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June 19, 2019

Debt-burdened servitude


June 19, 2019

The accumulation of foreign debt has become a problem of prime concern for many developing countries, in particular for Pakistan.

The terms of bailouts by IFIs are becoming more onerous than ever before, as has been amply demonstrated by the recently negotiated IMF programme by Pakistan. The sums needed to repay loans received from the developed countries are snowballing. The burning question is: how do our economic managers ensure that this really will be the 13th and last IMF programme?

There is no magic wand to fix our current economic malaise. With or without the support of the IMF, structural reforms are of paramount importance if we want to put an end to the boom and bust cycle Pakistan perpetually endures. This time around, there ought to be a national consensus, easier said than done, to put our house in order for once and for all to ensure a new era of sustained economic stability and growth.

As is well documented, tax reforms are of paramount importance. In short, tax the untaxed and don’t burden the over-taxed with more tax. The undocumented economy must be brought into the tax net through committed and sustained efforts. Use of technology to catch tax evaders and improve the general tax administration must be promoted.

The manufacturing sector must be promoted. It barely makes up 18 percent of our GDP – a shocking statistic considering where Pakistan stands in its development cycle. The country has prematurely de-industrialized. Local manufacturing is essential for creating jobs, investments and much needed import substitution.

Moreover, whilst the country most certainly needs to enhance its tax base, the manufacturing sector has been unduly overburdened with over-taxation. Equitable, broad-based taxation will also ensure the competitiveness of the manufacturing sector.

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, it was in 1949-50 when the first post-war economic recession looked like becoming world-wide and second time around 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 which is even lower than Rs3,500 billion.

Though the powerful impetus of the Export Bonus Scheme during the Second Plan period of 1960-65 resulted in the rise of 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 United States 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 by 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.

For too long, no conscious attempt to improve Pakistan’s external balance has been discernible and 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 perpetual debt-burdened servitude.

Reforms will need to outlive the tenure of the IMF programme to ensure we finally do away with the boom and bust economic cycle that afflicts Pakistan every five years or so.

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

Email: [email protected]