Friday July 19, 2024

Aid from Bangladesh

By Abid Hasan
May 24, 2021

Every government in Pakistan, including the current one, has gone around the world with a begging bowl. We are now drowning in debt and stuck in an anemic growth orbit, and will continue to be this way since no government has pursued the deep reforms necessary to establish an economically strong Pakistan.

It was unthinkable, 20 years back, that Bangladesh’s GDP per-capita in 2020 would be almost twice that of Pakistan. Bangladesh could be an economic powerhouse in 2030 if it grows at the same rate as in the past. If Pakistan continues its dismal performance, it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030.

Pakistan’s poor performance is our own fault, but our leaders conveniently blame our enemies and the IMF and World Bank. No doubt the IMF/WB have often peddled “poorly thought out and one-size-fits-all” policies and bad loans but the deep hole that Pakistan is in is largely its own doing. While corruption and the economic impact of terrorism have a role in the mess, for the most part the poor performance is a result of pursuing irresponsible, inappropriate and unpredictable policies, and half-hearted reforms. The two most glaring examples of reckless policies were: excessive overspending by government, financed by domestic and foreign debt; and imports far exceeding exports leading to unsustainable external debt

Bangladesh’s successful journey is a good example, given the similarity in terms of religion, poor work ethics, messy politics, bad governance, weak public administration, high corruption, elite capture etc. In just two decades, Bangladesh has overtaken Pakistan on key economic indicators. Over the last twenty years, Bangladesh’s GDP per-capita increased 500 percent, two and a half times that of Pakistan. How did Bangladesh become a miracle story and Pakistan a disaster tale?

The socio-economic development story of any country is complex and unique to that country. However, one commonality among high democratic achievers is that over long periods they have by and large adhered to the key elements of the ‘Washington Consensus Policies’ – sound fiscal and monetary policies, liberalization with focus on exports, targeted pro-poor expenditures, and reduced role of government in commercial activities. Interestingly, all high achievers also had high levels of corruption.

Bangladesh encouraged savings over consumption. Its savings rate is around 30 percent of GDP, compared to 15-20 percent for Pakistan . Pakistan’s irresponsible and impulsive policies encouraged public spending and import consumption way beyond what the country could afford.

In 2000, Pakistan’s exports were 50 percent more than Bangladesh. Since then Bangladesh’s exports increased 700 percent, almost three and half times that of Pakistan. In 2020, Bangladesh’s exports were almost twice that of Pakistan. Because of imprudent import and exchange rate policies, we have been foolishly incurring foreign commercial loans, deposits and bonds, at high interest rates, to finance unnecessary imports. A stark example of this bad policy was when we imported $3 billion of cars and phones and raised an equivalent amount of Eurobonds.

For most of the past two decades, Bangladesh’s fiscal deficit was around three percent of GDP, while Pakistan’s fiscal deficits were twice as high. Over 20 years, Pakistan’s cumulative per-capita government spending was $4000, while Bangladesh was half of that. Despite our per-capita spending being twice that of Bangladesh, our economic and human development indicators are worse than Bangladesh. We spent double for worse outcomes! Government spending in Pakistan has been reckless, based on the uninformed belief that higher spending leads to growth.

As a result of irresponsible fiscal and trade policies : (i) Pakistan’s public debt is now close to 600 percent of government revenues, twice that of Bangladesh; (ii) bank lending to the private sector is 200 percent in Bangladesh and 80 percent in Pakistan. Credit to the private sector is very restricted in Pakistan because of excessive government borrowings; and (iii) our external debt is 400 percent of exports, four times that of Bangladesh.

Pakistan’s FDI policies mostly encouraged investment in the service sector, where revenues are in rupees while liabilities in foreign currency. In comparison, Bangladesh aggressively promoted FDI in export manufacturing.

Bangladesh’s economic miracle also benefitted from separation of religion from state, elimination of unelected institutions’ role in politics, and their leaders’ single-minded focus on Bangladesh.

It will hurt our national ego, but the only sure way for Pakistan to accelerate growth and reduce debt, and avoid seeking aid from Bangladesh, is to emulate Bangladesh. There is no shortcut to success, except to follow prudent fiscal and monetary policies.

Pakistan must take the following painful steps to live within its means: (i) lower deficits to 3-4 percent in 2-3 years, through a judicious combination of tax raising, expenditure management and privatizing SOEs; (ii) for a few years, freeze total spending and domestic/ external debt at current levels; and (iii) strengthen the debt limitation law to make it difficult for irresponsible policymakers to circumvent the law.

Taxing the wealthy should be the major pillar for raising revenues. Pakistan should consider a dedicated ‘Debt Retirement Wealth Tax’ on individuals holding assets (urban/rural land and housing, vehicles, deposits and shares) over Rs50 million; and significantly increasing property taxes on property valued at more than Rs50 million. To lead by example, the PM could start paying property taxes on his “zero-rated” home. There should also be an increase in taxes on goods consumed by the wealthy.

The politicized ‘war on corruption’ should be turned into a ‘war on waste’, with savings used for growth inducing expenditures. Loss-making SOEs should be privatized urgently. When debt-to-GDP is around 100 percent and debt service consumes over 50 percent of tax revenues, it is suicidal to increase government spending to finance SOE losses and untargeted subsidies – every additional Rupee spending has to be financed by more domestic and external debt, thereby deepening the debt trap.

The deeply flawed 7th NFC Award, which has facilitated Pakistan’s bankruptcy and buried it under a huge pile of debt, needs to be changed. The provinces need to carry a proportionate burden of defense, debt service and subsidies, while the federal government PSDP should be limited to mega national projects only.

Pakistan must redouble efforts to accelerate export growth and curtail unnecessary imports to reduce current account deficits. Tax policies and business eco-system should be reformed so that exporting has the highest profitability compared to all other businesses catering to the domestic market – for example, to bring about a fundamental shift, domestic profits could be taxed at 50 percent, and export profits zero rated.

If we continue with a ‘business as usual’ policy, we could end up taking aid from Bangladesh in a decade. In order to establish an economically strong Pakistan, it is incumbent on the PTI to reach out to all political parties to develop a national consensus on the fundamental reforms necessary to accelerate inclusive growth and at the same time lower debt.

The writer is a former adviser to the World Bank.