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August 11, 2018

Relinquishing dependency


August 11, 2018

As Imran Khan-led PTI government prepares to take charge of the country, it is likely to face several challenges. Although many will need to be addressed in the short to medium-term, the one challenge that will require earliest attention relates to grounding the economy with reckless abandon.

During the last five years, fiscal deficit pushed up from four percent of GDP to 10 percent, and now three-fourth of our GDP carries debt liabilities. In fiscal 2107-18, with meagre export earnings, Pakistan recorded the largest trade deficit of $32 billion. Among the twin deficits – fiscal and current account – the latter requires urgent attention.

Some are making dire predictions that the new government will be forced to seek a bailout and has no option but to walk into the arms of the IMF for the next few years. Not necessarily so, especially considering what the IMF’s largest shareholder conveyed through its secretary of state, Mike Pompeo.

Several alternatives have also been talked about – seeking bilateral assistance from friendly countries, especially China and Saudi Arabia; setting up an Islamic banking facility that would attract large inflows of FDI; privatising public-sector dinosaurs like PIA and PSM; aiming for higher inflows of home remittances and getting the Pakistani diaspora to invest in the country.

All these measures will help our current situation besides plugging smuggling and tax evasion. Taking these measures will be like doing what the IMF does without the IMF. However, keeping in view the internal and external environment, it remains for the government to see whether it will need to go to the IMF, and if so, under what terms and conditions.

It may be useful here to share first-hand knowledge of a couple of important events that are directly related to the discussions currently being held on this subject.

Pakistan had entered into an agreement with the IMF in 1988 to tide over its balance of payment problem. The same year, Jordan had also entered into a similar agreement with the IMF. In July 1990, then prime minister Benazir Bhutto paid an official visit to Jordan, where the implementation of the IMF agreement had caused some problems.

I wanted our prime minister to hear for herself the assessment of the Jordanian government about the experience they had with the agreement. During official talks with then prime minster of Jordan, I passed on a note to her to ask the Jordanian prime minster about his opinion of the agreement. When she raised the point, there was pin-drop silence from the other side. The Jordanian prime minister first looked right and left at his colleagues and then burst out laughing.

Quickly recovering, the Jordanian prime minister said “prime minister, if you ask me, I would say I am very happy that this agreement was signed. You see, the agreement was actually signed by my predecessor. During its implementation, there were disturbances in Amman and other cities. As these disturbances continued for several days and turned into riots in some places, King Hussain dismissed that government and invited me to form a new government. That is why I said I am happy that this agreement was signed. Otherwise, I would not be sitting here in front of you as the prime minister of Jordan”.

The purpose of referring to this meeting is not to say that all agreements with the IMF lead to such consequences, but to keep our eyes wide open during any negotiations. Several countries, including Pakistan, have entered into agreements with the IMF without witnessing such consequences, and have also benefitted when severe conditions were not attached with the agreement.

Having mentioned conditions, let me pen another experience related to Pakistan and the IMF’s conditions. Pakistan’s 1988 agreement with the IMF – signed by the then outgoing government, barely a week before Benazir Bhutto’s oath-taking – had some very harsh conditions incorporated in it. The conventional wisdom of both Pakistani and IMF pundits was that, once approved by the IMF board, the conditions could not be amended however harsh they might be.

But there came an occasion when this conventional wisdom was disproved. In February 1989, several world leaders had arrived in Tokyo for the funeral of Emperor Hirohito. These leaders included prime minister Benazir Bhutto and Michel Camdessus, the then managing director of the IMF.

In a short meeting held between the two on the sidelines of the main event, BB raised the issue of the 1988 agreement’s harsh conditions, and how they were adversely affecting some of her priority areas of development. Camdessus asked her which particular conditions she considered harsh. On their identification, he showed grace and immediately agreed to withdraw these conditions and amend the agreement. This later provided substantial relief to the government.

I am narrating these facts because after Benazir Bhutto, it is Imran Khan who may be able to bring some charisma to the office of the prime minister, and who may articulate our national narrative with confidence at international gatherings. His reforms agenda is also in sync with the priorities of several developed countries and multilateral organisations which can go an extra mile to help him deliver benefits to the people of Pakistan.

Coming back to the fundamental issue of why we keep going back to the IMF while some other countries, which were earlier in the same boat as us, have done away with this dependency. The forex reserves of these countries have grown due to the strength of booming exports; their economies regularly record surpluses, and their people enjoy higher living standards.

We know that the largest part of our current account and balance of payment problem is contributed by trade deficit. In trying to finance trade deficit, our forex reserves keep declining and our currency keeps getting devalued. There is no rocket science in this. So then why have we not been able to stop this haemorrhaging of our national economy and plugging the gap by increasing our exports?

The simple and truthful answer is that we don’t have much to export. Therefore, our trade deficit and balance of payment problem has remained constant. And the reason for this is that we stopped the industrialisation of our economy nearly 40 years ago and turned ourselves from a country led by production to one led by consumption. This was largely financed by borrowings from home and abroad and by undocumented economy.

Our institutional structures in government as well as our tariff structures are loaded against exports. Such is this built-in bias that even in products in which we have a competitive advantage, it is more profitable to import than manufacture here. Take a look at our export basket and you will find that most of our export items have remained unchanged for nearly 40 years. We still largely remain a mono-industrial (textile) economy, and even here our value addition is lower than it is in Bangladesh, India and Sri Lanka. The rest of our exports are mostly raw, unprocessed and low-value goods.

We have been long addicted to ready-made solutions from abroad, instead of putting our house in order – which means reforms and changing the status quo.

The way to increase export earnings and solve our balance of payment problem is to industrialise the economy, use investment and technology to expand production and export base, and keep adding value to everything we produce. Without such an approach, we will neither be able to address the root cause of our problems, nor become a surplus economy and end our dependency syndrome.

The writer designed the Boardof Investment and the First Women’s Bank.

Email: [email protected]