We believe in good luck

KARACHI: One of the defining characteristics of humans is to learn from their past experiences. The exercise is tedious as it sheds light on our own mistakes but it’s even more important if the consequences of our decisions affect the larger population. That is in principle, the logical rationale for the economic review in various developed nations.

To not only anticipate the future and plan accordingly but to analyse the ripple effects of the policies of the past. Sadly, economic populism rules our country, where the incoming ruling party intentionally propagates slogans comprising words like ‘eradication of injustice’, ‘end of corruption’, ‘transfer of wealth’ without specifying the means or tools to achieve it.

It is not an entirely uncommon happening specific to our region of the world but has even deeper roots in Latin America. But what is astonishing is how quickly those countries have risen to the top and were able to convert those vague words into impressive quantitative achievements like ‘GDP’ and ‘productivity’. Many third world countries; a term initially coined by Nehru to exhibit neutral position in cold war are now known as ‘emerging economies’.

Unfortunately, Pakistan is nowhere to be seen in the race and apart from the political reasons; technically speaking our country is not pursuing viable economic policies. The balance of payment crises of 2008 exposed the folly of some aspects of our economic planning when the trade deficit (exports minus imports) even exceeded our entire exports.

The major cause was not a decline in exports but a drastic rise in imports attributed to sky rocketing oil prices. Surprisingly the exports of Pakistan have grown at a steady pace in the recent past and have been close to the export targets.

Even this year, the Trade Development Authority has given a provisional exports figure of $19 billion against the targeted $18.9 billion. Although our exports have not grown at the pace of Asian tigers and China, they have nevertheless been resilient after taking into account the political factors in Pakistan.

What dearly cost our foreign exchange reserves in the fiscal year 2008-2009 was our huge oil import bill alone contributing to 29 per cent in the $40 billion imports.

The record trade deficit in fiscal year 2008-09 needs to be critically analysed not only because it led to balance of payment crises leading us to IMF but also because it indicates a structural problem which hampers our future sustainable economic growth.

Now, if broken down into simplest form, trade deficit can be reduced by increasing exports or reducing imports. The exports of Pakistan are highly concentrated in textile sector and so the tremendous long-term growth is extremely difficult unless Pakistan broadens its exports base. And we have got accustomed to this shout of broadening our exports base.

What we are not paying due attention is our massive imports bill. The figures speak for themselves. Since the Pakistan People’s Party came into power, our trade deficit has been reduced from $21bn (Fiscal year 2008) to an estimated $9bn (Fiscal year 2010). This was not due to increase in exports which in fact stayed constant on average during the last three years, but due to a sharp decline in imports by 30 per cent.

So it was international oil price declining rather than diligent economic planning that helped the PPPs politicians save face. No credit is due to them as that factor is hardly under anyone’s control and could well bring us down to our knees anytime the international recovery begins which would cause oil prices to increase.

According to the Trade Development Authority, for the fiscal year 2009-2010, the largest share in imports comprised of petroleum; 29 per cent but this alone does not provide the entire picture as our food imports also majorly comprise of palm oil; at  38 per cent of food imports.

We have witnessed in the past that a surge in oil prices bears high correlation with the prices of palm oil and soyabean oil as the exporting nations of Brazil and Malaysia divert the production of edible oil to bio-fuel purposes in times of high oil prices. So, taking the correlation into account, our exposure to oil price risk is greater than we anticipate

Right now, the oil prices are down due to Euro-debt crises and slow recovery expected but it is an accepted consensus by economists that the prices are suppressed right now.

So, what have we done about it? This is where the economic populism comes into action…shouting when it’s too late and not preparing beforehand. The Economic Coordination Committee under Shaukat Tarin tried different proposals including hedging oil price risk and exploring alternative energy sources.

While alternative energy resources reducing our dependency on oil are the ultimate long term solution, the process is plagued with bureaucracies and lack of political will. So, unless we as a nation mature enough to take hard decisions, we can hardly expect the long term solution. But what is unfortunate is that even short to medium term solutions are not addressing this problem.

But to achieve a sustainable improvement in any economic policy brings with itself the harsh reality of foregoing the myopic short term vision and finding solace in knowing that a better future is ahead. It is not a technical matter but rather a simple choice of sacrificing the short term luxury to avoid the hardship of tomorrow. Presently, the oil bubble is in a deflationary stage but to pin our hopes on a lucky happening to continue in future is beyond any logic. But then again, ‘logic’ is not a word in a populist dictionary and we, for better or for worse, are ruled by the populists.

Published in The Express Tribune, June 21^st, 2010.