June:2019

✓What is still worrisome though is the fiscal deficit that is close to five
percent of GDP but the upcoming budget will no doubt be addressing this issue. the
reliance on technocrats to formulate economic policy has been the norm in most of
Pakistan’s history. It's not a bad thing.
Example:
According to the State Bank of Pakistan’s statistics, Pakistan’s annual exports of
textiles and textile products in 2000 were $5.8 billion which grew to $12.9 billion
by 2016. This translates into a compounded annual growth rate of 5.1 percent. In
comparison, Bangladesh (which started garment manufacturing much later than
Pakistan) exported ready-made garments worth $4.9 billion in 2000 that soared to
$28.1 billion in 2016, yielding a compounded annual growth rate of a stunning 11.5
percent.Putting each country’s performance in a wider context, Pakistan’s share of
the global textile and apparel export market was 1.63 percent in 2000 and grew only
marginally to 1.76 percent in 2016. Bangladesh, on the other hand, expanded its
market share from 1.38 percent in 2000 to 3.83 percent in 2016 – about a three-fold
leap in its international market share.
✓In the last ten years (2008-2018) the external debt has spiralled from $34 billion
to $94 billion an increase of $60 billion which is unprecedented and unmanageable.
✓PAKISTAN has locked in its 22nd IMF bailout. To extricate itself from this
cyclical dependency, it must increase exports. In business terms, we need to start
clearing a profit. However, Pakistan is deep in the red and on a trajectory of
increasing deficits. Its total trade volume is $84 billion; only roughly $23bn of
that is exports. Our neighbours are doing better. Pakistan’s exports increased by
only 50pc from 2005 to 2017, according to the World Bank’s Pakistan at 100 report.
India’s exports of goods and services increased by 216 per cent; Bangladesh’s by
250pc; and Vietnam’s by 519pc. Pakistan’s share of the total value of the exports
of all countries in the world declined from 2003 to 2017, while Bangladesh’s
increased.

✓OVER the past year, the PTI government’s economic focus has been on redressing
macroeconomic imbalances. However, there are a host of other policy problems that
require honest, competent and decisive decisions. Here are 10 important examples.

Reko Diq: The recent $5.9 billion award by the World Bank’s court (ICSID) against
Pakistan is a classic outcome of misplaced patriotism, incompetence and corruption.
Like India, and as suggested by the UN trade organisation UNCTAD, Pakistan should
have long ago denounced the unequal investment treaty which allowed a foreign
company to sue it.

The court’s award on Reko Diq is now final and contesting it further may be futile
and impede foreign investment, and further delay exploitation of the huge ($1
trillion) deposits of copper and gold in and around Reko Diq. While rejecting the
award in principle, the government ought to explore a pragmatic solution which
circumvents the exorbitant award and enables early, efficient and beneficial
exploitation of the mineral resources.

There are several areas in the economic landscape that require competent decision-
making.

LNG imports: Although well aware of the rapid depletion of Sui gas, Pakistan’s
preceding leaders failed to arrange for sustainable imports, eg through the Iran
pipeline. The previous government negotiated a ‘sweetheart’ LNG deal with Qatar.
Two LNG terminals were assigned in an equally opaque exercise. Now, an intricate
game appears to be underway to determine who gets the sorely needed third terminal.
To remove the smell of rotting fish, the government should make the entire
decision-making process on the LNG business totally transparent.

‘Autonomous’ entities: Over 300 government entities cumulatively lose two per cent
of Pakistan’s GDP each year. Everyone agrees these entities have to be
restructured, divested or closed down. For over a decade, nothing has moved.
Previous governments found it difficult to divest or restructure politically
sensitive but commercially disastrous entities like PIA and the Steel Mills. The
temptation is to sell off the most profitable enterprises first (eg the two Punjab
power plants). Instead of trying to reinvent the wheel, the government would do
well to hire one or more specialist firms to propose a plan and execute it quickly.

Housing and wealth creation: The allocation of government land and financing of
home acquisitions are traditional vehicles for wealth creation and GDP expansion,
as illustrated by the history of America and modern China. In Pakistan by contrast,
government land has been parcelled out through official entities mostly to house
the rich and powerful rather than the poor or middle class. This has accentuated
economic and social inequality. The prime minister’s housing scheme can be the
vehicle not only to provide shelter, but also create wealth for the poor and middle
class (and expand GDP) through the allocation of adequate land and cheap credit for
affordable housing.

