Balancing the economy

The accumulation of foreign debt is a problem of prime concern for many developing countries and in particular for Pakistan. Today, Pakistan is in the midst of a balance of payments crises with increasingly limited and difficult options. The sums needed to repay foreign obligations are snowballing. The accumulation of external borrowing is so sharp that the country is unable to pay off its debt without needing to reschedule.

Despite its best efforts, Pakistan has no option but to enter a harsh IMF programme. The balance of payments predicament is so severe that the programme is likely to be front-loaded – devalue the currency and raise interest rates immediately to the extent of additional 20 percent and 200bps respectively.

Moreover, the IMF is likely to insist on increasing energy tariffs and widening the tax base. In truth, our predicament is of our own making. Only if our economic managers had reformed the tax machinery in a way so as to widen the tax net without further burdening existing taxpayers, only if we had decided to develop our industrial base for employment, import substitution and revenue generation and if only we had focused on value-added exports to curb trade imbalance.

Unfortunately, now we find ourselves in a vicious cycle whereby there is genuine concern of losing all means of financing. For instance, Pakistan has a total debt of around $83,000 million with debt servicing of $4,500 million which comes out to be around 5.5 percent of the total external debt.

As can be very clearly seen, the total foreign debt has increased almost double during the last ten years.

Finding ourselves in such a predicament, Pakistan looked to friendly nations to stave off the immediate balance of payments crisis. This has helped kick the can down the road in FY 2018-2019 but without deep structural reforms, through a harsh IMF programme, the country cannot rehabilitate itself.

The IMF terms are harsh, perhaps unreasonable but we are the creators of our own unfortunate predicament.

In the pre-plan period prior to 1955, the average annual balance of trade was favourable for Pakistan. In this period, Pakistan had a negative balance of trade only two times. Once, in 1949-50 when the first post-war economic recession looked like it would become world-wide. The second time was in 1951-52 when there was a Post-Korean War slump and Pakistan continued the OGL imports of consumer goods far too long.

During the First Plan period from 1955 to 1960, the balance of trade became adverse. The only year during this period when Pakistan had a favourable balance of trade was 1955-56 when exports had received a temporary fillip from the devaluation of the Pakistani rupee. Since then balance of trade, on the whole, has been worsening, instead of getting better and is now at an all-time high.

Though the powerful impetus of the export bonus scheme during the Second Plan period of 1960-65 resulted in a rise in the value of exports, Pakistan has never had a favourable balance of trade since the value of imports rose even faster

The association between massive inflows of foreign aid and equally massive adverse balances of trade during this period is not coincidental. This aid took the form of not only developmental goods but also of huge quantities of surplus food-grains and other agricultural commodities from the US and other developed countries. During the course, the self-reliance index of Pakistan’s foreign trade dropped rapidly to an all-time low.

During the first three years of the Third Plan period (1965-70), the average adverse balance of trade reduced somewhat. This was achieved by expanding exports and cutting down imports. Pakistan is now finding slashing down imports far more difficult than expanding exports.

This is explained mainly by the fact that the massive inflows of foreign aid have greatly increased Pakistan’s dependence on imports from donor countries not only in respect of machinery and other capital goods but also basic industrial materials. This situation may take quite some time to be corrected, because the development of indigenous basic industries is quite a painstaking and time-consuming task.

There has been no conscious attempt to improve Pakistan’s external balance, and the initiative seems to lie entirely in the hands of the countries donating foreign aid. When foreign aid inflows grew somewhat from the donor countries, the value of Pakistan’s imports rose. It is thus no wonder that the adverse trade balance was also higher year after year.

In short, the value of imports was rising and the value of exports declining. Since then the adverse balance has been rising, the highest being during 2013-2018. Unless imports are balanced with exports and loan, credit and aid homogenized, the country’s lack of socio-economic sovereignty will lead to lack of political sovereignty. This is a thought which must worry our economic thinkers and planners. – the sooner the better.

The writer is the chairman of the Atlas group of companies.

Email: yhs@atlas.com.pk