Grave Challenges and Misplaced Priorities

A new government has taken charge in Islamabad: the party of Pakistan Tehreek-e-Insaf (PTI) was elected on the populist platform of accountability and restoring national pride. However, the new government faces serious challenges, the paramount of which is economic meltdown. The country currently faces a massive financial crisis, owing to a number of missteps of the past regime and the perpetual rot in Pakistan’s economy. By all estimates, Pakistan immediately needs a forex fund infusion of US$ 12-14 billion to pay liabilities in the next few months. That said, Pakistan’s current account deficit has skyrocketed to over US$ 2 billion per month and its trade deficit was US$ 3.19 billion in July, translating to an annualized deficit of around US$ 35 billion. This trade deficit is the biggest contributor to the country’s current account crisis.

Prime Minister Imran Khan, in his first speech to the nation, highlighted the challenges faced by the country and assured the nation that the new government will take on these challenges through fiscal discipline, austerity, and accountability. His speech, though very candid and compelling, failed to propose any tangible solutions as to how Mr. Khan’s government plans on restoring the economy. More so, the highlighting of key challenges and grim reality in the speech may likely dissuade investors and cause them to put their decision to invest in Pakistan on hold. 

For now, the PTI government’s key priority seems to be bringing money from outside into Pakistan. In this regard, the strategy seems focused on two prongs. One is to bring back the allegedly ‘looted’ wealth to the country by prosecuting the culprits. And the second Is to incentivize overseas Pakistanis to bring their wealth back to Pakistan. This strategy seems insufficient in dealing with both the short-term and long-term economic challenges of the country.

First, let us talk about the ‘looted wealth’ stored abroad. People seem out of sync with reality regarding the magnitude of wealth stashed abroad. This figure is put at US$ 200 billion. To put things in perspective, Pakistan’s total banking deposit base is around US$ 105 billion. More so, the country’s budget for fiscal year 2018-19 stands at US$ 47 billion, while the average budget of the last 10 years should stand at around 30-35 billion dollars. Now, even if the entire budget gets stashed abroad, this amounts to around 6-7 years of total budget. This stat alone should make one discard the 200 billion claim, forget the fact that a lot of this budget gets spent on salaries and operational aspects of civil, military, and judicial expenses and salaries of the state. Pakistan’s total foreign debt stands at US$ 91 billion, which is less than half the 200 billion mark. Even if one agrees that this figure is accurate, bringing this back would be a tiresome, lengthy legal procedure with low chances of success. Yet this flimsy figure is quoted by country’s finance minister and Prime Minister as a means to ensure financing going forward.

As for incentivizing Pakistanis to bring money back to Pakistan, one has to understand the potential sources of the money. There are four potential sources of funding among overseas Pakistanis. First is the labor class, mostly in Gulf Cooperation Council countries. They earn labor wages and send most of their earnings back home to support their families. They are the largest source of remittances to the country and since they already send the bulk of their earnings back home, no significant incremental gain can be expected from them.

The second segment is the well-settled Pakistani professionals who mostly reside in western countries and earn a good living there. These Pakistanis own property, have children in the foreign education system, and possess foreign passports. For all practical purposes, they belong in the new countries. To expect that a regime change could incentivize them to move a significant part of their wealth to Pakistan seems unrealistic. There will be some success with this segment, but that will be too little and its impact will be marginal in the short-term.

The third segment is the exporters who have their companies registered abroad and because of mistrust of the government’s policies and taxation regime, move a minimal portion of their profits to Pakistan. To expect that this segment, because of their trust in Mr. Khan, will start bringing more and more profits into Pakistan is also unrealistic. The state should try to give this segment the confidence to bring most of its profits back, but this is going to be a long-term process and requires trust in institutions and the system, rather than in an individual or a party of their choice.

The fourth and final segment are the big businessmen of Pakistani origin abroad who come and go with every regime. Even this regime has a few associates, such as British real estate tycoon Aneel Musarat. But such businessmen have been investing in every regime, be it of Pervez Musharraf, of PPP, or of PMLN. Faces change but every regime has had such investors coming in and thus the hope of any gain is minimal.

Another option that the government is considering to fix the financial crisis is to ask the Chinese to reschedule some of the corporate loans for the CPEC projects. This could potentially cause long-term damage to the country’s creditworthiness and should be avoided at all costs. What the government can ask the Chinese to help with is probing the alleged cost-overruns and paybacks in CPEC projects, ensuring any funds thus discovered reach the Pakistani treasury. It will be an easier fate with the Chinese government for projects that are under-development or have recently been deployed.

If the government wants to fix Pakistan’s finances, it will have to come out of populist gimmicks and unrealistic sloganeering and focus on real solutions. In the short-term, there is no alternative to securing US$ 12-14 billion debt financing either from the IMF or from friendly nations like China, Saudi Arabia etc. Though the government’s pre-election and post-election rhetoric of breaking the begging-bowl has boxed it in a corner, there is no alternative to this hard choice in the short-term. The long-term solution lies in increasing Pakistan’s exports and productivity. So far, the PTI government seems clueless as to how it will manage to boost productivity and exports, and the country seems stuck between grave challenges and misplaced priorities.