Addressing economic distortions

The political turmoil around the opposition’s no-confidence motion against the Imran Khan government is unlikely to be a short-lived affair. If the motion succeeds, the PTI will be out on the streets, demonstrating against its ouster. And if it fails, the opposition will be carrying on their campaign on the streets. The casualty will be the economy, which is already on life support.

That the economy is technically bankrupt has been clear for more than a year now. Imports are the exports and dollar income from stagnant exports, remittances and FDI is barely enough to finance rising imports – with debt servicing needs met through more debt. On the domestic front, federal revenues – net of transfers to provinces – are consumed by debt servicing and defence, with a part of government payroll and all of development expenditure met through (more) debt. Pakistan has been rendered a debt-strangled economy.

This situation has arisen because of government policy choices over the last four decades, and all governments – military and civilian – are responsible. Specifically, policies have been driven by particular vested interests, in direct conflict with the interests of the national economy. Dominant constituents in the corridors of power have aligned themselves, domestically with the import, land, stock market, and particular industrial lobbies and, externally, with international financial interests.

This unholy alliance appears to have been formed during the 1980s and surfaced in the early 1990s. The next decade saw General Musharraf’s economic team, comprising the cream of talent representing these interests; it has continued to be in power for the last two decades and is continuing to benefit their foreign and domestic principals at grievous cost to the national economy.

The depredations wrought by domestic lobbies and international financial interests are well known. Less known and acknowledged is the damage being caused by three industries: sugar, paper and automobiles. Any increase in output is reflected in GDP growth figures and hailed as positive. However, short-term growth can also cause erosion of the economic base in the long term. A classic example is that of felling trees for sale, which is recorded as a contribution to GDP, but which leads to deforestation.

Sugarcane producers receive a guaranteed price, which compares better relative to other crops and leads to greater than optimal allocation of acreage to sugarcane. Higher production of sugarcane translates into higher production of sugar. Given the high price paid out to sugarcane producers, the price of sugar produced by sugar mills is higher than world price. The net result is surplus output, but at higher than world prices.

By the time the following year’s crops are ready for harvesting, mill owners decline to lift the crop on the argument that their warehouses are full of yester-year’s sugar output. Sugarcane farmers scream ‘disaster’ and mill owners respond by demanding government subsidies to be able to export the surplus sugar. Farmers and mill owners pocket the subsidy, while the government is left nursing the sugar sector’s contribution to the national budget deficit. Clearly, economic and political rationality demands limiting the acreage devoted to sugarcane.

Paper is the major raw material for the production of any printed material, including books. Pakistan’s need for paper is met largely by imports and partly by domestic production from imported pulp. Standard economic theory states that import duties on raw material be lower than on the final product, so as to promote local production and employment. The current situation is the reverse: import duty on paper is high, but books are imported duty free.

The high duty on paper protects three powerful paper manufacturers in the country, but books that can be printed in the country are ordered from abroad. Even Urdu books are printed abroad; given that importing books duty-free costs less than local printing on duty-paid imported paper. Economic and political rationality demands that import of paper and books be treated at par, so as to stop the drain of foreign exchange and to protect the domestic printing and publishing industry and employment therein.

The automobile industry is a drain on scarce foreign exchange. Import or assembly of vehicles costs dollars and the consequent recurrent consumption of imported gasoline costs more dollars – all borrowed. Hundreds of new vehicles are registered every day and come on the road; feeding the profligacy of the elite, while the economy continues to sink down the foreign debt hole. Economic and political rationality demands a ban on import and domestic assembly of non-commercial vehicles.

Addressing these distortions, falsely celebrated as progress, is imperative and urgent to rescue the economy back from the brink. An overriding need, however, remains reduction of non-development expenditure, including non-combat defence expenditure. These expenditures constitute the grossly excessive ballast that is dragging the ship to the bottom. The question is: will rationality prevail?

The writer was a member of the 7th NFC and is now a member of the 10th NFC.

He tweets @kaiserbengali