SMEs: The heavy borrowing on the local market by recent governments has
consistently squeezed out lending to small and medium enterprises which are the
main creators of jobs, goods and services. Today, many SMEs in Pakistan are
borrowing money for business development at exorbitant 20pc to 30pc interest rates
from so-called private financing channels. A conscious policy is required to
provide easier credit at market rates through normal banking channels to SMEs.

SEZs: The establishment of Special Economic Zones including under CPEC have been
delayed mainly due to the fight over whose land would host the zones (and be sold
at enormous profit). The government ought to promulgate a law on ‘eminent domain’,
allowing it to requisition sites for SEZs at pre-industrial prices. This will save
the government money and speed up creation of the SEZs.

Waste disposal: Pakistan’s major cities are drowning in their own filth, as
illustrated by Karachi’s plight after last week’s monsoons. Karachi produces 11,000
tons of solid waste daily; Lahore 7,000; Hyderabad 4,000, etc. Waste-to-power
plants are one answer to dispose of solid waste. Some Latin American countries are
paying 16-20 cents p/kwh to have US and Swedish companies fully finance the
installation of the most efficient plants. In Pakistan, provincial authorities
offer nine to 10 cents. The one Chinese plant set up in Lahore at this rate has
been abandoned. Realistic power rates and collection fees are essential to attract
investment for these waste-to-power plants.

Thar coal: Pakistan will be unable to fully exploit the vast Thar coalfield for
power generation because there is insufficient water to cool the plants, the carbon
emissions will be unacceptably high and the electricity produced is not much
cheaper than alternatives because the cost of mining (with outdated equipment) is
very high ($40 vs $8 in Virginia, US). Thar coal could be used for power,
fertiliser and other purposes if gasified to pipeline quality, the carbon emissions
captured and mining made more efficient. Advanced technologies to achieve this are
available. The government and power companies need to make the decision to invest
in and apply these technologies.

Read: Thar coal plant begins pumping power into national grid

Manufacturing: In Pakistan, manufacturing contributes only 10pc to GDP. The country

will remain non-industrialised unless it builds the essential tariff and non-tariff
‘protections’ for its nascent domestic industries (disregarding the suicidal
‘liberalisation’ advocates) and/or encourages its enterprises to enter into joint
ventures with efficient foreign producers (who will enter such joint ventures if
they cannot export into Pakistan).

CPEC: Pakistan needs infrastructure to develop; only China is ready to build it;
its official loans are ‘cheap’ (2pc to 3pc with long repayment periods, akin to
‘grants’). The loans for power projects to Pakistani companies were ‘commercial
(around 6pc interest). Chinese companies have executed most of the projects, since
Pakistan had limited capability to do so. The equipment supplied for the power
plants was mostly Chinese but many of the turbines and boilers were sold by
America’s General Electric. The power projects are highly profitable, perhaps
excessively so. There is no ‘debt trap’. The Chinese loans will be easily repaid
(unless the projects are rendered economically unviable by retroactive conditions).

Expanded cooperation with China remains the best route to Pakistan’s industrial and
commercial development. In the afterglow of the Washington visit, some among
Pakistan’s business and official elite seem susceptible to the Western propaganda
against CPEC and China. They risk making a major strategic blunder.

The writer is a former Pakistan ambassador to the UN.

Published in Dawn, August 4th, 2019

✓✓
took the reins of administration
the most pressing and immediate concern
address the severe economic crisis at hand.
The country’s ability to meet its external payment obligations was melting down by
the day,
while the fiscal imbalance was out of control.

Examining the numbers will help illustrate the dire situation inherited by the
government.

The gap between exports and imports in 2017-18 stood at $37.6 billion, the largest
in the country’s history.

The external current account deficit (arrived at by adding other inflows and
outflows to the merchandise trade flows) had crossed $19bn.
the current account deficit — was an unprecedented $27bn.

With debt repayments expected to rise sharply from 2018-19 onwards

Pakistan’s foreign exchange requirement was projected to remain elevated for the
next few years, despite import compression.

On the fiscal side, the budget deficit had breached 6.6 per cent of GDP, or Rs2.3
trillion.

