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Friday March 29, 2024

Forsaken reforms

By Mushtaq Rajpar
January 18, 2018

For the past five years Pakistan’s economy has not changed its basic composition, structure or dynamics. Fundamentally it remains the same, and as per historical cycles of crisis and lifting up of the crisis, it now needs a fresh injection of foreign loans to sustain foreign exchange reserves and save the falling value of the rupee against the dollar.

Last month, the rupee depreciated around five percent against the US dollar and Moody’s and the International Monetary Fund (IMF) have predicted a further depreciation of the currency. The IMF has estimated the real exchange rate to be 10 to 20 percent overvalued. If the prediction is correct, we will soon see a further 10 to 15 percent devaluation of the

currency.

The PML-N government had two ministers, Ishaq Dar and Ahsan Iqbal, who spoke high of their achievements. But it is important to review the legacy of achievements they will leave behind. Their democratic dispensation has already become a casualty of accountability efforts. What strengthens the economy, stabilises it, reduces deficits and provides the economy with a solid ground for sustainable growth is no rocket science. The basics remain the same but it is the government that fails to introduce these economic reforms. This time too there was just talk and no real reforms happened.

In the much cited example of the Asian Tiger, and the economic rise of China and other countries since the 1980s, there is a single factor in common: the sustained high ratio of foreign and domestic investment in the economy. But the FDI ratio has not seen a high increase in Pakistan as compared to India. Last year India’s FDI went over $25 billion, while in Pakistan it remained less than $2 billion, including the funds that went in to CPEC projects. CPEC projects are not ushering in a cash flow in the country rather it is the Chinese equipment and heavy machinery that is adding to our trade deficit by disturbing the trade balance.

Our exports value half of our imports revenue, which is a gap huge enough to not be filled up by remittances alone. Moreover, as the PML-N government is facing political pressure in its last year, it may not borrow from the IMF. And other sources of cash inflow have also dried up, including the Coalition Support Fund (CSF) from the US.

Though the PML-N government claims to have ended power outages, reports received from across the country speak otherwise. Take for example the Sindh province, where not a single city is free of loadshedding, and people are suffering hours-long power cuts and are forced to livein darkness even during the winter season.

It would be interesting to see what claims the PML-N government would make regarding its economic achievements. The ousted prime minister, Nawaz Sharif, has already started playing the victim card. And with a new prime minister in office, it seems there is no government in the country.

Pakistan needs to arrange financing of over $10 billion for the Diamer-Bhasha Dam which was inaugurated by General Pervez Musharraf some 10 years ago. Both the former PPP and the current PML-N governments failed to arrange funds for the mega project which is a need of the Sindh province for storing water and for production of hydropower.

Neither the China-Pakistan Economic Corridor (CPEC) nor the US initiated Kerry Lugar civilian assistance (of $7.5 billion) came up to our high expectations, even though both promised to meet Pakistan’s development needs. It is clear that the two countries had their own development priorities and spent their financial resources where they wanted to.

On the other hand, interesting developments are surfacing with regard to the Bhasha Dam project being brought under CPEC. In its recent report, a credible foreign wire service revealed that China demanded a share of ownership in the dam as a pre-condition to financing it. The Wapda chairman, however, rejected this condition, terming it to be ‘against Pakistan’s interests’. Even though China refutes the claim made in the story but the Wapda chairman was heard telling this to a parliamentary committee.

The end result is that an important long-term project is not being supported by any lending agency or friends of Pakistan. Or we could also say that both the PPP and PML-N civilian governments did not effectively try to mobilise resources for the dam. Left on the government, and it would take ages to complete the project from its own resources because a sense of direction and urgency is alien to our governing elite, both civil and military.

Politically speaking, it is much easier to align the country with China or Russia. But building an economic connection with these two countries is not easy and goes beyond just a political desire; there needs to be an economic logic, which is missing. In the wake of tense political relations with the White House, Pakistan will have to make alternative arrangements to fill the gap of borrowing for the next budget. It would need to have enough cash flow to payback the foreign debt, which now amounts to over $13 billion per annum. In 2013, a $6.6 billion loan from the IMF was used to make payments for previous outstanding loans and without a fresh loan arrangement Pakistan faces the threat of default.

Army Chief General Qamar Javed Bajwa recently highlighted the need to improvise the tax-GDP ratio. Without addressing this issue, Pakistan’s debt cycle will remain hostage to foreign influence and continue to keep the economy on the edge of defaul. In our history, both civilian and military governments have failed to achieve this target. Other countries will not spend their taxpayers’ money to pay for our expenses and development needs. It is this basic message that our ruling elite needs to understand. One wonders why only shock therapy works on us.

Email: mush.rajpar@gmail.com

Twitter: @MushRajpar