Continued…

 

The financial year 2019-20 is around the corner. Most likely, the government will set an ambitious growth target of around 4% with expectations coming from the agriculture and large scale manufacturing. A big segment of this increase in GDP will be incidental linked to population growth and inflation. Any rise more than 3.5 % could be considered a success. In simple words, Pakistanis will continue to face recession, price hikes, unemployment and pressure of revenue departments.  

 What will it be like? Cost of living will rise by 26% (current devaluation) and more. It depends where the free fall of rupee halts. So if one has to compare with the budgets of past two fiscal years, the figures may be higher but real value much lower. Devaluation, monetary and fiscal policies will be major retardants cutting into purchasing power. 

 A simple explanation for the majority of Pakistanis who earn in local currency is that the net cost of consumption will increase. It could be more but not less. Those subsisting on remittances from abroad will be compensated as the system will benefit them. Due to inflationary pressure, at the farmer’s level, most transactions will take place in barter than hard currency. Informal economy will grow. Donkeys will replace Chingchies. 

Due to tight fiscal space, the government’s biggest challenge will be to bridge the gap between the supply and demand. 

Hypothetically, a win-win situation premised on ‘national character and morale’ still exists. If the amnesty scheme is a roaring success, the FBR targets met and exceeded, private sector infused with local and direct foreign investments, and agriculture turnaround affected, the wide gap of 6.2% deficit could be reasonably reduced to manageable levels. But a general cannot lead into battle all alone. He needs a team of equally motivated and charismatic command to replicate his charge. Unfortunately, this commodity is in short supply. Given the management patterns and lack of synergy within federal ministries and with provinces such a doable scenario is not likely to materialise. The greatest expectation; the agriculture sector could become the unkindest self-inflicted injury. 

 From the IMF perspective, excessive demand in economy leads to balance of payment crisis. In other words, our demands are more than what we have. Though the majority is hand to mouth; our elites live beyond means. The solution is simple. Curtail demand and narrow the gap; eat less even if you suffer a slow death. The situation does not affect the elite who earns in dollars and spends in rupee. They get richer. 

This capitalist-liberal stabilisation policy has three effects; first, a floating/flexible exchange rate, secondly tight monetary policy and finally tight fiscal policy. Not only in Pakistan but also in most part of the underdeveloped and developing world, such structural adjustments failed causing poverty, underdevelopment and civil wars. The failure lies in the fact that the segment of population expected to work out the miracle become more impoverished and irrelevant while those controlling services industries and foreign currency thrive. 

As devaluation will lead to increase in landed cost of imports, inflation will increase. To counter the inflationary pressure, the central bank will increase discount rates jacking up interest rates. This would affect borrowing by the private sector for investment in projects. In addition, the cost of all products including development projects would increase. For an average citizen, borrowing will be more expensive. Artificial prosperity around credit and debit cards will make windfalls. Consumerism will increase. 

The axe of a tight fiscal policy will ultimately fall on development expenditure. Public sector investments will decline. This cut when linked with higher interest rates will curtail public sector investment; create unemployment and difficult living conditions. With curtailment of cash into local economies GDP will decelerate. 

In line with IMF suggestion, the Public Sector Development Programme (PSDP) will remain frozen at Rs. 675 Billion shared between the centre and the provinces. The government is also considering spiking the PSDP with additional Rs. 250 Billion likely to come from National Highway Authority, National Transmission & Despatch Company and Pakistan Electric Power Company and other sources. This would bring the expected development funds to Rs. 925 Billion. In case the federal government and provinces manage to utilise this amount honestly, it could give a boost to growth. But there is another factor that shall impact. 

Higher discount and interest rates shall make government borrowing from private banks more expensive. Devaluation will also increase the rupee debt tied to dollar. If the government does borrow, it shall be at a higher cost. Instead of breaking shackles, the country will be in a trap. The development runs risk of retardation. 

The more you try to change, the more it will remain the same. 

The present government has spent nearly a year in trying to comprehend how the rot of devaluation, debt trap and dependency set in. It could have been much quicker but for the Babus and Financial Gurus who deliberately obscured the obvious as they in many ways were accomplices to the crime. 

This complicity has been explained in a series of articles, this being the last one. Here are a few piercing questions and explanations. 

The inquest begins with Economic Reforms Act 1992 and culminates through two successive regimes from 2008 to 2018; a decade of retardation. These are more than twenty years when democratic governments stripped the country naked; an explanation why no political party in opposition will support government efforts. Their agents will rather retard. 

In the 90s, when the Economic Reforms Act unfurled itself, Pakistan under IMF supervision accumulated a debt of $17.4 billion. Having broken away from IMF during President Musharraf’s government, Pakistan successively went into two IMF programmes in 2008 and 13. During this period, the public debt as percentage of GDP rose from 58.4 % to 74.4%. External liabilities rose by $ 49.1 Billion. In other words, under the tight IMF control why was Pakistan allowed to accumulate a total debt of $66.5 Billion and raise public debt by 16%?  These twenty years account for Pakistan’s 70% debt liabilities. The culprits are PMLN, PPP/PPPP, Babus and financial Gurus. Ironically, these IMF programmes were declared successful. 

So the road to the promised land of honey and plenty remains a mirage. If past is precedence, with the IMF overhang, Pakistan is likely to continue piling public and foreign debt. With the same Babus and Gurus in place, the fiscal space will keep widening.

Experts familiar with the workings opine a growth of 2.5 to 3.5 in the next three years. Considering the incidental factors, this would be outright retardation or slowing of the economy. So what will happen to creation of 10 million jobs and 5 million low cost housing units? Who will provide jobs to the youth? Who will control the rising unemployment? How will small manufacturing units and businesses become productive in suffocating environments? 

But there is still a way out. The misery can be shortened if the government takes the simplest route of endogenous growth and pursue a high paced national development plan spearheaded by agriculture. But there is an ethical lien. Corporate farmers who made billions will never become the leaders of this revolution. The government, private sector and civil society have a joint responsibility of tapping this instant reservoir. 

 The question remains, when, who and how? 

Concluded