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Is the worst behind Pakistan’s economy?

Relying on debt

Editorial Published October 3, 2023

PAKISTAN is in a debt spiral that may push it over the cliff should the world decide to remove the drip-feed of bilateral and multilateral loans that is keeping its failing economy on life support.
Grappling with several economic problems — elevated inflation, large fiscal deficits, low industrial and agricultural productivity, a frail balance-of-payments position, a weak exchange rate, etc — Pakistan’s dependence on cash injections from its few foreign friends and global lenders is increasing by the day.

For the last few decades, we have been a most loyal customer of the IMF, the World Bank, and others to pay our bills, because we do not collect enough taxes to finance our budget, and the country’s capacity to earn enough dollars to pay for imports from its own pocket is severely hampered by low productivity.

Thus, it is no surprise that Islamabad was the top borrower of cheaper funds from the International Development Association among South Asian countries. The World Bank’s annual report for 2023 says Pakistan had secured $2.3bn in financing from the IDA during the last fiscal year.

With the government’s reliance on domestic and external loans growing rapidly to meet all its expenditures after making escalating debt payments, Pakistan’s debt hangover is worsening rapidly. State Bank data shows that the total public debt rose to 74.3pc of GDP at the end of FY23 from 73.9pc a year ago.

The mounting debt stock is not only making the government borrow more to pay back its creditors but also eroding its capacity to support inflation-stricken people and grow the economy to produce jobs.

Sadly, the ruling military and civil elite haven’t grasped the seriousness of the situation, in spite of repeated warnings from multilateral agencies and ‘friendly’ countries. Instead of taking measures and making sound economic policies to solve the fundamental weaknesses in the economy, they continue to grope for a big bailout from the Gulf monarchies.

The materialisation of the promised multibillion-dollar investment bailout may provide temporary relief — just like the recent $3bn IMF loan delayed sovereign default has — but it will not change the inevitable.

No amount of bailout dollars can take the place of basic economic reforms. There are no quick-fix solutions to the multidimensional economic crisis.

Successive governments have delayed fundamental reforms for far too long, owing to political reasons, and have used borrowed cash to pump economic growth.

Once the short low-growth spurts end, the economy will find itself in a much deeper hole, with the man on the street left to bear the increased cost and pain of new adjustments while the elite classes keep enjoying their privileges.

As the nation tries to control grave internal political and faith-based conflicts, it is postponing economic reforms. This will prove disastrous for the country.

Published in Dawn, October 3rd, 2023
My understanding is that the real estate sector is worth around $400 billion. If so and if they were to tax it at a 2.5% millage rate, you'd be looking at a straightforward $10 billion a year in tax revenue. That would be 20% of the federal 23 budget.

Seeing as Pakistanis love hard assets there needs to be a lot more property taxes in Pakistan and a decrease in income tax to boost business growth.

Such a simple solution, but no way the elite will do that.

The property tax is a joke in Pakistan. I have seen mansions in Pakistan paying not even a week's worth of salary as tax.

Runaway inflation​

By Editorial Board
October 03, 2023

The monthly inflation numbers for September 2023 are in, and they present a pretty shoddy picture of the state of Pakistan’s economy. Year-over-year CPI inflation has shot up to 31.4 per cent, jumping four percentage points from the previous month’s 31.4 per cent and wiping the gains of the previous three months. While the trend of rising inflation is in line with market expectations after the massive fuel price increases seen in both August and September, the magnitude of the spike is clearly above what the fundamentals warrant, especially in light of how the rupee has steadily appreciated over the last 20 days of September. Additionally, the rural inflation number is again seen leading the trend at 33.9 per cent, a dead giveaway that a large part of today’s inflation is attributable to supply chain shenanigans. Is it possible that black market players scared away from currency speculation by the government’s strong administrative action are taking an increased interest in consumer goods, manipulating prices of essential items? Who can tell? But there is no gainsaying that something is rotten about how our domestic supply chains function.

Take, for instance, how our staple food supplies are hit by one crisis after the other. Wheat and sugar are in particular prone to artificial shortages and sudden price spikes. But these are by no means the only commodities witnessing unexplained price hikes. A look at the underlying data of this month’s price review reveals that the price of sugar year-over-year rose by 89.95 per cent; of wheat flour by 81.29 per cent; of condiments and spices by 78.77 percent; of gur by 68.98 per cent; of rice by 64.71 per cent; of beans by 56.07 per cent; of mash pulse by 36.39 per cent; and of potatoes by 34.55 per cent. These price increases are clearly beyond what is warranted by market fundamentals, and can only be explained based on market manipulation and price gouging. In other words, market malpractice has become the most potent driver of domestic price inflation.

