Pakistan is ripe for change, but little appetite for reform among elite

In a recent Gallup Pakistan survey, an astonishing 77 percent of respondents expressed dissatisfaction with the current state of affairs. 69 percent considered the present economic situation as very bad or bad. Only 15 percent believe that the country’s economic situation will significantly improve over the next 12 months. In essence, Pakistan is at a pivotal point, with the population seeking radical change that improves their lives and livelihoods.

The discontent with the status quo could be an opportunity for transformation if the political mandate aligns with policy implementation to address the deep underlying macroeconomic imbalances. These imbalances include large fiscal deficits, low industrial and agricultural productivity, and a fragile balance-of-payments position with the looming prospect of default.

Over the last decade, Pakistan’s dependence on cash injections from friendly countries and global multilateral lenders has grown, leading to a total public debt expansion to 74.3 percent of GDP at the end of FY2023 from 63.3 percent in FY2013. As the debt becomes progressively less sustainable, Pakistan’s access to international credit markets has effectively been shut. Pakistani policymakers, therefore, view the prospect of direct investments from Gulf countries as the latest remedy to the crisis. The hope is that the dollar booster will bolster the perennially anemic reserves, galvanize economic revival, and extricate the country from the vicious cycle of no growth and increasingly unsustainable debt servicing that has little room for investment needed for basic services and human capital development – essential capabilities required for future growth.

Given the lack of common ground between the aspirations of the vast majority and the elite, something will eventually have to give.

- Javed Hassan

Irrespective of whether multi-billion-dollar investments materialize, they are unlikely to serve as an alternative to sound policies that address the fundamental weaknesses in the economy. More disconcertingly, the desire for a silver bullet solution to all that ails the economy suggests that the penny has still not dropped among the power circles about the nature of the crises or their severity.

Even if they do materialize, the investments will only provide temporary relief to the liquidity crunch. They will not eliminate the low productivity structure in the real sector, fiscal solvency crisis, and long-term liquidity and solvency crises in the external sector. Fundamental reforms and debt restructuring will still be required for sustainable growth, employment generation, and enhanced real incomes for Pakistan’s youthful population.

Perversely, the latest injection, if it happens at all, could lessen the urgency to reallocate resources toward their most efficient usage. Effectively, it would serve as a barrier to the movement of resources from less productive to more productive activities. The observation by the economist Franklin Fisher that “In dealing with actual economies, the barriers to resource movement may be more important than the frontier” aptly captures Pakistan’s economic malaise.

To address the fiscal crisis, it is imperative that overall government expenditures be reduced through privatization and rationalization of state expenditure. However, this alone will not sufficiently alleviate the gargantuan problem that besets state finances. There is an inescapable and urgent need for effective resource mobilization through equitable tax policies that significantly broaden the tax base to include agriculture, retail, property, and service sectors, notwithstanding the delineation of taxation authority between provinces and the federal government. Much of the burden of painful adjustment costs should ideally be borne by segments of society that have historically benefited most from rent-seeking policies, whether deliberately or inadvertently, facilitated by the state.

On the external front, support for adjustment costs during the transition period can be provided through debt restructuring framework agreements. Debt restructuring will also afford the opportunity to renegotiate the one-sided Independent Power Plants (IPP) contracts, which have not only resulted in unbearable tariff hikes for many consumers but have made large swathes of industrial activity unviable. However, negotiations are likely to be tortuous, requiring deft handling not only by the Pakistani government but also by one or two Paris Club member countries potentially chairing the negotiations to shepherd other creditor countries and private lenders. The biggest challenge will be onboarding Chinese, both official and ‘private’ commercial lenders, which other Western countries see as state-owned financial institutions or part of official creditors.

There is an emerging consensus among multilateral agencies, donors, leading economists, and the societal milieu that conditions in Pakistan are ripe for change. Stefan Dercon, a professor of Economic Policy at Oxford University, stated during his recent visit to Pakistan that the status quo is untenable and harmful to Pakistan, even for the elite. He argued for the need to find common ground to ensure the continuity of growth and development.

Unfortunately, despite the existential crisis, the governing classes, including the private sector business groups, remain stubbornly unwilling to undertake the necessary reforms. Given the lack of common ground between the aspirations of the vast majority and the elite’s untenable desire to maintain their stranglehold on resources, even at the expense of economic growth, something will eventually have to give.

Javed Hassan is an investment banker who has worked in London, Hong Kong, and Karachi. He tweets as @javedhassan. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Arab News. 

– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training. Twitter: @javedhassan