Pakistan: Mapping an Economic Recovery.

 In a politically charged country having a sensible discussion on the economy is fraught with frustration. The political narrative deceptively disguises a combination of economic mismanagement and/or inaction the result of which is an anaemic economy. Talk of an economic default is common, and with it comes the weight of the blame game. Add to this cocktail endemic corruption, especially by the political leadership of the past and the result is not comforting. 

The PTI government of Imran Khan was seen as a possibility to steer the economic ship to calmer waters and in some areas success was seen. Two of their major achievements are increasing the tax base from 1.14 million tax payers to 2.4 million and to improve electric bill collection by 157%. Concerted efforts to address the trade balance did occur during their government with cutting imports from $63 billion in 2018 to $46 billion in 2020. During the same period exports fell from $26.22 billion in 2018 to $25.26 billion (largely affected by COVID). 

The PTI government inherited foreign exchange reserves of around $16 billion in mid 2018. In March 2022, around the time of the ouster of the Imran Khan government, the reserves were $22.4 billion, which then in first week of April (as the non confidence motion was going on) declined to $17.3 billion on account of $2.9 billion in debt repayment ($2.4 b alone to SAFE of China) and drop in home remittances from mid March 2022 to end of April 2022.  In reality in the period 2010 to 2022 Pakistan foreign exchange reserves have ranged from a low of $13 billion to a high of $28 billion (August 2021 on account of fresh loan disbursements). 

On the other hand the trade balance of Pakistan has been deteriorating over the past 10 years. This is largely due to stagnant exports and mushrooming exports. In addition internal structural economic inefficiencies in the power generation sector and the gas sector have added a huge burden to successive governments. In fairness to the PTI government they survived the stormy waters of the COVID 19 impact while registering below single digit growth, the more adverse damage was avoided. In 2021 we saw a buoyant growth in GDP and it would auger that some fundamentals at the macro level could have been turning positive. 

Looking back at the economic indicators and numbers can go only so far in a country of 230 million people where poverty and debt defaults are the topic of discussion on an everyday basis. Mapping Pakistan's economic recovery requires to consider a 10 year economic plan. While the intent to reduce the $130 billion debt burden is a cliched slogan one is inclined to believe that solutions are either not being focused upon or the political will to deal with these issues is absent. The issues being listed below not only need economic policy commitments to correct the situation but also need to consider a plethora of while social and administrative changes in the way the country works, (or does not work). 

Major Issues.

1. Circular Debt.

In short circular debt is a accumulation of unpaid subsidies on the electric power generation in the country and it is raised to finance the distribution companies who have to pay the power generation companies. In normal circumstances the circular debt would simply be the funding required to plug the gap between the power bill and the collection of bills from consumers. However, successive governments have subsidised power in multiple ways; either by incentives to power generation companies by paying them a higher tariff (PPP and PMLN governments) or by paying a subsidy on account of the consumers (PTI). The historical problems of the energy sector were covered in an earlier blog https://aqsher.blogspot.com/2021/11/pakistans-energy-sector-historical.html?m=1 so will not go into it much here.

The effect of this is that Pakistans financial system carriers a massive circular debt which in 2018 was PkRs 1.14 trillion and in April 2022 was PkRs 2.3 trillion. This increase was on account of the power subsidy from the PTI government (Rs 404 billion) and around RS 660 billion of subsidies to power producers plus the interest impact with such debt costing as high as 13% (and rising).  This circular debt is almost entirely held by domestic banks and is currently at $11.5 billion (Rs 2.3 trillion). How to reform the power sector and reduce this circular debt has to be a priority and have been dealt with in detail in the mentioned blog. However to summarise the following steps needs to be taken urgently.

a. Develop more efficient and cheaper power generation capacity to replace the expensive and inefficient power plants (which are subsidised through the agreements of the past). With new capacity the need for subsidy will go and older plants will either be phased out or power generators will have to come into line with new tariffs.

b. Improve the consumer electric billings collection. It is estimated that about 20-30% of consumer bills are unpaid or seriously delayed and about 12-15% of power is stolen from transmission lines. In 3 years it is estimated that the PTI government did improve bill collection by Rs 190 billion, and this needs to be continued and extended to government entities who are chronic defaulters in their bill payments.

c. The aim of the above measures should aim to reduce the circular debt by $2 billion a year after a two year implementation period, thus implying that in 6-7 years this $11.5 billion debt will be settled bringing much needed liquidity and confidence to the financial system.

d. Reform the gas energy generation sector where inefficiencies are chronic. For instance Pakistan loses gas worth roughly $4 billion a year through what is called Unaccounted For Gas (UFG). This is gas that escapes the transmission system through methane emissions and leakages. It is estimated that fixing this problem will cost $500 million and it would provide $4 billion of revenue a year!