It is heartening that the strong administrative measures taken by authorities to curb smuggling and currency speculation have reversed the rupee’s slide, which has yielded direct dividends to the public in the form of lower fuel prices this fortnight even as global oil prices remain on the upswing. This should go some way towards alleviating inflationary pressure, although it remains to be seen how long this trend can be sustained, especially when the lifting of administrative curbs on imports has increased the demons for hard currencies. Also, gas prices have to be hiked in view of Pakistan’s covenants with the IMF, which will again stoke inflation. The central bank on its part has done pretty much what it could to curb inflation, with limited success – although sky-high policy rate has pushed the cost of doing business unbearably high. Private credit is contracting and the economy has slowed down to a snail’s pace. Further tightening the monetary policy beyond this point may prove counterproductive.

On the other hand, this runaway price inflation is taking a heavy toll on the common Pakistani’s purchasing power. The caretaker government may have a limited mandate and keeping the IMF programme on track may claim the lion’s share of its attention, but none of this warrants turning a blind eye to the plight of the regular Pakistani, who is finding it increasingly difficult to get about for work or school after paying for the family’s bread and butter. In fact, the poorest among us are finding it impossible to keep the wolf from the door with winter just round the corner. They deserve better and, all things considered, strong administrative action to stamp out market malpractice is pretty much the only option open to the authorities to check unfettered and unwarranted inflation. The sooner the caretaker government realizes this, the better.

Pain is coming​

By Mosharraf Zaidi
October 03, 2023

Pakistan’s most important decision-makers are now facing a dire and extreme choice. They can either choose to inflict some long overdue pain on elite rent seekers, or they can choose to inflict even more pain on the already long suffering middle class and the poor.

That is the clear economic choice that now confronts Pakistani decision-makers. Continue the existing elite consensus of high subsidy-low tax for the rich, and runaway inflation, dysfunctional public services and misery for the poor. Or stop the bleeding by ending the subsidies raj, ending amnesties, ending low or no tax wealth and asset accumulation. Pain (or rather, more pain) is coming. Pakistan’s decision-makers just have to choose who will feel it. The rich? Or the poor?

Last fiscal year, government expenditure was Rs16.1 trillion, whilst government revenue was Rs9.6 trillion. Some people say that this is an indicator that Pakistan spends too much money. It isn’t. It is an indicator that Pakistan does not collect enough money or revenue. It does not have enough revenue because Pakistan is a high subsidy and low tax zone for the rich and super rich. When the most capable in a society refuse to pay into the system, the system gets stretched.

Last year, this stretch was a mean one. Pakistan had to find Rs6.5 trillion from somewhere. It found it through borrowing money – mostly from Pakistani banks. Where do the banks get that money? They get it from the State Bank of Pakistan. Where does the State Bank get this money? It just prints it. Khurram Husain estimates that in the past three months alone, somewhere to the tune of Rs10 trillion in new rupees have been added to our economy. Mostly so that Pakistani elites can continue living in the magical world of high subsidies (for the elite) and low taxes (for the elite).

What happens when a country keeps borrowing money without collecting some of that money in the form of taxes? Well, the future of that country becomes more and more bleak with each additional rupee borrowed, especially in a world of high interest rates or markups. More urgently, all this borrowing is taking place not from within a given stock of money, but from a constantly and rapidly expanding stock of money. The printing of money is dangerous. To understand how dangerous this is, we must simplify a little. Imagine it is the beginning of time, and there is only one hundred dollars out there in the universe, and only one hundred rupees. Then, all other things equal, the rupee to dollar exchange rate in this imaginary world would be Re1 to $1.

Now imagine that someone goes out and decides to start printing rupees. They go and print an extra hundred rupees. The rupee to dollar rate would then just straight up double to Rs2 to $1. You print another hundred and the rupee to dollar rate would rise to Rs3 to $1. Last month, the rupee to dollar rate crossed the Rs300 to $1 barrier – so you can imagine just how many rupees have been printed.

Of course, in this scenario, we have been a bit unfair. All other things are not equal. The dollar is the most powerful fiat currency on the planet. The Pakistani rupee has had to carry the burdens of wars, poverty, post-colonial baggage, a partition in 1971, constant geopolitical gamesmanship, terrorism and an unrelenting existential adversary. So if you were a Pakistani decision-maker – in charge of directing or governing the economy – the question would be simple. Knowing that all other things are not equal, would you be more careful (red pill) about how many rupees you print and how rapidly you cheapen your currency, or would you be less careful (blue pill) and continue undermining your currency?

The Pakistani decision-maker has, so far, kept on choosing the blue pill. This is how, broadly, we went from one dollar costing Rs100, then Rs200, and then Rs300. Then, last month, a bunch of phone calls were made, people were threatened, and the fear of the Lord Almighty was restored among ‘rogue’ speculators and ‘illegal’ hoarding outfits. And ‘abracadabra’: like magic, our poor old rupee started to stand up to the great US dollar.