Naturally, the magnitude of the unfolding economic crisis took a toll on confidence
and the markets, with the rupee experiencing sharp declines.

The currency slide added to the sense of urgency for the government since it was
feeding into both inflation as well as panic in the markets.

With official foreign exchange reserves under pressure, and no confirmed new
commitments in sight, the State Bank decided to conserve its forex to honour
sovereign payment obligations in a timely manner.
In these circumstances, what was concentrating minds the most was the IMF question.

While ordinarily, approaching the IMF for an emergency assistance programme in such
a situation would be taken by policymakers without too much hesitation, in this
case the context was all-important.

Firstly, the prime minister had ruled out going to the IMF in election rallies. He
believed the Fund imposed unnecessary and avoidable hardship on a receiving
country’s population. His nominated finance minister fully agreed, while also
possibly harbouring the suspicion of many in Pakistan that the Fund is more a
weaponised institution of influence and control under US stewardship than an
‘ordinary’ international lender of last resort.

The prime minister took arguably the most difficult decision of his career.

This suspicion was not without basis. The IMF’s own Independent Evaluation Office
had judged in its inaugural report in 2002 that Pakistan, together with the
Philippines, were two cases where geopolitics played an important role in Fund
programme decisions. In addition, repeated statements by senior US officials had
also signalled their intention to lean on Pakistan via the IMF. The FATF story was
also playing out in the background. The fact that FATF benchmarks have been
intertwined with IMF programme conditionality in a most unprecedented manner has
validated all the concerns.

Two other considerations were on the table. The IMF programme would have stringent
‘front-loaded’ conditionality that would unleash inflation, unemployment and
impoverish parts of the middle class. This would in turn rapidly erode the
political capital of the new government. A sharp fall in political capital would
not allow the government the space and latitude to pursue its agenda of providing
low-cost housing etc. while also potentially seriously impairing its ability to
pursue its own wider reform programme.

Finally, a genuine reservation regarding IMF programme design was whether it was
aligned with the requirements of structural reform the country so badly needed to
undertake. After all, Pakistan was heading back into a second consecutive IMF
programme barely two years after ‘successfully’ completing one. Ultimately, the
questions boiled down to: was an IMF programme loaded with stringent conditionality
the only option? How viable were the non-IMF options, if any, on the table? And
were the consequences of Plan B any different materially from those under the
current IMF programme?

While the government grappled with the complex issue of approaching the IMF, and
reached out to friendly countries for assistance, the resultant delay was
increasing the uncertainty and adding to a sense of panic. However, it would be
wrong to lay the blame on the delay alone. It was clear from early on unfortunately
that the PTI government had not done its homework before taking over the reins of
power and was woefully ill-prepared. Prior spadework had not been done, the
severity of the crisis appeared to have been completely misread and underestimated,
and there was no stabilisation plan to put into effect from day one. In addition, a
most critical element in providing confidence to markets, strategic communication,
was completely absent.

In this backdrop of rising confusion and near panic, the prime minister took
arguably what is likely to be the most difficult decision of his tenure. He
overruled his finance minister and decided to reach out to the IMF. A couple of
months later when the IMF leadership (and apparently the US administration)
complained about the approach of the then-finance minister, who was stonewalling
the Fund on some of the most stringent conditionality, the prime minister decided
to replace him to fast-track the process and reach quick closure with the IMF. In
hindsight, approaching the Fund appears to be the correct decision. Plan B was not
funded and would have created more disruption while prolonging the uncertainty.

Now that the IMF deal is done, and Pakistan has embarked on a robust stabilisation
programme, what more can be done to ensure a quick transition to jobs-creating
growth? Work on SEZs under CPEC is stalled, and giving it attention and a vigorous
push can kick-start an important growth driver. In addition, the government should
ensure pending tax refunds are expedited and FBR does not harass businesses in its
hunt for taxes. The ridiculous and disruptive anti-encroachment drive should be
halted. Thousands of small businesses have been needlessly demolished in a harsh
economic environment. The government should seek to lessen the costs of disruption
under stabilisation, not amplify them. Finally, improving strategic communication
with markets and investors regarding its forward-looking plans still remains a to-
do item.

The writer is a former member of the prime minister’s economic advisory council,
and heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, August 2nd, 2019