Economic downslide

The alarming downslide of Pakistan on the economic front has only been adding to the miseries of the people of Pakistan. The most crucial questions are: how can the country tackle the present crisis, and what should be the way forward for the government to control the economic downslide?

It is true that the outgoing PTI government did not perform well although several macroeconomic indicators, especially economic growth and exports, were impressive. The PTI’s performance in debt management was unsatisfactory. Little wonder then that the economy which was being highlighted as the best-performing economy just four years ago is being compared to Sri Lanka’s and is said to be close to default now.

Sri Lanka defaulted because it failed to pay back its loan timely. The revival of the IMF programme, in the case of Pakistan, is crucial to avoid default. The coalition government is being blamed for the economic mess. Even though they are not at fault here, their decision to raise oil and gas prices has affected all sectors, inviting people’s wrath.

During the PTI’s tenure, there was no medium- and long-term economic planning. The party perhaps lacked the capacity and capability to go for economic planning and ended up adopting a firefighting mechanism to avoid crises. It did well in some areas; Imran Khan’s decision to reopen the economy in the middle of peak Covid-19 did well; his amnesty scheme to the construction sector, which was connected with almost 40 other industries, was remarkable as it helped avoid hunger and unemployment in the country.

But the policy of securing more loans to settle different expenditures, including loan payments, has disturbed today’s economic performance as well. These loans have now accumulated to be almost 80 per cent of the total loan portfolio of Pakistan in just three and a half years.

The crisis today is not of economic indicators but of default, and there is no solution except to accept the IMF conditions. No bilateral or multilateral loan can be secured without the IMF’s confidence in the economy. One can imagine the importance and influence of the IMF from the fact that Pakistan’s close friend Saudi Arabia is not willing to extend its loan without the restoration of the IMF programme. Is there any alternative to the IMF programme? Even though it is not possible in the short term, long-term steps can help resolve the issue.

I believe that Pakistan needs to overhaul and re-profile its economy to get rid of loans by putting in place a structured debt management system on a long-term basis.

Pakistan’s economic performance is quite discouraging and calls for an immediate policy shift on the economic front. Re-profiling the economy to overhaul its economic performance and downturns and getting rid of the heavy load of the IMF debt could be a step in the right direction.

Fiscal and monetary policies work in tandem to balance and support each other to achieve the optimum level of economic growth. Pakistan’s economy is suffering from external and internal debt with all sorts of economic ills, including high inflation, low investment, high security risk and few incentives for businesses. This needs immediate policy intervention. The downward revision of the policy rate by the State Bank of Pakistan is crucially needed to attract and create an investment-friendly atmosphere in the country. All of this is not possible if we still want to remain under the umbrella of the IMF. The first policy intervention in this regard is to bring down the interest rate to an acceptable level to promote investment in the country.

The interest rate should be brought down to between 3.5 and 4.5 per cent from the present 15 per cent in two years. This may be done by reducing 100 basis points every three months for the first year and 50 basis points on a quarterly basis for the next year. The estimated investment through this policy intervention is likely to be $25 billion to $50 billion. This could bring an economic revolution to the country, but it is all subjective, depending on our security atmosphere. Steps must be taken to provide safety and security to investors; otherwise such intervention will only contribute towards surging inflation. The present-day double-digit inflation is already playing havoc with the economy.

The massive depreciation of the Pakistani rupee is another blow to economic stability. The exchange rate needs to be revised and it should be brought back to Rs125 per dollar, as our exports and imports are almost inelastic, especially our exports. Devaluation is usually carried out to enhance exports, but we need to adopt some other measures to enhance our exports to earn foreign exchange. By doing so, we can avoid addition in our debt and servicing liability. Reprofiling interest rates and rupee appreciation may help us avoid the cumulative effect of debt burden by about 50 per cent, compared to our liabilities today.

The GDP growth rate through these monetary policy measures can reach 6.5 to 8.5 per cent per annum through the proposed intervention to make it sustainable. Foreign direct investment (FDI) could contribute to economic growth, subject to proper and practical steps ensuring economic reforms on a long-term basis. The foreign debts owed to the IMF, World Bank, ADB and others could be offset by pursuing a more aggressive investment policy coupled with impressive GDP growth.

The investment climate in the country can only be generated through a robust strong economic system supported by a strong political system, which needs to be strengthened through rule of law. Undoubtedly, political stability is a must and a precondition for sustainable growth, promoting investment in the country. The role of politicians and state institutions is all the more important to strengthen the political system to achieve the goal of sustainable economic growth.

Incentive schemes like tax exemptions to the vital sectors of the economy are absolutely needed to enhance growth. Amnesty schemes should be reintroduced to have more investment and taxes, as countries like Pakistan have been surviving and thriving over the informal economy. Some use these schemes to whiten their money, which in turn contributes to the overall economic growth enhancing exports.

Exports should be incentivised for foreign reserves and remittances to pay back our costly loans from different institutions, disturbing our economic performance and growth. The overall incentives – right from growers to industrialist manufacturers to the services sectors, especially e-commerce – should be extended. These fiscal measures, incentives, exemptions and subsidies of around Rs3,000 billion are likely to generate $15 billion to 25 billion, in addition to our present-day foreign reserves, enough to pay back our loans in 7-10 years.

The long-term planning and reprofiling of the economy on the above policy lines is immediately needed to get out of the present economic mess. The IMF programme should be discontinued; instead a new mechanism as proposed above may be put in place to support foreign reserves and pay back loans. Otherwise, we may face a Sri Lanka-like crisis in the coming months, which is not acceptable to anyone in Pakistan.

The writer is a former additional secretary and can be reached at:

hassanbaig2009@gmail.com