Friday June 02, 2023

Breaking the IMF shackles

January 27, 2022

The writer is a finance/economics professional.

Pakistan and the IMF – a love story where the partners seem to be inseparable. Or perhaps an addiction without which Pakistan can’t live. How it's spun, the fact that Pakistan has made a record of being one of the top borrowers from the Fund – approaching the Fund 22 times as of 1958 and 15 times since 1980 – is embarrassing.

It seems that every regime in Pakistan, especially since General Zia's era, that got power looked at the IMF as a child would go to mother for rescue, and then the same economic disaster ensued. Even in 2022, there are talks of another tranche to keep us afloat.

How is it possible that Bangladesh that separated from us and was weaker than us, got less support from the IMF? Perhaps, there can be parallels drawn with India or other countries, but that would be farfetched since India is in another, much higher, economic league. How is it possible for Bangladesh managed over eight percent GDP growth pre-Covid and decent (much better than Pakistan) growth during Covid, yet we struggle for even two percent growth and had five percent growth at best (and even that was subjective)?

Pakistani decision-makers’ ill-conceived, unrealistic, and narcissistic decisions are the simple answer to the above questions. Not only did we not decide based on our national interest, we caved in to the interests of other nations. Further, and more importantly, individual interests superseded national interest.

Wisdom must prevail at some juncture and now would be a better time than any other, as the country is on the verge of an economic meltdown and is virtually bankrupt. Even a layperson won't think that Pakistan can expect to get out of the IMF’s shackles in the coming few years. However, a structured approach built on short-, medium- and long-term plans, coupled with building foreign reserves based on alternate economic activities and formulating an inside out economic development approach, can get us out of the fiasco.

With its enormous resources such as oil, gas, minerals and potent industries like tourism and agriculture, geographical situation and a young population, Pakistan undoubtedly has the potential to be among the top economies in the world – or at least has the capacity to shed off its dependence on foreign loans.

Oil and gas have been our major imports (Pakistan imported over $10 billion a year of oil for the past decades and over $13 billion in the year 2019/20), even though we have mega reserves of them, and still run shortage of gas; this is incomprehensible and unacceptable. The main reason why we haven't been able to tap into these precious resources is none other than the governments and OGDCL.

Oil/gas exploration and production is a capital-intensive business, but conglomerates would only invest in a conducive environment with long-term expectations of returns. Case in point: the Middle East, and Africa for companies like Sinopec (one of the largest companies worth over $300 billion) that started investing in turbulent markets like Goban and Sudan from 2004 and since then have had many ventures in such areas. There are many other companies that have made significant investments in these types of markets.

China is one of the largest oil importers, importing over a million barrels a day and mainly from Russia. With our geographical proximity to China and attractive incentives, China would instead import from us than other markets.

Why haven't these companies considered Pakistan? It can't be that we don't have enough reserves since even we don't know for sure how many reserves we have. But certainly we have enough, based on what has been discovered so far; with Fata, we must tap the mega resources mentioned in the preliminary reports.

Pakistan must come up with effective policies that include a sovereign guarantee and attractive contracts based on reasonable rates and terms to attract investments. There are many opportunities available in the area. The government must limit its role to a facilitator and allow the sector to develop.

Further, an inexpensive and competitive supply of inputs is imperative for building a solid industrial base. Cheap and uninterrupted electricity supply is one of the main driving forces for industries, and Pakistan has struggled in this area. The approach to solving this problem has been unpragmatic, where we have focused on traditional electricity sources, like building dams, and mainly only the government has been managing the sector.

Pakistan produces over 37,000 megawatts of electricity annually and requires about 26,000 megawatts – but due to archaic infrastructure and ineffective supply mechanism, the industry doesn't get the needed electricity.

To fix this, Pakistan must involve the private sector on a competitive basis and exploit alternate means. With the country’s large population and potential to compose a solid industrial base, many corporations would be interested in considering electricity production and supply, if they get attractive, competitive market-based incentives.

One solution can be to benchmark the mobile phone industry for electricity deliverance. Instead of having one IPP (that may use solar or other means for production) for an area (like K-Electric), we should open the area to a few IPPs to produce and sell electricity on a competitive basis. On a long-term basis and on market-based rates, another solution can be to allow private companies to set up solar farms and build the needed infrastructure.

Another attractive area for Pakistan for economic development is tourism, which is one of the largest industries globally with the potential for significant contribution to the GDP. The industry is worth about $5 trillion, and the figure may even be higher if it includes the related services. With the focus on providing a valued experience to tourists, Muslim countries like Turkey, Malaysia and Indonesia recorded tourism revenue of $34 billion, $21 billion, and $18 billion, respectively. Pakistan can achieve the same kind of revenue figures, if not more.

We must ask hard questions to build a solid domestic and foreign tourism industry. And we must set specific objectives based on modern, 21st-century requirements and view the industry independently, instead of through a religious lens.

Limited infrastructure like roads to Swat and the Galiyat are being built and this has significantly contributed to the industry. However, considerable development must still be done, especially in the northern areas. For starters, all government lodgings, like the governor house in Nathiagali and other places must be auctioned immediately.

Further, security agencies and departments must formulate a foolproof nationwide security plan. It's imperative that both local and foreign tourists feel safe.

Along with the above areas, the agricultural sector is another area that can play a pivotal role in economic development. Agricultural production is suboptimal and needs dramatic capacity building for farmers and for maximising yields. Also, fruits and vegetable processing, polishing, and packaging plants need to be set up throughout the country to make agricultural produce more competitive for export purposes. Pakistan needs to tap into the fast-growing organic industry for not only agricultural produce but also for meat. Moreover, the government should consider developing vertical gardening by providing the relevant training and running awareness campaigns (to attract people and render technical training for the relevant elements such as hydroponic irrigation).

The livestock sector too has the potential for significant improvement. The government needs to separate the industry from agriculture to give it the required recognition. The sector needs dramatic capacity-building for training people to rear quality livestock for meat and milk production. People should get livestock on attractive and friendly payback terms to increase production.

Many other areas can substantially improve the economy. But one thing is sure: plans must be consolidated and implemented on a war footing to turn around the economic meltdown and move towards breaking the IMF’s shackles.

Finally, we cannot expect the federal and provincial governments to be directly involved in the above recommendations. The governments' role must be limited to facilitation for providing a level playing field and conducive environment for the integration of the private sector. We cannot expect to make the improvements without involving the private sector.