Sunday May 28, 2023

What is ailing our economy?

May 21, 2023

LAHORE: Pakistan’s economy is in dire straits. The economy is plagued by multiple issues, and usually only a couple are enough to bring things crashing down.

To put up a figure, we are facing at least 16 negative factors that are pulling our economy down.

These factors in order of their impact are governance, political instability, a large informal sector, circular debt in the power sector, loss making public sector companies, a poor justice system, corruption, lack of foreign investment, poor infrastructure, low human capital, energy crisis, inflation, terrorism and security issues, weak tax collection system and dependence on aid from other countries.

With such a large baggage, it is unlikely that Pakistan would embark on a sustainable growth path at least in the mid-term. We might be bailed out for a while, but the structural deficiencies in our economies would remain the same.

We are not in any way in a position to service our debt. Our revenues are so low that in order to service our sovereign debt, we will have to further increase our debt.

The piling up of debt is not in our interest. Technically we have already defaulted. We should not be afraid of practically defaulting now then lingering on and ending up with a high default. Many countries in the past have defaulted, including Pakistan in the past 40 years.

According to the International Monetary Fund (IMF), there have been 27 sovereign defaults globally since 1980. The countries that suffered sovereign defaults in the last four decades include Mexico (1982), Brazil (1983), Yugoslavia (1983), Nicaragua (1985), Peru (1985), Chile (1986), Argentina (1989), Ukraine (1998), Russia (1998), Ecuador (1999), Pakistan (1999), Argentina (2001), Turkey (2001), Uruguay (2002), Moldova (2002), Ivory Coast (2011), Belize (2012), Greece (2012), Cyprus (2013), Ukraine (2015), Puerto Rico (2016), Venezuela (2017), Sudan (2020), Lebanon (2020), Suriname (2020), Belize (2020), Ecuador (2020).

The rescue packages for sovereign defaults vary depending on the country and its situation. However, some common rescue measures include:

1. International Monetary Fund (IMF) programmes: The IMF provides loans and technical assistance to countries in crisis to help stabilise their economy. This programme never suited us.

2. Debt restructuring: Debt restructuring involves changing the terms of the country’s debt, including the interest rate, maturity dates, and principal amount. The goal is to make the debt more manageable.

They might give a long-term recipe for restructuring.

3. Economic reforms: Economically troubled countries are asked to take on reforms that make their economies more competitive and efficient.

These may include measures to reduce public debt, privatise state-owned enterprises, and reduce subsidies. This we should pursue strictly.

4. Debt forgiveness: Some countries receive debt relief in the form of debt forgiveness from their creditors. The IMF does not provide debt relief but friendly countries can and it suits us the most.

5. Aid and grants from other countries: Countries suffering a sovereign default may receive aid or grants from other countries to help manage their economic situation. It will be welcomed by Pakistan.