Babar Ayaz underscores the grave economic situation confronting Pakistan’s new government, and considers potential solutions
Pakistan’s newly-elected – or, as PPP chairman Bilawal Zardari put it, ‘selected’ – PTI government will have to hit the ground running as it faces serious challenges on the economic front, with a yawning gap between the country’s current account payments and income.
Although Pakistan’s exports have increased by 13.7 per cent to $23.2 billion in the last fiscal year, the import bill, in sharp contrast to the export surge,widened by 15.1 per cent to $60.9 billion in the past fiscal year. Thisis the highest ever import bill that Pakistan has paid in a single year since its creation. In absolute terms, imports were $8 billion higher than the preceding year.
According to the Pakistan Bureau of Statistics, during the fiscal year 2017-18 Pakistan’s trade deficit stood at $37.7 billion, which was 16 per cent, or $5.2 billion, more than the comparative period of the previous year. This is the country’s highest trade deficit in history.
Even after taking into account $19.6 billion of remittances in that year from overseas Pakistanis, the balance of payments deficit narrows down to $18.1 billion. This does not include the debt servicing of foreign loans and repatriation of profits by the multinational companies in Pakistan.
Thus, the most-immediate problem confronting the newly-inducted finance minister, Asad Umar – who resigned from his position as president of the Engro Group to join politics in 2013 – is to arrest the decline in the economy. The major challenge, as everybody knows, is to control the current account deficit. According to the last government, the current account deficit swelled to $18 billion. We are told that the import bill soared mainly because of two factors: an increase in machinery importsdue to China-Pakistan Economic Corridor(CPEC) projects, and a rise in oil and gas and palm oil imports. The puzzling question here is this: was China not supposed to fund the machinery as part of the CPEC investment? If that is the case, then why is it being said that we have to pay for the machinery upfront, as for regular imports? The machinery imported under CPEC was to be financed by the projects it is intended for, and paid for over a number of years.
It is vital that the incoming PTI administration asks these questions. It should also clarify the financial structuring of each individual CPEC project, becausethe previous government did not share this information with the people. From now on all government transactions, as promised by Imran Khan, should be transparent if corruption is to be stopped.
There is also a chance that Chinese companies will over-capitalise their projects, particularly machinery imported from China. This can only be checked by a vigilant economic team that is not mesmerised by the promise of a $62 billion investment. How much of this foreign direct investment has come from China is another open question.
Imran Khan had often criticised the Sharif family for taking commission on such projects, which may or may not be proved.But any corrupt practices can be exposed by telling the people how much each project has been over-capitalised.
The next important economic problem Khan’s government will have to tackle is to stop the haemorrhaging of money from public sector organisations. The PTI manifesto does not talk about privatising these public sector organisations; it promises to first turn around such companies by putting in place professional management which is not swayed by political demands. This is an old mantra which we heard in the Zia-ul-Haq era, and it was unsuccessful then.
There are only two success stories in this respect: Habib Bank Limited and United Bank Limited. The Nawaz Sharif government appointed former city bankers Shaukat Tareen and Zubyr Soomro as respective presidents of these banks in the 1990s, to turn their fortunes around. Once the job was done, the banks were privatised. But here too, looking at the short term gains, the Nawaz government disinvested more than 50 per cent shares to foreign investors.
Imran Khan’s team should keep in mind that if anything is privatised, it should not be more than 51 per cent, so that profits can be kept within the country, adding to its capital receipts. At present, remittances of profit by foreign countries and these privatised entities are repatriated, adding to the current account disbalance.
So the current challenge is to bridge the current account deficit by going to the International Monetary Fund. If Imran Khan’s team is tempted to do that, it will have to compromise on many subsidies and economic reforms dictated by the IMF, as the Americans have clearly stated that they do not want to bail out Pakistan through the IMF to finance imports from China. That means Imran Khan’s hands will be tied on both financial reforms and in trying to bring some kind of equity to US-Pakistan relations. In any case, he has been supported by the establishment with a clear understanding that he will not try to interfere in foreign or national security policies, as Nawaz Sharif did. And if he does, his fate may not be very different from that of his predecessors.
Talk of turning the prime minister’s house into an educational institution is also nothing new. In the past, many rulers initially promised that but once the bureaucracy presented the pros and cons of such measures, no further action was taken. Yet there is indeed scope for cutting down the expenses of the PM’s and president’shouses, which run into billions. Perhaps it is with cutting down the government’s expenditure in mind thatKhan has appointed former state bank governor Dr Ishrat Hussain as adviser on institutional reforms and austerity.
Foreign trips expenses can also be cut drastically by reducing the size of delegations and making the news organisations pay for their own staff if they want to accompany the president or PM on official trips. Free junkets for politicians and journalists should be stopped to save money.
Even if Imran Khan is only halfway successful in making these reforms, people will believe that he walks the walk as well as talking the talk. This has great PR value, maybe even more than actual reforms.
Here I am tempted to share an anecdote from when Gen. Pervez Musharraf took power in Pakistan and there was much talk about reforms. In the presence of many oil and gas industry executives, I once told him, ‘Sir, all governments talk about reforms when they come [to power]. While their foot is on the accelerator to get things implemented quickly, there is a heavier foot, that of the bureaucracy, which is on the brake; so even if you think you are going anywhere, you are not.’
In the interest of the people of Pakistan, I hope Imran Khan will not let these brakes hold him back.