Pakistan’s economic transformation

Let’s be ahead of the curve and start thinking about a post-Covid-19 world in which the economic landscape is more resilient; less debt trapped; and can generate required financial resources.

National action will have a societal wide impact, determining Pakistan’s economic growth trajectory and its capacity for a greater public sector entanglement in areas like health provision. In the short run, avoiding market disruptions, limiting layoffs, keeping businesses solvent and providing for the vulnerable, yet managing the health shock is essential. More critical is to start visualizing the economy on a forward-looking basis and designing a ‘whatever is required’ policy response for an economic transformation.

The Covid-19 health shock has brought Pakistan’s low growth economy to a sudden halt, necessitating a rewiring of the economy. Let us consider how much political capital and executive time is spent on debt-creating instruments – multi-lateral, bilateral and commercial financing, short-term investments in government paper, and oil on deferred payments followed by endless efforts to implement conditionalities of these loans. The answer is: a whole lot, with lesser focus on strategic thinking beyond reliance on debt instruments. This recognition is a starting point to realign policy with the following non-debt creating instruments, constructing the political and social capital desired to follow through, with a ring-fenced human resource for delivery.

Divesting through sales, management transfers, public offerings and private-public partnership is a prudent way to create resources, competitive domestic markets and an investment ambiance – Pakistan is good for business. Energy production and distribution, agriculture, aviation and logistics sectors, to name a few, have the potential to operate efficiently with improved service delivery in a multi-buyer multi-seller market. This can only happen once the state withdraws itself from operations and focuses on policy and regulation. The telecom market created by dismantling the monopoly of Pakistan Telecommunication Limited (PTCL) is symbolic of the benefits of a well-functioning market.

Second, monetizing existing infrastructure assets through long-term leasing, investment funds, listing on stock exchanges, concession agreements with the private sector, followed by using these proceeds to boost developmental spending can recover the economy from the Covid-19 shock. Big and bold infrastructure initiatives like farm-to-market roads and job guarantee schemes can be put on the map.

Asset recycling holds the possibility of providing new infrastructure without adding to existing public debt, while improving existing infrastructure service delivery and making assets commercially oriented. Surely, the scale and scope of general government capital stock is substantive. The assets of the National Highway Authority alone are over $21 billion. North to south rail links, seaports, airports, transmission grids, gas networks and 12,131 kilometres of roads carrying 80 percent of country traffic have seen an investment of more than $30 billion in the last few years from the state and are worth much more now. Freeing up a portion of this money will build a next wave of assets and importantly utilize those people who have lost their jobs due to Covid-19.

Third, recovering monies owed to the state requires an all-in effort. It is hard to defend: i) borrowing, when PTCL’s remaining privatization proceeds of $800 million are outstanding for 15 years on the pretext of transfer of remaining properties; and ii) levying new taxes when arrears of Rs600 billion in taxes and Rs300 billion in Gas Infrastructure Development Cess can be largely sorted with a speedy follow-up with the Supreme Court. The power sector dues of Rs1,178 billion ($7 billion) owed to the state by industry, commercial enterprises, people like you and me, and governments need an indiscriminate recovery.

Fourth, sustaining remittances with expected job losses abroad requires an unprecedented intervention to bring $5 billion to $10 billion of hawala/hundi money through legal channels. Entice remitter and remittee into the system through a lottery and other incentivised schemes, accompanied by simply ending illegal money transfer options.

The more challenging non-debt creating instruments are, fifth, the recuperation of $5 billion to $10 billion from multinational enterprises who have shifted taxable profits to low-tax countries by transfer pricing and eroding the tax base (Cobham & Jansky, Journal of International Development 2018).

Sixth is hedging petroleum products. We have seen one of the fastest and deepest economic disruptions the world markets have ever witnessed. In 15 days, world markets hit bear territory (20 percent drop) and slid further down to 35 percent before recovering slightly. The fall in global demand hit oil the hardest with the oil market losing as much as 50 percent. This is a generation-defining moment for oil importing countries like Pakistan. Hedging petroleum products’ imports is possible with smart decision-making and a prudent fund manager for the state with a potential saving of $18 billion over the course of three years.

We can do better by building a national consensus for a manageable paradigm shift in our thinking, rather than spending time and resources in building new debt instruments which the current crisis may render insufficient for people’s needs. Thematically, it is a way to secure independence of the economy and begin a possible economic transformation. An optimistic take-away is that not only are we mineral rich but also considerably asset rich.

The writer is former advisor, Ministry of Finance, Government of Pakistan.

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