2. Economic impact of corruption.

It is estimated that corruption within Pakistan costs the economy PkRs 7 billion (US$31 million) per day! That is over $12 billion a year of adverse economic impact on the economy. This is corruption at all levels, largely politically sanctioned and in many cases institutional at district level, police, judiciary and various government offices. Imran Khan has talked of a crusade against corruption and often has talked of stolen money being returned to Pakistan from abroad but there need to be steps taken to deal with the situation within the country too. 

A credible system of accountability and justice needs to be created which is not politicised by any party. Once public figures are being investigated or facing the judicial system any comment by political figures should be avoided as it plays into the political victimisation narrative. Reforms need to be considered where people who are being investigated should step aside from public and government positions. Currently there is no oversight of the judicial system for corruption and there needs to be some reform in this respect too.  As is known there is a military judicial system within the military establishments of the country and it should be considered that from time to time the military disclose actions that are taken against military personnel who have broken the law. This is a transparency all sections of the government need. 

Imagine if corruption can be reduced by 50% that will mean $6 billion more money into the system which is ten years could cut our external debt by 50%!

3. Focus on Exports.

One does not need to be an economic rocket scientist to know that positioning the economy to have more exports than imports is the best way to improve the lot of the country and the people. Since 1960 Pakistan has only had a few odd years where our exports were more than our imports, (trade surplus), and the trade deficit has been chronically rising year on year. There is an argument that this is largely on account of rising import costs for fuel and gas, which may partially be correct, but there is not doubt that export performance has been very weak. 

A concerted and well thought out policy and plan for boosting exports needs to be implemented. Incentives for exports and extension of banking credit to be made available for exporters. This is the most vital part of the economy that needs to be seriously overhauled. 

Pakistan Trade Balance - Historical Data

Year        Billions of US $.       

2020.        $-18.60B

2019        $-28.38B

2018        $-34.92B

2017        $-28.44B

2016        $-19.55B

2015         $-17.44B

2014        $-15.68B

2013        $-15.67B

2012        $-17.98B

2011        $-10.69B

2010        $-10.34B

2009        $-12.24B    

2008        $-18.42B

2007        $-10.00B

2006        $-10.18B    

2005        $-4.24B

2004        $1.01B

2003        $0.49B

2002        $-0.07B

2001        $-0.76B

2000        $-0.92B

1999        $-1.02B

1998        $-0.65B-

1997        $-2.93B

1996        $-2.86B

1995        $-1.64B

1994        $-1.43B

1993        $-3.16B

1992        $-1.54B

1991        $-0.71B

1990        $-2.18B

1989        $-2.52B

1988        $-2.14B

1987        $-1.76B

1986        $-2.49B

1985        $-3.75B

1984        $-3.29B

1983        $-2.96B

1982        $-3.36B

1981        $-2.67B

1980        $-2.53B

1979       $-2.12B

1978        $-1.61B

1977        $-1.29B

1976        $-1.01B

1975        $-1.01B

1974        $-0.33B-

1973        $0.03B

1972        $-0.14B

1971        $-0.29B

1970        $-0.27B

1969        $-0.32B

1968        $-0.33B-

1967        $-0.50B

1966        $-0.35B

1965        $-0.59B

1964        $-0.40B

1963        $-0.35B

1962        $-0.33B

1961        $-0.32B-

1960        $-0.23B

4. Banking Reform.

Looking at the balance sheet of any of the banks in Pakistan will reveal that banks are simply involved in an arbitrage game. They take low cost deposits and invest them in government borrowings and a smaller proportion of their assets are deployed in lending to the economic sectors. Lending is also largely to government entities or the very large private groups with the SME market largely ignored. 

A banking reform is badly needed where banks are given targets for lending into various economic sectors. Even in the United States banks are obligated to lend for say affordable housing (low cost housing) and there are severe penalties on banks who do not achieve those targets. While banks are the trustees of public deposits they also have an important economic function to fuel growth.

Political Complexions.

Since 1970s political prerogatives have cast the framework for experiments with the economy the burden of which have deeply affected the economy. Z.A. Bhutto's socialist experiment and mass nationalisation of industries and banks was not only a failure of gigantic proportions it set back the economy by decades. The war in Afghanistan during the Soviet occupation there plugged the balance of payments through US aid packages which was then followed by a merry go around of successive PPP and PMLN governments with a stint of military rule under General Musharraf. The PPP and PMLN economic planning was largely debt driven and creating structural inefficiencies as we saw in the power sector. 

