The graph of life is not straight. No matter how much we hate it, it is an amalgamation of straight parts, the twists and curves. Economies work in a similar manner. There are times of prosperity with steady economic growth and recessions when this growth contracts. It is not limited to developing countries. Throughout the course of history, economic superpowers go through recessions too. This implies that recession is a universal phenomenon. Currently, Pakistan is going through a rough patch. The economic indicators are in poor shape. Both inflation and unemployment are on the rise.
But the question is how did we end up here? Is the damage repairable? And how is Imran Khan’s Government coping with this pressure?
To probe into this economic depression, we take you back to 2013. Nawaz Sharif is elected Prime Minister of Pakistan and his close allies take important ministries. Ishaq Dar is appointed as the new Finance Minister of Pakistan. As a part of its economic revival program, PML (N) sets the following targets to be achieved in their tenure:
● Budget deficit to be brought down to 4% by increasing revenues.
● Inflation to be brought down by limiting government borrowing, decreasing tax rates, and reducing energy shortage.
● Industrial manufacturing to be taken up to 8%.
● Investment GDP ratio will rise to 20%.
● Large investment in human capital.
● Open up markets and promote regional trade.
● The improved regulatory environment on a national level.
Manifestos are misleading and often forgotten. They are ways to garner political support and win elections. Ishaq Dar, shortly after coming into power, signed a program with the IMF. For the first time in the history of Pakistan, he completed it successfully. The indicators improved by and large till 2016. PML (N) managed to create fiscal space by building up of foreign reserves. However, the country was heading towards a crisis within one and a half year of the completion of this program. It was bewildering to see the pace with which this macroeconomic stability evaporated. Why did this happen? The answer is very simple. It wasn’t based on sound economic fundamentals. According to many political commentators, Ishaq Dar did little to help the economy of Pakistan. Most of his economic reforms weakened the macroeconomic situation, created a decline in our foreign exchange reserves, and widened the external and fiscal imbalances. In the wizarding world of Dar, all the economic ministries were answerable to him only and all the suggestions from his fellow ministers and civil servants were kept at bay. They failed to capitalize on a massive reduction of the oil prices in the international markets. Consequently, the imports didn’t slash down and exports didn’t boost.
This was the state of Pakistan Imran Khan inherited. Before we jump to any conclusions, here is what PTI promised in their manifesto:
• PTI, unlike PML (N), promised to decrease the influence of a Finance Minister by increasing the autonomy of FBR.
• PTI wanted to have direct taxation as their primary source of revenue.
• Incentivizing the businesses with their inclusion in the tax bracket.
• Creation of 10 million jobs and strengthening of the labor market.
• Implementation of a policy framework for building five million houses.
• Facilitation of a business-friendly environment.
• Transformation of key institutions such as PIA, Pakistan Railways and Pakistan Steel.
• Boost the tourism industry.
• Development of policies to increase bank deposit base from 30% to 50% of GDP to encourage higher savings
• Improvement of exports
Economy under PTI
A recent report by a UN Commission measures Pakistan’s GDP growth at 4.2 pc in 2019 as compared to India’s 7.5 percent and Bangladesh’s 7.3 percent. Ever since PTI came into power, the economic growth has slowed down, the inflation rate is high, and unemployment is on the rise. The current situation is a dilemma for economic policymakers because their actions to control one issue may exacerbate the other. However, good policy changes and regulations will take Pakistan right on track.
Who is to be blamed?
There are two schools of thoughts in this regard. One school of thought blames the previous Government for this mess and the other blames PTI for further worsening the situation, if not improving. We’ll start by critically analyzing things which went wrong for PTI. Before 2018’s elections, people were under the impression that PTI will not go to IMF but they eventually did.
The Government overestimated foreign remittances, failed to increase direct taxation, went to IMF, and criminally couldn’t deliver the planned targets of their 100 days in power. No matter what your political affiliation is, PML (N) had a major chunk of share in creating this depression. They took almost $35 Billion Dollars as external loans. Why was this huge sum needed in the first place? They tried to create an artificial environment by controlling Dollar vs PKR parity which was the outcome of their failure to bring down Trade Deficit. This translated into a huge Current Account Deficit and accelerated more than GDP growth. In addition to this, the imports were increased multiple times to that of Exports resulting in a country lucrative for imports due to artificially controlling Pak Rupee. On the other hand, the exports could not get to their customers owing to increased prices. Sadly, the government encouraged the import of items that were already manufactured in bulk in Pakistan. Therefore, the local industries lost their businesses gradually. The lower Dollar rate and cheaper consumable items translated into a decrease in inflation numbers. Showboating developmental projects like Metro Train had consumed billions of Dollar which otherwise could have spent over revenue-generating projects for repayment against loans.
