Published in Jul-Aug 2022
“There is no point talking about what the government should do in the next six or even 12 months. We have to focus on what this government can do in the next three to five years. The debate needs to be about that”
AURORA: How serious is this present crisis, given Pakistan’s historical pattern of boom and bust cycles?
GHIAS KHAN: It is bigger and more serious than the ones we experienced previously. We have been through boom and bust cycles before. Every time the economy grows, imports go out of control because we are a very import-driven economy, hence the large current account deficits we accumulate, and then in order to finance them, we have to go back to the IMF. We have been to the IMF about 13 times in the last three decades; so nothing new here. However, it is the magnitude of the current crisis that makes it serious. It started at the global level and is driven essentially by three factors. Firstly, overall demand contracted globally during the pandemic and in order to kickstart their economies, most of the affected countries provided stimulus packages to the people. The Central Bank printed more money and there was an increase in the money supply and demand began to increase as people had money to spend. Secondly, the pandemic had a worldwide impact on supply chain networks and transportation costs skyrocketed. Thirdly, the war in Ukraine, a country that is a large provider of energy and food, particularly wheat. Put these three factors together and we are experiencing a super commodity cycle with oil prices going up as high as $125 a barrel. When you bring this international context into the Pakistani environment and consider the fact that we are a very import-driven economy, particularly on the energy front, you can see why our debt levels have been very badly affected. In fact, next year, Pakistan will have to pay about Rs 3.9 trillion in debt servicing and we are targetted to collect about Rs 7.5 trillion. So the pressure on debt repayment is huge. We will have a current account deficit of $15 billion this year. To summarise, this crisis is emanating mostly from the global commodity cycle and is very serious for Pakistan due to the inherent flaws in our economic model and the fact that we have not been able to increase our exports. In 2013, they were worth about $25 billion and this year they will barely touch $29 or $30 billion. The current global crisis has magnified the local one. Recently, we had to increase the price of petrol and a similar increase will need to happen with gas. The gas circular debt was Rs 600 billion a year ago, today it stands at Rs 1.5 trillion because we are selling gas at such a lower price than what we are buying it for. We are subsidising gas without having the money to do so. We are now in a situation where a country of 220 million people is in a debt trap because our levels of debt are roughly equivalent to about 72% of our annual GDP on top of which is a trade account deficit of $50 billion.
A: What is your opinion about the measures announced in the recent budget?
GK: They are band-aid solutions. Yes, they will help in the short-term, because once the IMF loan comes through, the other global financial institutions will also give us money, which will shore up our foreign exchange reserves. Also, the conditions imposed by the IMF will make us more disciplined and we will collect more taxes. However, that is not the answer if we consider Pakistan’s medium to long-term future.
A: What are the long term solutions?
GK: We need to address two major challenges. The first is on the fiscal side. We do not collect enough taxes and we are losing too much money on State Owned Enterprises (SOEs). The second is that we do not export enough to pay for our imports.
A: Both the challenges and the solutions are well-known. Yet nothing is ever done to address and rectify them. Why?
GK: The key lies in the execution. Let’s pick the fiscal side; tax collection and the inherent leakages in our system. As a country, we only collect 10% of our GDP as tax – in India, for example, the figure stands at 12%. We are not doing enough about documenting the economy, which would reduce the amount of cash in circulation. Right now about 37 to 40% is in circulation and this is an exceedingly high number. By documenting the economy, more people will come into the tax net and they will have a transaction history, which in turn will help them obtain financing from banks and thereby enable them to reinvest in their business. It is a multiplier effect. However, the government cannot broaden the tax base and solve the issue in one year, but it definitely has to do a lot more. Although I disagree with the imposition of the super tax I understand why the government has imposed it – we don’t have a choice; targets have to be met and funded one way or the other. However, not initiating a drive to document the economy or not bringing unproductive sectors into the tax net will be a recipe for disaster.
A: Isn’t this a question of having the political will?
GK: Probably, as well as the execution challenges that come along with it.
A: What do you mean by execution challenges?