The PTI economic model is not completely clear and this is perhaps because their economic team needs to be stronger. In what has been so far there is a broader approach to social and economic welfare and graduated reforms in some economic sectors. The expansion of the tax base and improving revenue collection are good first steps and need to be supported by a cohesive 5 year economic plan which would be important to monitor performance. 

While Pakistan economic problems seem massive and insurmountable there are solutions that are available. This economic map of recovery if implemented can reduce Pakistans reliance of debt financing, improve economic performance and provide monetary surplus for affecting social change. The important question to ask if there is the political will to go down this path which requires some tough decisions. 

Pakistan Army: Damned if they do and Damned if they don't!

 Being a cantonment rat because my father was in the army, throughout my life the din of army life was always present. Studying in Cadet College Petaro (yes Zardari and I were batch mates), the expectation was to join the army. However my father, who had an illustrious military career talked me out of it with the words, "you are too political to serve in the army". Through the tumultuous history of Pakistan we have had four military governments and through each civilian government the feeling has been that generals have been in the shadows. 

Relations between civilian governments and the military has been shaped by many factors, largely shaped by the perception of stability or lack of it and how it can develop into threats to the country. At other times divergences on national security issues ( Nawaz Sharif and General Musharraf) had resulted in military assuming power. At other times political interference in the affairs of the military as did Z. A Bhutto resulted in the rise of General Zia ul Haq, an officer who superseded more competent officer to rise at the top created conditions that affected civilian-military relationships. 

Today social media is flooded with people debating the role of the Army in the ouster of Imran Khan. Before assuming the office of PM Imran himself has stated that the army chief was neutral and not political, and today it seems his ardent supporters are talking of the betrayal of Imran by the army chief. For the record this seemed the second time in Pakistan history where the army has remained neutral (General Aslam Baig was the other). I support Imran and while I have not heard any comments, so far, from him blaming the army for his ouster, he has made snide references to traitors and turncoats which can be seen a wild broadsides to any and everyone. 

From what one can glean the army remained neutral through the whole saga of the non confidence motion and it all may have encouraged a final nudge after Imran had lost the vote. As a supporter of democracy one can only be satisfied that the army was not the kingmaker in this instance. As a supporter of Imran one feels wronged by the non confidence motion but that is a part of the parliamentary democracy. Party members change sides, for whatever reason, this is what democracy is about, and of there is or was a foreign conspiracy then there is a different forum to debate and deliberate in. 

In a country where almost every institution has been plagued with corruption, nepotism and divisiveness along ethnic and religious affiliations, the Pakistan army remains very different. It is the only institution where your ethnic and religious background do not matter. It remains the one body has has internal remained stable and provided the edifice of security in a country where direct and indirect threats are numerous. 

Indeed this is a different army from the one my father served in where certain norms of conduct were rigid. I never ever sat in my father official car and one time I asked his military batman to polish my shoes i was severely punished by my father with the words 'he is here to look after me, not you'. Perhaps today batman's in many military homes are used as personal servants of the whole house and no one may consider that wrong. There have been rumblings that some officers live beyond their means etc. etc. However there is a process to within the military code to bring such officers to task and as per military protocols this is not plastered in newspapers. 

One wants to see the military out of politics and thus when they have done so this time, we should not damn them for this role. By constitution the army is expected to stay out of politics and it has largely done so this time. Imran Khan would be in his right to blame his former alliance members and party members for being traitors to him and his party and were he to have enough members in the next assembly he can reform the constitution to deal with floor crossing and it would be within their rights to do so. 

While this piece may not find many friends on both sides of aisle, I do feel that at times we have to think of Pakistan first and then parties and individuals. We should not allow needless attacks on the role of the army when it has shown it can stand away from the political process as this plays into the hands of the enemies of Pakistan. There are ample professional soldiers in the Pakistan army who will continue the tradition of professionalism and shun politics and that is the continuity that Pakistan needs more than ever. 

In the same vein the Sharif government should not try and milk this situation by passing resolutions condemning Imran Khan and the PTI for alleged insults to the army. Certainly the PMLN is aware of its own castigation of the army during the Musharraf era, and it needs to concentrate on governance rather than immature politics. 

Indeed Imran Khan has created political awareness in droves of the youth who were apathetic towards politics and this is a good thing. He also bears the responsibility to guide these youth to positive change and not engage in an emotional narrative that defiles the one institution, the military, which was neutral and continues to provide the stability that is needed. These are delicate times for the country and many, including myself, hope that elections are held and this mess is cleared up. By the same token we need to be careful not to ignite emotions that can cost the country dearly.