The European debt crisis, which began to unravel some two years ago, has not only created widespread uncertainty and nervousness in the global market but also pushed the world economy into a new dangerous phase. If not addressed urgently, the European debt crisis may endanger the future of the euro as a currency as well as the European Union. In view of this crisis, the world economy may witness a recurrence of the 2008 global economic and financial meltdown.
Despite frantic efforts by the European leaders to contain the debt crisis, the fire that ignited in Greece has now spread to Italy. Greece is effectively a bankrupt country and Italy has entered the danger zone. Spain, Ireland and Portugal are not far behind and are already feeling the heat from the fallout.
Technocratic governments have now been put in place in Greece as well as Italy with a mandate to implement painful reforms designed to ward off a perilous crisis. The European leaders have put in place a $1.4 trillion rescue plan to bail out Greece and now Italy, in order to prevent the spread of this contagion to other European Countries, and to recapitalise European banks. The bailout package envisages austerity measures that include massive cuts in government spending including reductions in salary, overhauling of the tax system, hike in tax rates and outright sale of rotten public-sector enterprises (PSEs). These measures are considered vital for salvaging the economies of Greece and Italy.
Are there any lessons for Pakistan? The critical ingredients that brought Greece and Italy to the brink are very much present in today’s Pakistan. The culture of patronage, fiscal indiscipline, bleeding PSEs, higher budget deficit, bad governance, and persistence of slower economic growth have been deeply entrenched in Pakistan for the last four years.
Although Pakistan has not yet arrived at the point of almost total collapse witnessed by Greece, if the status quo is maintained and business as usual policy continues, the country may witness a similar situation within the next two years (2012-13 and 2013-14). In such a scenario, who will come to bail out Pakistan? And at what cost? The question will be raised in important world capitals – does a bankrupt country like Pakistan deserve to possess nuclear/strategic assets? Has anyone given any thought to such an eventuality? Perhaps not. The nation is too busy politicking.
Pakistan is likely to face a serious debt crisis in the next two years when it will have little resources to repay its external debt and will be seeking a bailout desperately. Pakistan’s economy has deteriorated in the last four years at a historically unprecedented pace. The economic situation has gone from bad to worse to a near collapse. What is disturbing is that neither the government nor its economic team members appear serious. A laidback, lethargic and non-serious attitude has become the hallmark of the economic team. In-fighting among the key members of the economic team is now the talk of the town and is reported regularly in the press.
Pakistan’s economy is currently in a dismal state. Investment is down to a 40-year low, economic growth has slowed to an average of 2.9 percent with an attendant rise in unemployment and poverty; fiscal indiscipline is widespread with budget deficit averaging 6.5 percent of GDP. Further, public debt has more than doubled in four years as compared with the cumulative rise in debt for the last 60 years; double-digit inflation has persisted for over 48 months in a row; repeated bailout packages are being doled out to keep the rotten PSEs afloat; foreign investment has collapsed in the last four years and balance of payments is now entering a danger zone after the dissipation of last year’s windfall gain in exports.
All these developments do not augur well for Pakistan’s economy. The country has already entered election mode. Reckless policies are being pursued to appease voters. The recent excessive cut in discount rate was made to appease industrial and business class. Support price of wheat is likely to be increased to gain political favour from the agricultural vote bank. Fiscal indiscipline will be witnessed both in federal and provincial governments. All these actions will accelerate Pakistan’s journey towards a Greek-like situation.
Pakistan’s economy is undoubtedly in very bad shape. If corrective measures are not taken urgently, the economic fallout will threaten Pakistan’s national security. Pakistan urgently needs a consensus among the political parties to save its economy and protect its national security. Time is not on our side. Enough damage has been caused and to bring stability to the economy we will require consensus on key economic issues.
First, every sector of the economy should be brought under the tax net. All Pakistanis, including the politicians, must pay their due taxes. All tax exemptions must be eliminated. The concept of global income should be introduced for income tax purpose. Second, overhauling of the tax system and tax administration must be undertaken. Third, all these rotten PSEs must be privatised in a transparent manner. No government can save these institutions any more. Fourth, provincial governments will have to enhance their fiscal effort. Fifth, the new NFC Award is a disaster unless binding constraints are imposed on provincial governments. Sixth, handling of the power sector requires a new approach. The power-sector crisis cannot be resolved by increasing power tariff alone. Seventh, the autonomy of the SBP must be respected.
These are some of the key issues where political consensus is required. Unless we agree on maintaining financial discipline and running the economy professionally, there is no power on Earth that can stop Pakistan from experiencing something identical to the current Hellenic meltdown in the next two years. God save Pakistan.
The writer is principal and dean at NUST Business School, Islamabad, Email: ahkhan@nbs. edu.pk