How do countries get out of economic crises?
We understand that the economic crisis in Pakistan is bad but the world has seen worse and gotten out of it.
The Great Depression
The Great Depression was one of the longest depressions in history. What made this depression stand out from the rest was its endurance and geographical spread. Therefore, it lasted for more than three years.
It originated in the United States but engulfed many countries in its jaws and most of them lost 15 percent of their Gross Domestic Products. In the United States particularly, the interest rates had dropped to low levels. The depression directly or indirectly affects all walks of society. The unemployment rose to 25 percent. Wages who still had jobs fell and U.S. gross domestic product was cut in half. This lead to global financial distress that had significant geopolitical ramifications.
Times like these require strong leadership. When the world needed a hero, Franklin D. Roosevelt tried to become one. Although his heroic tendencies are debatable, we’ll still give him some credit. The most important skills required of leaders during times like this are effective communication and capacity to sell hope. This is because the recession is exacerbated and triggered by a loss of hope and confidence in the economy. Roosevelt knew the strategy which his predecessor didn’t. He literally talked the United States out of this crisis. He started a series of radio evening program where he addressed several problems of the economy. Roosevelt gave people hope and strategy to fight this depression. In addition to this moral support, he created jobs, provided unemployment insurance, and allowed unionization. These programs are still in existence.
Malaysia is easily one of the most successful non-western countries to achieve a relatively smooth transition to modern economic growth over the past decade. Malaysia is a major supplier of primary products to the industrialized countries; tin, timber, rubber, liquefied natural gas, and palm oil. The Malaysian economy advanced 4.5 percent in the first quarter of 2019. The Malaysian economy advanced 4.5 percent in the first quarter of 2019. Malaysia had a financial crisis in 1997 where their ringgit exchange rate fell from RM 2.42 to 4.88 to the U.S. dollar.
This resulted in a heavy outflow of foreign capital. The leadership imposed strict regulations and tried to curb the outflow of capital. The Ringgit was curbed to 3.80 against the U.S. dollar after depreciation. Malaysia, in the moment of crisis, understood the importance of effective bankruptcy laws. The government managed to create additional courts and made regulations to restructure firms’ financials. As a result of this step, companies were able to reorganize their assets. This method proved very fruitful and within two years financial of distressed firms was resolved.
Additionally, the government stopped the operation of illegal share markets. Instead of having a lot of shares registered in the name of a handful of nominee companies, the Stock Exchange made it mandatory to register the shares in the names of beneficiary owners. The stock markets immediately started to recover with this step.
The Chinese economy advanced 6.4 percent in the first quarter of 2019. China had to face the brunt of the global financial crisis of 2008. The U.S. and Europe were forced to cut back on consumption and the demand for Chinese goods plundered. To overcome this financial crisis, China took the simplest of steps. First, they stimulated the domestic demand through enhancing the public expenditure by introducing a stimulus package of 4 trillion Yuan. The Government reduced taxes, pushed VAT reforms, business tax cut, and raised the threshold of individual income taxes. Rigorous steps were taken that involved cutting down the interest rates and quota control on lending by commercial banks was removed. The bank reserve requirement ratios were lowered and China managed to inject a huge amount of liquidity to the banking system.
What needs to be done?
First and foremost, an increase in direct taxation is the key as opposed to increasing General Sale’s tax. This will help to alleviate the inflation pressure on the general public without affecting Tax Collection. The government should turn its focus on improving quality control units so that people buy local products as oppose to products from Multi-National Companies. This avoids any Foreign Exchange Leakage and promotes local industries. In most simple words, a country cannot buy success from the outside, it has been developed internally.
Secondly, the Government should strengthen our financial and regulatory authorities through the appointment of competent leadership and minimize any sort of political interference. For example, the State Bank of Pakistan must be given functional autonomy. There are multiple benefits of having an independent and competent authority.
Thirdly, the Government should modernize the financial system to combat tax evasion and money laundering. The high fiscal deficit in Pakistan is due to low tax collection rates. Black markets have taken over and continue to siphon off wealth abroad. These markets are responsible for creating an imbalance between the supply and demand for dollars.
Lastly, the Government should spend more on education rather than cutting the annual budget dedicated to it. Pakistan lacks scientists and academics. Business-friendly policies should be formed to lure people to invest in Pakistan.
There is no doubt that Pakistan has great potential. The Government needs to convince the market to harness that potential. Once it does, the rupee will be on the run and our balance-of-payment worries will end. Let’s hope for the best!
The writer is Former General Manager and Strategist of two leading Hotels in Istanbul, Turkey and is currently serving as Head of Sales in Bima Mobile Pakistan (Ltd).