In a short period of time, the rupee has gained 6.0 per cent against the dollar. And just like that, the sense of panic and urgency for meaningful and serious changes to how the economy is governed has been replaced by a familiar smugness in Islamabad and Rawalpindi: “experts and naysayers are always too pessimistic, but look, Pakistan is back, baby!” Decision-makers are awash in the afterglow of a successful effort to reign in the rate of the rupee to the US dollar. The sycophants and charlatans that whisper economic alchemy waswasa into the ears of decision-makers are buzzing with excitement.

Do the remarkable gains of the rupee against the dollar merit mockery? Absolutely not. But they should not be celebrated either. Any gains in the value of the rupee – whilst the country’s poorest and most vulnerable buckle under inflationary pressures – are welcome. But we should ask ourselves more about these gains. How were such gains achieved so swiftly?

If all it takes to wipe out twenty rupees per dollar is a crackdown on hoarding and smuggling, curious minds and sharp intellects should be less focused on buying mithai, and more focused on asking why such a crackdown requires the leadership of the military to intervene. In what kind of a country is it the job of a military (in the midst of a new war on terror) to have to force speculators and hoarders to take a break from their loot and plunder? And does anyone seriously believe that this loot and plunder won’t be renewed as soon as Pakistani decision-makers are distracted by the next major crisis?

All countries borrow money to supplement their tax collection. Pakistan taxes the poor and the working class to supplement its borrowing. Both the overarching economic crisis in Pakistan and the metastasizing problem of a cheapening rupee are anchored in the absence of a reasonable fiscal equation in the country.

In European Union countries, almost all of whom carry a much larger stock of both domestic and external debt than Pakistan, the fiscal deficit is on average about 3.0 per cent of GDP. Traditionally, international financial institutions expect countries like Pakistan to run fiscal deficits of roughly 4.0 per cent. Last year, Pakistan’s fiscal deficit was 7.7 per cent. That 3.7 per cent difference isn’t small. It comes to around Rs3.4 trillion. If Pakistan was generating an extra Rs3.4 trillion in taxes, it would neither need to print so many rupees and watch the rupee fall against the dollar, nor need to borrow so much money at historically high interest rates that its debt servicing bills keep ballooning. Where can Pakistan find Rs3.4 trillion in taxes?

There are 37.5 million households in Pakistan. The only segment of the population that should be the focus of taxation is the highest income bracket. So let’s focus only on the top 10 per cent, or about 3.75 million households. If we were to split the burden of Rs3.4 trillion upon these top 10 per cent of households, we would need each household to pay roughly Rs76,000 each month (around $250), or a total of around Rs907,000 per annum.

When this data is presented to decision-makers, the super-rich will scream bloody murder. In part they will be equipped with data about average income levels of the highest income quintile. But this should only serve to whet the appetite of decision-makers to ensure equity and fairness in taxation – and to engineer a nuanced, focused and targeted tax collection exercise in which the richest and most able carry the largest share of this Rs3.4 trillion tax vacuum.

Ultimately Pakistani decision-makers must realize that the countries they constantly seek bailouts from, like the Kingdom of Saudi Arabia and the People’s Republic of China, have all already gone through this exercise of learning how to collect revenue from their rich and super rich.

Saudi Arabia is an economic juggernaut today in part because it has learnt to have ambitions that are far grander than its oil wealth. Non-oil revenue in Saudi Arabia in the second quarter of 2023 surged to 43 per cent of total revenue. Of this non-oil revenue, the vast majority came from taxes on income, profit, capital gains, goods and services. In short, Saudi Arabia has chosen to be a country where the most able carry the biggest burden.

The world awaits Pakistan to make a similar choice. The signals from Pakistani decision-makers so far are not encouraging. A rising rupee can delay the dawn of reality for a short while, but it cannot evade the inevitable. Pain is coming.

The writer is an analyst and commentator.

Debt dilemma​

Pakistan’s debt is eating up its vitals. Owing to depreciation of the rupee on a regular basis, the proportion of borrowed money has surged to dangerous levels. It is now officially acknowledged that debt has touched a staggering Rs64 trillion by the end of August 2023, indicating an increase of 29% in twelve months. This has compounded not only the money equation but has also brought pressure on debt-servicing. Moreover, the concerns exhibited by the World Bank in terms of sustainability of the economy, and the fears of an imminent default, are more than enough to keep policymakers on the tenterhooks as it poses grave risks to macroeconomic frameworks. The fact that the debt trap has widened by Rs14.5 trillion in just one year and is unstoppable is a dilemma fraught with consequences.

