The economy is Imran Khan’s real challenge
For the past forty years, Pakistan has endured a bad economy. Structurally, things were never as bad as at the beginning of the transition to democracy in 1988, but they have progressively become worse under several political parties and military regimes.
Every regime is driven by populist impulses, ending up compromising on critical economic reforms in order to win votes. They avoid taking tough decisions, fearing that the political opposition will exploit popular sentiments against them, and this is exactly what oppositions do in bad democracies. They feel they have nothing to lose, and so they exploit sentiments to their advantage. Interestingly, when they are in power, they face the same music resulting in a circular problem that has lasted decades, dealing only with surface symptoms.
The current Pakistan Tehreek-e-Insaf government has come into power on the promise of major economic reforms. But critics have rightly argued that the party wasted too much time formulating strategies behind closed doors. After about nine months in power, it should have rolled out policies according to a stated vision of economic growth but seems to have lost an initial advantage of striking a heavy blow at the very vested interests in the industry, business and tax collecting machineries that has stifled reforms in the past.
Finally, Prime Minister Imran Khan has realised that things are not going in the right direction, and instead of giving more time to his economic team, he decided to fire its top three managers—the finance minister, governor of the State Bank and chairman of Federal Board of Revenue (FBR).
There is also a strong belief that Khan can take the tough decisions that have evaded other political parties in the past. Public trust in his leadership remains one of the highest, and his credibility, charisma and clean political past remains his strongest governance assets. Just a few days ago, he declared the PTI was the only party in Pakistan that could take difficult decisions. And the economic decisions are going to be tough indeed, especially with resistance from vested industry interests who will use the opposition political parties and the media, and throw ill-gotten money out to bring the unions to the streets.
Pakistan’s economy suffers from five structural problems that no previous government has addressed adequately. First, Pakistan’s tax collecting bureaucracy is corrupt, inefficient and organised enough to resist reforms that would curtail their under-the-table deals with companies, corporations and affluent individuals. Khan has threatened to raise a new tax machinery if the FBR continues to fail in its functions and as a first step, last week, he announced the appointment of an FBR chief from the private sector.
The second big challenge is public debt, fast reaching $100 billion, and mostly accumulated by the previous two governments, adding roughly $60 billion in ten years. Unless there is a miracle, it is very possible the present government will not come out of the economic crisis despite its best efforts. It has to repay foreign loans worth $27 billion in the next two years and will have to keep working with a stressed economy.
Third, the balance of payments have become a permanent economic misery for over three decades. While exports have remained stagnant for the past five years at $25 billion, the import bill has jumped to more than $48 billion. Instead of allowing the rupee to devalue and float at its natural strength, the previous government borrowed heavily to keep it artificially high. That hurt the exports, and increased the imports bill.
Fourth, loss-making public entities remain the biggest burden on the economy. Since privatisation is resisted by the unions, the governments have been reluctant to touch them. Also, unless they are reformed and made profitable, no private investor will ever buy them. This government has also taken a familiar route of pouring money into these entities, hoping they might be reformed enough to end losses. With the new finance minister, I believe this policy will undergo rigorous review.
Finally, the power sector that will be key to the economy has suffered multiple imbalances, inefficiencies and corruption. Circular debt has crossed one trillion in the last few years because the government pays more to power producers per unit than it charges the consumer or the industry.
Reforming Pakistan’s economy is not a job for the faint of heart. It requires strong leadership, deep commitment and determination to restructuring. Also, it needs political strength and popular support to face inevitable resistance, and despite the constant opposition noise in the media, it is the economy that will prove to be the biggest challenge and defining point of Khan’s political career.