There’s need to focus on economy Business Recorder 25/2/24

Feb 25, 2024 |

Farhat Ali Business Recorder 25/02/24
Breaking a two-week impasse following elections, Pakistan’s political power-brokers, after extensive negotiations, have reached an agreement to form a new coalition government with Pakistan Muslim League-Nawaz (PML-N) to lead the centre supported by Pakistan People’s Party (PPP) at a price.

PML-N to form the government in Punjab, PPP in Sindh, Pakistan Tehreek-e-Insaf (PTI) in KP and most likely a PML(N)- led coalition with PPP and BAP (Balochistan Awami Party) in Balochistan.

Another bout of give-and-take for the constitutional positions in the parliament and provincial governors will take another two weeks or so to settle down. Pakistan Tehreek-e-Insaf Pakistan (PTI) is likely to form the opposition, maintaining their claim of vote rigging. Under the emerging scenario political stability is a massive challenge.

The next challenge for the new administration is more formidable and soon enough will be put to test in management of the country’s dire economic circumstances. The administration will be forced to contend with Pakistan’s acute economic plight, after the country narrowly averted default last year with the help of an emergency IMF lending agreement.

Traditionally, the starting point of the new administration is to disown and discredit all what has been performed by the previous government. This option is not available to the new administration as its performance is a continuation of the one it had under the flag of PDM (Pakistan Democratic Movement) with PML-N and PPP as major coalition partners.

The immediate need is to work out a new programme with the IMF as the present one is due to expire this April. There is absolutely no other option but to once again return to the Fund for more support. Fitch Ratings warned this week that finalising a new IMF deal is “likely to be challenging”, but Pakistan has little choice: “Failure to secure it would increase external liquidity stress and raise the probability of default,” the credit rating agency said.

The Pakistan economy and fiscal sustainability are confronted with four acute challenges – debt-to-GDP ratio, revenue mobilisation, growth and inflation.

Pakistan’s debt has soared since 2007 as authorities failed to invest borrowing from international bondholders and countries, including China, into productive sectors.

“Debt accumulation has been overwhelmingly used to continue fostering a consumption-focused, import-addicted economy,” according to a think-tank in Islamabad. This means that the government has to borrow even more in order to make payments against its existing debts.

In absolute terms the borrowing was squandered away in random government spending and supporting incompetence and misgovernance. The nation is on the edge now. Debt is now 80 percent of GDP with interest payments as percentage of government revenue standing at 57 percent. In case of Bangladesh the percentage of interest is 32, for India it is 28 and for Indonesia it is 15. The difference is that all these countries diverted borrowing towards growth and in revenue generation.

With an interest payment of 57 percent the government will be left with only 43 percent for its own needs. Under the new IMF programme, with interest payments on the increase, the availability of funds for government spending would reduce further if growth is not achieved. If the trend of addiction to reckless borrowing is not reversed immediately the country would be working for the lenders and not for its people – with dire consequences.

The answer lies in growth. In the year 2023 the country’s GDP fell into negative territory with an extraordinary weak growth, thereby increasing the burden of interest on borrowing. The foreign reserves are hovering at US $ 8 billion, which is just enough to cover 6 weeks’ imports. Foreign direct investment is negligible. Industrial growth has shrunk. Money transactions in the market are minimised to immediate needs. Its general public interest is struggling with high inflation, which is floating between 30 to 38 percent as against 9 percent in Bangladesh and 6 percent in India.

Pakistan’s economy is caught up in a conflicting cycle of high borrowing, low growth, low revenue mobilisation and high inflation. This vicious cycle is unsustainable. Unless there are sweeping reforms and dramatic changes to status quo, to which the country is addicted, Pakistan will sink deeper into a fiscal and economic crisis.

To avoid debt restructuring, the better choice is the new IMF programme fully knowing that it would unleash some painful reforms. It would be painful for the elite class in terms of doing away with their vested interests and more painful for the middle class and poverty-stricken rising population of the country.

To usher in an IMF programme seamlessly, there is a need for a dramatic reduction in government expenditure and a significant increase in revenues, thereby carving out a portion to pay off the loans out of the system.

The expenditure which appears reckless and blatant are the loss-making public sector enterprises, which need to be retired or privatized by overriding vested and political considerations. Then there are over 34 federal ministries, with overlapping functions in the centre and with the provinces. Many could be made redundant and done away with while the other could be rationalised and trimmed for better performance. There are many other areas of public money waste, which need to be plugged.

High utility costs and high borrowing rates have made the industry, businesses and exports uncompetitive. The solution to this has to be worked out, which is not an easy one.

Foreign investment is negligible. It is linked to country perception, which is all about political stability, rule of law, business potential and cost and ease of doing business. Much needs to be addressed to mobilise investment in the country. The foremost need today is political maturity and political harmony in Pakistan.

Indonesia, a country with a population of 200 million which gained independence in 1948, is a relevant example to cite as to how the nation can emerge out of its dark times to make a new beginning. The nation experienced its general elections on 14th February 2024. They were peaceful and welcomed by all parties. The new elected leader pledged to continue with the economic policies of his predecessor more vigorously.

Indonesia of today is a member of the elite G20 club and aims to be among the 5 largest economies of the world in the next five years. Indonesia went through a checkered history of militancy, military rules, civil chaos and political and economic uncertainty. But eventually sanity and nationalist spirit prevailed and robust political governments took up country leadership, which so far is seamless and is expected to continue as the people have understood and experienced its benefits.

Copyright Business Recorder, 2024
Farhat Ali is a former President, Overseas Investors Chamber of Commerce and Industry

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