Is Pakistan’s economy immune to crises?

In a thought-provoking piece published in Dawn last month, Dr Akbar Zaidi has asked us to stop talking about the weaknesses of Pakistan’s economy for a moment, to think about its resilience instead, and reflect upon “why it continuously avoids any real crisis”.

It’s a good question and worth thinking about. Not many countries get to reflect on how, in spite of it all, they’re still standing. Pakistan’s economy has weathered some very severe storms, yet it still stands and delivers. Might there be a story there?

Dr Zaidi’s hint is towards the informal sector, or how the country’s “wide social and economic networks allow families and individuals to live in worlds which are often not on the economists’ map.” He believes that remittances form a large input into this ‘informal sector’, making it resilient and keeping it going even during times of severe economic distress.

But there are two things he fails to mention. One is that besides remittances, another crucial input for the ‘informal sector’ is energy, whether electricity or natural gas, and for this vital input, the ‘informal sector’ is totally dependent on the vagaries of its elder sibling: the formal economy.

Shortages of power and natural gas have hit small and medium enterprises much harder than the formal economy, where the large manufacturing concerns have adapted by investing in captive power and leveraging private channels to arrange privileged access to dwindling gas resources. And through this vital input, the supposedly ‘resilient’ informal economy ends up sharing the fate of the formal sector, living and breathing with every pulse of the circular debt, the winter gas load management plans and the oil price fluctuations. Far from resilience, the informal sector is in fact brittle, unable to adapt to the new shortages that are becoming a permanent feature of Pakistan’s economy, and tied into the formal economy’s weaknesses and shortages.

The other thing he forgets to mention is that in the two crisis moments in our recent past, Pakistan pulled through on the back of external help and nothing else. For the crisis that began in May 1998, the external help arrived in the form of a Saudi oil facility and in the form of a $600 million loan from the IMF. And for the crisis that began in 2007, external help finally arrived in November 2008, though this time there was no oil facility, only a loan from the IMF.

In fact, the only time Pakistan has faced a sharply deteriorating economic situation with no external help arriving was in the years leading up to 1971, but that opens up a different can of worms altogether.

Yet, there is no doubt that Pakistan has weathered some very difficult times, and in spite of it all still stands. What explains this resilience? If I were to venture a guess, I’d say two things. We are self-sufficient in food, and our enormous gas reserves, which account for almost half of our domestic fuel requirement, have helped cushion the impact of rising energy prices worldwide.

The layperson may not feel that his energy bill is cushioned. Households have seen their energy bills rise very sharply in the last three to four years. What the layperson does not see is the growing trend towards domestic gas as the fuel of choice, burdening our already strained gas reserves with rising demand. Close down CNG pumps for a month, generate all your electricity from furnace oil and see what your energy bills look like after that and you’ll get an idea of what I’m talking about.

Fact of the matter is that we are still largely shielded from the spike in energy prices around the world, but we cannot remain shielded forever. A projection by the Petroleum Institute of Pakistan shows that by the year 2025, our supplies of natural gas will dwindle down to a quarter of what they are today. Domestic gas is running out, no major fields are about to come online, and the cheapest imported alternatives are priced at triple of what we’re used to paying for gas, and in many cases much more. We need a clearer understanding of where the price of energy is going over the next 10 years, and nobody needs this clarity more than the ‘informal sector’.

Will external help be as forthcoming now as it has been in the past? Remember how the government of Nawaz Sharif struggled with its external position throughout 1998 and 1999?

When the IMF finally did come through, it was in December of 2000, and with a miserly $600 million at that; just enough to carry us through till June 2001, when they would examine the budget to see if any further money was warranted. No growth came from the ‘strict implementation’ of the IMF program in 2000. It took 9/11 and the consequent windfall avalanche of liquidity to come pouring in to get growth started again in this country in 2002.

But is such an avalanche likely to happen again? With the recession abroad, and all stocks of international goodwill exhausted, it’s unlikely that any external windfall is about to come our way. Just enough money to keep us from going over sure, like in 2000, but not enough to underwrite a boom.

In some cases, the economy’s vulnerabilities have grown. For instance, in November 2008 we discovered that our banks can be drained of liquidity very quickly. In 1998, fears of a run on bank resources was restricted to foreign currency accounts, but in 2008 even rupee liquidity saw severe stress, enough to prompt an intervention by the State Bank. If fears of a bank run meant freezing foreign currency liquidity in 1998, what might similar fears mean today?

Pakistan’s economy has shown some resilience over the decades, undoubtedly, but it would be a mistake to allow that to become a source of complacency in the complex and dangerous world that we are entering now.

Published in The Express Tribune, November 17^th,  2011.