Paran Balakrishnan | Updated on September 18, 2019 Published on September 18, 2019
For the $6-billion loan, Pakistan has to adhere to stiff conditions. But Imran’s focus isn’t on tackling the economic mess
It’s long been accepted that Pakistan’s army chief is the country’s most important power-broker who calls the shots. But in the coming months, there may be another crucial figure who’ll wield clout behind the scenes. His name is Reza Baqir who was with the IMF nearly 20 years and who now has been parachuted into the top job at Pakistan’s central bank.
Baqir’s unenviable task during the next three years will be to keep a tight watch on Pakistan’s economic manoeuvres and to ensure it complies with toughest conditions ever set by the IMF for its latest $6-billion bailout. Abiding by the IMF’s terms will be all the more difficult because there’s no indication of Imran Khan, whose government just marked its first anniversary, showing any sign of comprehending, or tackling, the country’s deep economic mess. On the contrary, Khan has focussed on raising the temperature against India over Kashmir and, instead of sabre-rattling, he’s now nuke-rattling to attract the world’s attention.
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Can Pakistan hike taxes and ensure many more of its elite are forced into the tax net? (Pakistan with its 217 million population has 1.5 million taxpayers. Compare that with Bangladesh which, with its 168 million population, has 1.6 million taxpayers). Also, can it raise electricity prices and push up exports enough to narrow its trade deficit? Can it reduce its overall budget deficit? Can it move to a “market determined” exchange rate? These are all changes the IMF wants to see in exchange for its money.
On the exchange-rate front, there’s one positive of sorts: Pakistan’s got closer to a market-determined exchange rate because its currency has sunk from PKR 120 to the US dollar to PKR 158 over the last few months (Ten years ago, PKR 80 bought one dollar). But for the rest, it will be a rough ride. The lower rupee might make exports more attractive but it will stoke domestic inflation, already over 8 per cent. The dollar inflow may allow the government, however, to expand welfare spending in an attempt to ease economic misery.
Pakistan is a standing example of a country that’s done almost everything wrong when it comes to ensuring its citizens’ prosperity. The result is it has plunged into its worst-ever economic morass while India and even Bangladesh have risen to new prosperity levels. The army’s interests have always overridden all others. But the fact is Pakistan would find it hard to afford a conventional war right now. Also, the current IMF rescue comes only three years after the last one ended and Pakistan still has repayments to make on its earlier borrowings.
Pakistan began as a country with a strong agricultural base and maybe that’s why it didn’t bother focussing on building industrial might. The result is its industries are terribly underdeveloped, even compared to Bangladesh. Consider power production. Till two years ago, the entire country produced only 25,000MW of power daily. That’s risen since then to 32,000MW because of the new Chinese-backed projects coming onstream under the China-Pakistan Economic Corridor (CPEC). Now compare that to India’s capital Delhi, an enormous power guzzler. In July, Delhi’s electricity consumption peaked at around 7,500MW on one particularly warm day. That one figure is enough to illustrate how Pakistan has failed to develop its industry.
In other key sectors, Pakistan’s performance is not quite as dire but it’s nothing to write home about. The cement industry produces around 40 million tonnes annually compared to India’s around 500 mt. Some of its cement is exported to the Middle East and even came to India until the latest trade shutdown. Steel production is at 4 mt compared to India’s 102 mt. India recently overtook Japan to become the world’s second-largest steel producer though it’s far behind China that turns out 800 mt, which is flooding world markets.
Clearly, industry needs to take root in a far more profound way in a country in which almost two-thirds of the population is under 30 and where 30 per cent is below the poverty line. But economic growth has fallen from 5.5 per cent in 2017-18 to 3.3 last year. And things will get much worse before they get better with growth projected to cool to 2.4 per cent in 2019-20.
Adherence to the IMF’s stringent loan conditions will be reviewed quarterly. But, in many places, the IMF Pakistan report appears almost to be going through the motions and not really believing its own words. The macroeconomic section, for instance, is headlined: “Sustained reform implementation is expected to steadily reduce imbalances and deliver higher and more balanced growth.” But the section goes on to note economic activity will probably decelerate because of the strict measures being taken. Then, sounding a plaintively hopeful note, it says the government’s belt-tightening should lead to higher private-sector and foreign investment.
Can Pakistan change its ways during the 39-month IMF programme? As anyone who follows Pakistan knows, it’s been through many such programmes. In fact, the IMF has bailed it out a staggering 21 times, and it hasn’t reformed in any way. Khan’s pronouncements also show little understanding of his country’s predicament. Will he stay the course when tough times start hurting his popularity?
Is an economically thriving Pakistan or one that’s an economic failure better for India? Certainly, India and Pakistan would benefit hugely by trading with each other like normal neighbours but that doesn’t seem to be on the cards in the foreseeable future. Worryingly, failure can turn leaders, and not just of Pakistan, towards other adventures to restore their popularity.
Khan, though, has got one big bargaining chip and may still get lucky. He’s reportedly seeking to persuade Washington to help dilute the IMF’s tough conditions and keep Pakistan off the FATF’s anti-money-laundering blacklist in exchange for US troops’ peaceful exit from Afghanistan, according to Pakistan’s The News, quoting an unnamed cabinet minister. President Donald Trump may just take the bait because he wants US troops out of Afghanistan by the 2020 elections and so Pakistan may yet get an easing of IMF financial pressure. Khan’s got two meetings this month with Trump to pitch his case.
Still, there’s a lesson in this for us. Countries that take their eye off the economic ball and get distracted by other issues can often find themselves mired in difficulties. India has got many things right till now, despite what the Modi government may say about the Nehru and Congress governments. Any deviation from focussing on the economy could lead us onto the wrong roads and away from the goal of being a prosperous nation.