GK: I cannot think why a government would not want to document the economy, especially given that we have the tools available – the NADRA, BISP and Ehsaas databases, for example. We have platforms like Raast, which by the end of this year will facilitate payments on a B2C basis as well (for example, people will be able to use the platform to pay for their supermarket transactions). The government should not think about what is popular or unpopular in the shortterm, but do these fixes now, even if there is pushback. We don’t have a choice anymore. If we don’t document the economy and broaden the tax base, we will be marching towards bankruptcy. What is encouraging is that there seems to be a realisation that this is Pakistan’s last chance of getting its act together. We also need to get the flow of money away from the unproductive sector and into the productive sector.
A: Why is this so important? GK: Think about it. If I can invest in real estate and pay zero percent capital gains tax after four years, why would I invest in a business where my corporate tax is going to be above 50%, which is one of the highest in the world? Capital will always flow to the opportunity where there is the best risk adjusted return. That is a principle we should not fight. The job of governments is to remove such rent seeking opportunities. The more they discourage investment in the unproductive sector, the more it will flow towards the productive sector.
A: The productive sector would be?
GK: Manufacturing and competitive business that will help increase exports; IT, food processing, mineral mining, petrochemicals, agri-inputs and engineering goods, among others. Such businesses will help with our balance of payment. On the export side, it is a matter of ensuring investors are not putting their money into fixed return businesses, but into businesses that are globally competitive and will help Pakistan to export more.
A: What would be the unproductive sectors?
GK: Real estate is the most obvious example, but there are other opportunities that benefit from heavy-duty protection from the government. Basically, businesses that do not invest in their own value chains; that will make them bigger and more competitive at the global level.
A: It was recently reported that Pakistan’s growth rate was close to five percent. How does this square up with the collapse we now have?
GK: The financial performance of most companies has been really good. A lot of FMCGs were able to increase their sales, particularly in the rural areas. Pakistan’s agri-sector has done well. Even the automobile sector is selling cars all over the country.
A: Even now? GK: Yes. Obviously due to the devaluation and the hike in interest rates, there will be a dip in their financial performance this year. However, as recently as December 2021, a lot of businesses were doing well, be they banks, automobile, fertiliser or energy companies. The issue is in the quality of that growth and the fact that a lot of it is import-driven. We import four billion dollars worth of cotton, 3.5 billion dollars’ worth of palm oil and 30% of our total gas requirements – this is the wrong kind of growth. We are a very high consumption economy and most of that consumption is met by imports, which is why every time we go through a growth spurt, we end up running out of dollars, simply because that growth is not coming from export-oriented industries. Bangladesh is a good example of a country led by export growth. Bangladesh’s export figures per capita are more than three times that of Pakistan. They export $30 billion worth of textiles and they are not cotton producers. They import all their cotton, yet they are able to export $30 billion worth of textiles. Pakistan used to be a cotton exporter, so we should have been way ahead of Bangladesh. Most of our cotton is being replaced by maize which is local consumption driven. Our agri-produce is moving away from being part of the export value chain to local consumption. Growth alone is not good enough. It has to have a component of export led growth, otherwise we will keep crashing our economy.
A: The solutions seem so simple.
GK: It is not that complicated. Yes, it can also seem overwhelming with the large swathe of challenges we face. The government machinery needs to be able to exercise judgement and make tough decisions. What is happening now is that the entire government machinery is jammed because bureaucrats are wary of making decisions. Many other countries have overcome similar challenges. It simply requires governments to take the right actions, even if they have political implications in the short term. As President of the OICCI, I am waiting for some of those measures to be taken and when they are, I am going to ensure that we support them. Pakistan needs the right measures to be taken and for these measures to be supported by people like myself and the media. Why are we not privatising PIA and Pakistan Steel, when we know the extent of their annual losses? Yet, nothing is done about them because if they are privatised they will be right-sized and this will have political ramifications. This is why the key is to support governments that take the right decisions, even if they are unpopular in the short-term. Frankly, I don’t have much to say about the economy in the short-term. There is no point talking about what the government should do in the next six or even 12 months. We have to focus on what this government can do in the next three to five years. The debate needs to be about that.
A: The government apart, is there anything the private sector should be doing to solve Pakistan’s economic stalemate?
GK: The government has to create an enabling environment and the private sector will do the rest. This means consistent long-term policy making; policies that can be tweaked, but not overturned every time there is a change of government. Investors require consistency of policy and the government needs to favour the productive sectors. The private sector is savvy, smart and intelligent and it will find a way to take advantage of an enabling environment.
Ghias Khan was in conversation with Mariam Ali Baig. For feedback: email@example.com