The quandary of getting the economy back on an even keel
The sinking value of the Turkish Lira in the wake of US sanctions, along with an assortment of other missteps by the Turkish government, serves as a warning for the new Pakistani government as it attempts to deal with the country’s economy. While Turkey, a member of the G20, has discovered that it cannot subject its economy to too many internal and external shocks, Pakistan Tehreek-e-Insaf leader Imran Khan and his confidants have been making bold promises of economic reforms.
Ahead of the new oath-taking ceremony for the new government in Pakistan, US Secretary of State Mike Pompeo sounded an alarm by demanding that an International Monetary Fund (IMF) loan should not be granted to help pay Islamabad’s debts to Beijing. In response, PTI’s designated finance minister, Asad Umar, taunted Washington that it should worry about its own debt to China, worth trillions of dollars, instead of threatening others. PTI will soon realize that such jingoism will not help to fix the country’s perpetually underperforming economy.
The current state of Pakistan’s economy, which is akin to a massive shipwreck, owes a lot to the finance team, headed by Ishaq Dar, of the previous government, led by the Pakistan Muslim League-Nawaz. It has left Pakistan in an economic crisis that is unparalleled — even grimmer than in 2008. The balance-of-payments crisis is monumental, the valuation of the rupee is exaggerated and subject to free-fall, and an economic bailout package is imminent.
The PTI government’s hands are tied, therefore, as either it will need to seek help from friendly nations to raise between $8 billion and $12 billion, or go knocking on the door of the IMF. To obtain a loan of $9 billion for a three-year period, Islamabad will require vital backing from key western countries, as well as China, Russia and Saudi Arabia.
The strengthening of China’s position within the financial institution makes it less likely that the US will be able to veto a request from Islamabad, while its European allies might not support Washington’s likely move either.
If granted, an IMF package will have a positive effect on the attitudes of other creditors and lenders, which would help the Pakistani government raise the additional $3 billion to $4 billion it needs to satisfy a shortfall of $12 billion. Saudi Arabia had already indicated that it could provide $4 billion through the Islamic Development Bank while there are reports that China is ready to extend a $2 billion loan facility at a low-interest rate.
Ultimately, if it is to provide the political space required for the country’s new economic team to set its house in order, PTI must forget its rhetoric about evading US sanctions, in solidarity with Iran, or opening new confrontational fronts with America.
Naveed Ahmad
For the fiscal year 2018-2019, the World Bank estimates economic growth of up to 5 percent in Pakistan. However, the country needs its economy to grow by more than 7 percent to ease existing pressures, otherwise tighter economic policies to improve macroeconomic stability are unavoidable, according to the World Bank’s Global Economic Prospects Report for 2018.
Even in the best-case scenario, where economic growth of 7 percent or more is achieved, economists estimate that Pakistan will need investment of $60 billion, something that Khan might aim to generate through his policies towards overseas citizens, as well as from friendly nations besides China.
Will a party now infested with the old, self-preserving elite be able to revisit legislation, curb corruption across the board, introduce broad-based structural reforms, enlarge the tax net and make the system more stringent? PTI does not have many options — yet it ought to be careful, given that the imposition of inefficient presumptive taxes and restrictive duties can severely hamper the investment climate.
Yet another bold, and long-deferred, policy decision that must be considered will be the privatization or closure of ailing public-sector corporations. As much as the Pakistan People Party opposes privatization of corporations like Pakistan Steel and Pakistan International Airlines, the PML-N preferred to maintain the status quo, a decision that cost more than 2 percent of GDP each year.
Pakistan also must revisit and renegotiate its free-trade agreements. Islamabad needs to adopt a more protectionist approach to boost the country’s industrial production, as well as exports. Given that the PML-N government has left the physical infrastructure in a much better condition, and that PTI has a special knack for social or human development, manufacturing with innovation is the key to unlocking the country’s export potential. According to Enrique Blanco Armas, the World Bank’s lead country economist, Pakistan’s exports declined by 20 percent between 2011 and 2017.
Despite contributing a 25 percent share of gross domestic product, and accounting for about 40 percent of the labor force, the agriculture sector has been accorded little attention. Agricultural land has been shrinking, while research and innovation have been negligible. Leaving aside the export of agricultural produce, the country’s own food needs cannot be met without increasing the annual yield by 5 percent. Reforms of the agriculture sector pose political challenges, too, such as equitable land distribution.
Ultimately, if it is to provide the political space required for the country’s new economic team to set its house in order, PTI must forget its rhetoric about evading US sanctions, in solidarity with Iran, or opening new confrontational fronts with America. Remember, Pakistan is approaching in a very similar position to that in which Turkey found itself in 2002. The lessons to be learned from that could not be more vivid and relatable.
– Naveed Ahmad is an investigative journalist and academic based in the GCC with a career in writing on diplomacy, security and governance. Besides other honors, he won the Jefferson Fellowship in 2000 and UNAOC Cross-Cultural Reporting Award 2010. Twitter: @naveed360
