the dams. China has the money, the expertise and the commitment to build them so for the sake of our hungry and poor people let’s build these dams. This will make the CPEC truly viable and generate enough wealth for us to pay for it. Together Thar coal and hydel power can banish poverty in Pakistan, and can turn the economy around.
Coming to the economic corridor, the fact is that these corridors will remain unviable unless they are fully utilised. Consider: the Lahore-Islamabad Motorway has been around for the last 20 years. So far there has been no industrial development along its route. There has been no value addition to agriculture production in the area. The people of the area hardly use it. It has become a subsidised convenience for the elite who can travel between Lahore and Islamabad at high speed. The toll cannot even recover its maintenance costs while the budget is used to cover its debt servicing.
To ensure that the CPEC does not fall prey to non-use, the industrial parks have to be viable with a competitive advantage to not only compete in Chinese and global markets but also in domestic markets. The western route into Afghanistan and Central Asia is dependent on peace in Afghanistan, while the central route to China is based on China fully using it. Perhaps it would have been better to build these routes on the principle of Build, Own, Operate and Transfer (BOOT) basis with China so that it has the incentive to maximise its usage.
Furthermore, the project has to be redesigned to eliminate wasteful spending and ensure that it generates wealth and prosperity for Pakistan. The CPEC has to also be effectively implemented to eliminate graft and corruption and has to be continuously monitored to ensure that it is built on time within budget and has the economic impact the nation expects. This would need revamping our project evaluation, project implementation and project monitoring capacities, and our institutions and decision-making processes.
The writer is a former finance minister.