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May 18, 2021

Rhetoric & revenue

LAHORE: Government’s rhetoric on the economy has already been questioned by its finance minister; however, still there is no letup in the propaganda the economy is moving in the right direction.

When in recession the economy does need stimulus. However if the state is starved of resources providing concessions is a risky proposition. Our economy is in dire straits. We have to take loans even to finance day to day government expenses. We cannot camouflage loans by routing them through Roshan Digital Accounts. The money that the overseas Pakistanis deposit in these accounts has to be returned back with a very high markup on dollars.

We are floating bonds to show that the world still has confidence in us. But that confidence is costing us dearly. The Chinese and the Middle East countries give us short-term loans or deposits at lucrative markups that they cannot get elsewhere. At the maturity of those loans we beg them to roll over those deposits or loans. This is happening every alternate month. One day we seek rollover from Saudi Arabia, the next day it is the United Arab Emirates and then Qatar or China. This is not a long-term problem.

We need higher and sustainable exports as far as the foreign exchange reserves are concerned. Our foreign exchange woes have been temporarily addressed by the covid-19. Part of the increase in remittances is because of travel restrictions. The overseas Pakistanis, realising depressed economic conditions in Pakistan, are sending amounts higher than those sent home in normal times. The travel restrictions around the world have also restricted foreign travel from Pakistan.

Thousands of pilgrims that used to perform Umrah every month remain confined to their homes. This restriction resulted in saving a huge foreign exchange easing pressure on foreign exchange reserves. There was no Hajj last year saving foreign exchange that would have been needed by over 50,000 intending Hajjis. Thousands of businessmen stay put in the country as they are denied entry because of Covid-19 in countries where they conduct business (both export and import). Then there are scores of families that used to go abroad on excursion on a daily basis but cannot do so because of travel restrictions. This has cumulatively saved Pakistan at least $6 billion on yearly basis.

The remittances will grow tame once the air travel returns to normal. The foreign exchange outflows will increase as soon as the visa restrictions (because of covid-19) around the world are withdrawn. We have celebrated the first $1 billion landmark in Roshan Digital Accounts. We would be paying an annual interest of $70-60 million to the overseas Pakistani depositors. The way these accounts are increasing we may soon reach the $5 billion mark on which we would have to pay $350-$300 million as yearly interest. On $10 billion deposits the annual interest would be $700-600 million. We must understand we are not accumulating these deposits for development work but for consumption in the same way as we do with deposits of National Saving Schemes. These are a kind of loan and only those loans are worth taking that are invested in projects capable of generating their own resources to pay back these loans.

We are somehow managing the economy on a day to day basis through these measures but are creating a liability that would haunt our country for generations to come. Despite arranging foreign funding worth billions of dollars we are still short of our budgetary needs.

To plug this gap we borrow heavily from the commercial banks and crowd out private sector credit. Inability to arrange loans as per budget requirements results in automatic reduction in development expenditure that is already much below what the economy needs.

Pakistan’s salvation lies in increasing its revenues by eliminating all exemption as well as purging the bureaucracy of corrupt elements. It should narrow the gap between its imports and exports by increasing exports to their actual potential. This way the huge foreign remittances would be a valuable source to shore up foreign exchange.

This way the need for foreign funding would be reduced drastically. The current expenditure should be capped at current level for at least five years except for increase in budgets of education and health. The development expenditure would have to be increased three-fold in next five years to reduce exixting infrastructure deficiencies.