Economic desperation and PTI’s populist dilemma

Despite support from Saudi Arabia and the UAE meant to boost Pakistan’s liquidity, our long-term economic prospects do not look good. The latest report released by the World Economic Forum, for instance, suggests that doing business in Pakistan is likely to remain difficult in the foreseeable future. This ‘Regional Risks for Doing Business’ report mentions a growing water crisis, unmanageable inflation, a lingering terrorist threat and the complete failure of urban planning as major risks faced by the country.

Inflation is rightly considered a major risk impeding our economic attractiveness. We may have benefited from low global oil prices during the past few years, but a combination of rising energy prices and expansionary monetary and fiscal policies have caused the inflation rate to have reached a four-year high, and the rupee value has deteriorated significantly. Climate change and haphazard urban planning are also Herculean tasks which have not gotten anywhere the attention they need.



The report has also singled out Pakistan, Nepal and Bangladesh to be susceptible to serious cyber-attacks as they continue to run on computer programmes which are often afflicted by malware. The fact that the State Bank of Pakistan has just rejected reports about a wide breach of bank accounts data shows our existing vulnerabilities to this threat. One wonders what adequate measures will now be taken to address this threat.

Fitch Ratings, one of the three major global rating agencies, has also just downgraded Pakistan’s long-term debt rating to ‘B-Negative’. This downgrade has occurred due to high debt repayment obligations, low foreign exchange reserves and the fragile fiscal situation. Pakistan’s external and public debt escalated rapidly over the past 10 years because of heavy reliance on borrowing, in part to finance the ambitious CPEC initiative. However, instead of improving the tax-to-GDP ratio, we choose to borrow more money. Along with declining exports and waning foreign investment, Pakistan’s total debt and liabilities are now hovering well above the debt sustainability limit of 60 per cent of the GDP.

If we manage to convince the IMF to give us another loan, even with a more graduated path of fiscal discipline, this programme would invariably imply public austerity measures which will complicate other needed measures, such as curbing the high unemployment and under-employment rates in the country. Increased borrowing to finance investment and consumption is not good news. Combined with exorbitantly-high defence expenditure, our debt servicing requirements leave little for anything else.

Before he became prime minister, Imran Khan often rallied against lending saying how international agencies compel the country to downgrade the value of the rupee (based on the rationale of making exports more competitive), which in turn requires us to pay increasing amounts to service our debts.



While a future IMF support would compel Pakistan to tighten its spending, the current government must avoid the mistakes of its predecessors, who kept shifting the burden of fiscal discipline onto the hapless masses and cut corners on investing in their basic needs.

What the PTI government must do instead is to make taxation more progressive, and especially prevent tax evasion by large landowners. While the IMF would not object to the government ensuring that chronic local tax evaders are brought into the tax net, such attempts will be less acceptable to the electables now firmly entrenched in the PTI cabinet. Bhutto had faced a similar dilemma with his populism. Whether the PTI will be able to better negotiate this predicament, remains to be seen.

Published in The Express Tribune, December 28^th, 2018.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.