The current steps taken by the present government to address market distortions cum non-economic malaise are very welcome, at best these are short-term solutions that essentially provide a window to undertake broader market reforms to address the real underlying economic issues being faced by Pakistan’s economy today. Let complacency creep in by assuming that everything is moving in the right direction and before one knows the window for ringing the required reforms gets closed and the economy gets back into the previous tailspin. Therefore, it is important to quickly build on this will and newfound resolve of the state and on its recent operational actions, by following up on these efforts through some prudent policymaking that truly aims at making the economy sustainable over the long term. Ensuring border controls to check smuggling and corruption, checking parallel dollar market functioning to erode the central bank’s influence cum authority over markets and stopping thieves from stealing a state’s power production or for that matter robbing any of its enterprises, all givens in developed and progressive global economies and rarely come even under discussion on economic management. The mere fact is that the state of Pakistan and its machinery had slipped, became complicit and involved in self-enrichment and now correcting its sins through some soul searching by the new boys in the hot seat!
What one needs to remember is that all these years that have led the country to be where it is (economically) today, there has been a consistent history of fiscal excesses. In the process, Pakistan has to ask for so many IMF bail-outs over the last half a century that the Fund itself seems to have almost given up on us. Also, an ever-growing state footprint on the economy has meant that due to crowding out of the private sector the capital has mainly been in inefficient hands, thereby today reducing the private sector to a paltry 15% of the economy from perhaps a historically high of around 38% in the 60s and then almost 33% in the 90s. The SOEs have continued to post un-sustainable losses, leaving the government in a position where it has to corner almost 85% of the market debt in circulation just to keep operational; this in an artificially high-interest rate environment, in turn making it extremely difficult for the state to even meet its debt servicing obligations without resorting to further borrowings (a debt trap).
Then, there is also the external debt of more than $130 billion with little to show for it. Forget Milton Friedman’s recipe of economic management advising that the ideal size of the state is where it is tiny and its role in the economy non-existent, even by Keynes’s yardstick today’s size of the government is totally unwieldy and needs to be reduced. However, the trouble is that if it does so now, given the current malaise this by itself will not be enough. There is a strong argument that the real tangible size of Pakistan’s GDP may well be below $300 billion, implying that its foreign debt at almost 45% is not serviceable without an outright haircut or some serious restructuring; the fact that quite a big chunk of this hastily acquired debt is actually quite expensive makes the equation even worse. Well, on a brighter note, fortunately, economies right in our neighbourhood have successfully performed this Houdini Act, courtesy of a stable government ensuring continuity of policies.
Not very long ago we had an economically weak and struggling India and our ex-part Bangladesh was placed in the bracket of poor countries requiring the primary focus of global economic aid. Today all this has changed whereby the economic turnaround has been brought about by the real stakeholders in generating productive economic activity, meaning the private sector through some sound economic governance and oversight. If there is a will, there is a way. The situation is by no means irreversible. Right across our shores, the then-new Sultan of Oman rescued his economy from the very brink of a precipice: GDP growth rate had fallen to under 2%, the external debt had risen to almost 94% of GDP in 2019, the current account deficit had swelled to almost 15% and the non-oil economy had shrunk to below 4%, all primarily owing to poor policies. He did so by carefully overhauling the economic and investment ministries, taking in well-qualified and internationally acknowledged experts from the private sector and giving them a clear mandate to bring new non-oil investments and create jobs, realising that it is the businesses that attract FDIs and not the governments. Even more importantly, he shunned conflicts by declaring Oman neutral and not only avoided undertaking any flashy or mega-projects but also made sure that though the kingdom remains a stakeholder, it distances itself from the management of Oman’s corporate affairs and let them run on market principles whilst ensuring a fair and transparent operating environment. The results are there for everyone to see in just 3 years with the budget deficit now at zero, a GDP growth rate nearing 5% and an unemployment level below 3% or nil in real terms!