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December 20, 2015

Pakistan’s Greek moment


December 20, 2015

The Greeks could splurge in a stagflation hit economy because deep down they knew the high financial stakes of France, Germany, and Italy. The Greeks were led into a borrowing trap by their fiscal indiscipline. The economic comeuppance ultimately arrived in the shape of debt default.

The Syriza government ramped up a defiant rhetoric, and yet came down to a pragmatic understanding with its European debtors who doled out 240 billion euros not out of the goodness of their heart but after a cold calculus of their banking and political interests.

Will someone come to the rescue of the only Muslim nuclear state in a similar debt default situation? A preview of this economic strangulation was revealed in Bret Stephen’s article, ‘Let’s Buy Pakistan’s Nukes’ in the Wall Street Journal’s December 16, 2008 issue. The author had suggested a Shylock-like deal with Pakistan to surrender its nuclear programme for a dole of $100 billion under a putative US nuclear security umbrella.

So the portents are here as well as the plan – to ensnare Pakistan in a debt trap and when the meltdown occurs lay out the nuclear surrender terms like a typical carpetbagger. How real is the threat and how bad is the economy? This should be the topic of a serious national security threat evaluation.

Pakistan is in the grip of an ‘accounting terrorism’ due to our economic managers’ propensity to fudge and evade their out of the financial squeeze brought about in the first place because of our fiscal profligacy, misplaced economic priorities, and failure to take tough economic decisions. Johan Galtung’s theory of structural imperialism explains imperial hegemony as an unequal relationship between the global ‘centre’ constituting mostly the first world and the ‘periphery’ comprising the developing nations.

The extractive nature of structural imperialism makes the dominant nations partners in crime with the policymaking elite of the ‘periphery’ nations – much to the detriment of their impoverished masses. Bretton Wood sisters such as the World Bank and IMF are in fact the extractive institutions of the global ‘centre’ out to bilk the global ‘periphery’ out of their resources in cahoots with the policy planning elite of the developing nations.

Our economic managers attempts to fudge figures is in fact a part of a tacit understanding of ‘don’t ask, don’t tell’ with the IMF in order to ensure a steady flow of capital from us to them in the shape of debt repayments. One example is our stated budget deficit of 5.3 percent for IMF consumption compared to the actual figure of 8.6 percent.

The accurate representation of our economic health will only be possible when we get rid of the economic charlatans minding our economy. Our fiscal imprudence is evidenced by a steep and steady rise in our national debt. While externally it is getting close to an unsustainable level internally the commercial banks have been cajoled into munificent doles to the government on lucrative rates, crowding out the private sector that is the engine of economic growth the world over.

The addition to our external debt during 2000-07 was only $3.7 billion while during 2008-15 it was a whopping $24.859 billion. The same goes for domestic debt. The total addition in domestic debt from 2000-07 was Rs1.796 trillion while from 2008 till 2015 Rs13 trillion were piled up. At present our external debt – $65.183 – is 270 percent of our total exports earnings. Growing at a rate of five percent annually, it is expected to rise to $81.9 by 2018-19.

It is then that the unsustainably high debt servicing figure of $8.2 billion is going to start becoming troubling. That will be when a Greece-like default spectre starts haunting Pakistan. Is the above situation truly alarming from a national security perspective?

The answer is yes. Because of our fiscal imprudence, wrong public spending priorities and inadequate resource generation we are on a precipice now. Ours is a classic case where fungible capital assets are being made non-fungible due to economic profligacy and pork-barrel public spending. The iniquitous tax regime, coupled with an inefficient tax bureaucracy, has stunted our indigenous resource generation. This has made the economy disproportionately dependent on external resources in the shape of aid and loans.

Our agricultural income (26 percent of GDP) and half of the services sector (57 percent of GDP) remain tax exempt, placing a disproportionate burden of taxation on the industrial sector which, despite being 14 percent of GDP, generates 62 percent of revenue. In the global structure of economic imperialism no ‘periphery’ nation has broken the stranglehold of the ‘centre’ without a breakthrough in industrial productivity. The implacable rise in the national debt is a ticking time bomb. It is time our debt problem was securitised as an existential national security threat.

What has led to such a sorry pass? The major culprits are lack of institutionalised economic management, a cavalier attitude towards expenditure planning and a lack of indigenous resource generation. An example of our slipshod planning is the much vaunted China-Pakistan Economic Corridor, where the project estimation was done in extreme haste and secrecy leaving the accuracy of the $46 billion estimates in serious doubt. The increase of 23 percent in the project estimate cost of three initial projects casts a pall of scepticism on the whole exercise.

Who knows where the figure of $46 billion would stand after an accurate estimation of all projects. Economic terrorism is the next most serious challenge to the national economic health. According to some estimates, property bought by corruption money by Pakistanis in Dubai alone was around $445 billion in the recent past. The impact of corruption money is evidenced by a surreal rise of 32 percent in foreign remittances before the Karachi Operation. The comparative rate of regional countries like India and Bangladesh during the same time period stood at 5-6 percent. As a consequence of the Karachi operation the rate has climbed down to a realistic figure of 4 percent.

Corruption has several dimensions – deliberate economic mismanagement to benefit elite segments of the politico-feudal-mercantile elite, crony capitalism, and criminal enterprises. The outflow of national resources through illegal flight of corruption money and an unsustainably high external debt are equally egregious sins that imperil the viability of our economic architecture.

A National Action Plan is, therefore, required to tackle the present economic slide. We need to be truthful about our economic reality, strengthen our regulatory institutions like the SECP, State Bank, and the Planning Division, and realign our spending priorities along pragmatic development goals. The price we pay for failure may be our national sovereignty. Our Greek moment is staring us in the face, the only difference is that there are no takers for our rescue narrative.

The writer is a retired brigadier, and a PhD scholar in Peace and ConflictStudies at the National University of Science and Technology, Islamabad.

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