Some of the aspects and statistics are worth considering. Pakistan cannot keep on devaluing its currency, and secondly a budget deficit of 7.7% of the GDP is quite worrisome, as it is above the anticipated benchmark of Rs1.3 trillion. It is a faux pas for the government, and this accumulation is having an adverse impact on the psyche of big businesses, and investors alike. Pakistan needs strong growth, and one that is coupled with an export-laden mechanism. Going back to incentivise the textile sector, promoting information technology and harnessing the automobile industry at home are some of the out of the box options that are inevitable in order to stay afloat.

The options at hand are to ensure that the dollar-rupee parity is set on market inertia, and unnecessarily the fiat is not downgraded. Likewise, seeking investment in food and agriculture, as well as erecting a sound industrial base are foregone conclusions. The least that is essential is a curb on auxiliary imports and a new paradigm of lifestyle on austerity. Doing away with the prevalent culture of perks and privileges, and ushering in savings can inject new life in currency. But the point is that there are no takers, as we are accustomed to live on with a dilapidated tender at the peril of our future.

Published in The Express Tribune, October 7th, 2023.
ISLAMABAD: While it remains too early to assert definitively, several indicators suggest that Pakistan’s economy may have weathered the worst of its recent challenges.

There were serious concerns that due to the IMF’s push for easing import controls and letting the exchange rate float, the rupee may see further free fall. However, after hitting a record low of Rs335 on September 5, the rupee is regaining ground, stabilising at approximately Rs292 to the US dollar, a level where the caretakers inherited.

Foreign exchange reserves have surged past $13 billion, including $5.5 billion held by commercial banks. Even with a notable spike in fuel prices, the inflation rate has slowed and now stands at 27.4%.

As caretaker federal ministers take charge of their respective ministries, they face a daunting task. The latest entrant, the federal minister for privatisation, rightly directs attention towards Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM), the two ailing state enterprises that have consistently incurred heavy losses with no resolution.

Though still operational, PIA reports monthly losses of Rs13 billion, while PSM, shuttered since 2015, continues to pay salaries to around 3,100 employees. The sustainability of the recent financial support to PIA raises questions about its alignment with taxpayers’ interests, but the intensity of finding a solution is a worthwhile effort.

The minister for power has been grappling with public outrage over the exorbitant electricity bills received in August. Having chaired the 2019 inquiry committee on the power sector, he possesses insights into necessary measures for enhancing energy sector efficiency.

While commendable efforts are being made to enforce anti-theft measures for electricity and gas, it is equally crucial to implement some of the routine recommendations outlined in the committee’s report. Interestingly, despite the commissions’ suggestion for expertise-driven leadership in the power ministry, the government is reportedly contemplating going in the opposite direction by appointing bureaucrats as chief executive officers to head various power companies.

Meanwhile, the minister for commerce and industries is vigorously pursuing ambitious goals, including a more than 35% increase in short-term exports. For years, successive governments have been fixing lofty export targets but have not undertaken any serious reforms.

As a result, those targets remain on paper, and exports have barely increased for the last 15 years. On the other hand, Pakistan’s share in global markets has been declining annually by about 1.45%.

Further, no attention was given to widening the export basket as most non-textile industries were content with selling in the protected domestic market.

Considering the current economic landscape and IMF-imposed conditions, giving subsidies would be impossible. Concerns linger that the government may opt for a populist route by seeking more import taxes to appease the powerful groups. This measure would significantly undo any efforts to curb smuggling and bring the economy to the formal sector.

In a broader context, the caretaker government’s primary focus is on facilitating the promised influx of $30 to $50 billion in foreign investment over the next three to four years.

The previous administration expressed optimism that this investment could significantly enhance productivity and transform barren lands into arable farmland. Anticipation surrounds the potential for Pakistan to achieve self-reliance in food production, saving approximately $10 billion in foreign exchange and doubling current food exports from $5 billion to $10 billion.

However, it is imperative to recognise that while beneficial, foreign investment and short-term enforcement measures do not constitute long-term solutions. Successful transitions from aid-dependent to export-led growth, as observed in numerous developing countries, hinge on significant taxation and trade policy reforms.

The significance of an independent and efficient judiciary has also played a crucial role in implementing economic reforms in many developing countries. In this context, the new chief justice’s stance against judicial activism should be viewed as a breath of fresh air.

In conclusion, Pakistan’s economic woes may be gradually giving way to a new chapter. The caretaker government’s effectiveness in doing the groundwork for addressing the most pressing challenges – state-owned enterprise reforms, exchange rate stability, trade policy reforms and facilitating the planned inward investment – will be greatly helpful for the incoming government.

While the path ahead may be fraught with difficulties, putting the country on outward-oriented economic policies is vital for getting out of the current economic meltdown.

The writer currently serves as a trade arbitrator for WTO. Previously, he has served as Pakistan’s ambassador to WTO and FAO’s representative to the United Nations at Geneva

No. Pakistan is the worst. It's a failed state.

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