Yes there are solutions. Of course there are. But the solutions are extremely unpopular. So unpopular that if any of these political candidates even whisper them to another person in his ears, they would have lost the elections. Economies, specially the sinking ones are not saved by taking measures that please people. Measures that irritate the public at large in the present but give them a relief in the future are the only measures that needs to be taken.
Let’s just go through a review of where we stand as an economy before we discuss the solutions.
In my June 2nd Article “Pakistan is heading towards a financial emergency….”, I had made some bold claims albeit full of pain in my heart because to predict a doomed scenario for a country you love more than your own life, is the most difficult of things to do as a person of finance. It was the sings that were screaming in my face, economic weakness signs that I have seen in the past 28 years of my life dealing with international economies of more countries than I can count on my fingers. On June second I had clearly said that I would not be surprised if the dollar to rupee rate crosses 125 within a month. And today it is 128.50 officially and 130 unofficially.
What does this mean to all the common Pakistanis and the Pakistani economy. Well to begin with me, our external debt is $98 billion dollars. Or it WAS. Was I say because we earn in rupees and pay back in dollars. So a 24 rupee increase in value of the dollar means an almost $24 billion dollar increase in our payback ability. The net reserves with the state bank are just $10 billion dollars out of the $16 billion in total held by all banks. The Debt To GDP figures the world and the economists keep giving to all of you are nothing but a fallacy.
Debt To GDP means nothing because The GDP is NOT our income. It’s the value of all services and goods produced in a particular time period. Of Pakistan had produced $300 billion in value of the GDP it by no means indicates that the $300 billion dollars is our income. The amount of taxes we collect is our income. Nothing else. The profits we make as the Government Of Pakistan from nationally run companies like PIA, Steel Mills, OGDC. PSO etc are added income in addition to the tax collection. And from this income we pay back our debts to the lenders. Our nationally run companies are not only making losses but are being given further money to continue their operations.
Simple put, we have no money left to pay our debts. In addition our Current Account Deficit has increased to almost $18 billion dollars. Out imports are twice the amount of our exports, more so than that but I am taking a softer approach. Our circular debt is at $10 billion dollars. Our reserves can barely cover our imports for more than 33 days. That is the biggest sign of worry amongst many signs.
Simple put, we are facing a situation that countries should never face. Specially the weak countries economically like Pakistan.
What is the Solution?
There is no ONE solution. The measures that need to be taken are numerous. We need to decide which measure is to be taken first and which ones to be taken second and third and so on and so forth.
The first and the foremost solution is to outright ban 1000s of imported items. Starting from luxurious items. You cannot ban imports that easily because there are Trade Organizations around the world who will object and we are members of those organizations. But there is a solution to this problem. And that solution is to increase import duty on these items to such a high level that nobody can afford it. That is the right of the country and nobody can object. You would be surprised to know that we even import Apples and Grapes and Lentils. Yes Apples. By banning or increasing the duties on imports we will immediately give relief to our falling rupee. Immediately. Because the pressure of buying dollars and paying for the imports will ease immediately. This will in turn lessen our burden or paying dollar based loans since our currency will have not devalued further. This will kill many birds with one stone.
- Current Account Deficit
The biggest myth is that devaluing your currency will increase your exports. Wrong. Devaluing your currency might discourage import but to think that it will increase your exports in a country like Pakistan is a wish and not a reality. Exports are not just priced sensitive. By no means they are. The price your expired intern decreasing does not mean that the demand of it will increase. That happens mostly in economies whose exports are already in an extremely healthy state and stable. The cost of production increase in countries like Pakistan for the exporters because of the devaluation of its currency locally. Energy or electricity is one of the biggest cost for exporters in Pakistan. We import furnace oil to produce electricity in most cases. If the dollar is expensive than it means that our energy cost will increase and this will increase the price of the finished goods to be exported out of Pakistan. Importers in other countries refuse to import such expensive goods.
Demand is not and I repeat not, price elastic in export industries.
For us to fix the CAD problem monetary policy will play a better role. The less money available to the businesses and the individuals, at a higher interest rates, the less they will have the disposable income to spend and spend specially on imported items. This is a painful measure and might reduce the expansion process of many business entities because of the higher cost of borrowing but 200 million people are more important than 100,000 businesses. At this time the goal is contain the fire speeding in the economy, we can rebuild it later if not completely burnt down.
Deflationary policy will also put extended pressure on manufacturers to reduce the cost of their products, this will not only help the domestic economy but also the export prices will become more attractive to the imports overseas.
- Overseas Pakistani Investment Fund
When the popular support is in favor of a candidate, he can perform wonders with economic policies. Perception of a candidate plays a key role in others having a belief in him. If the investors or the general public thinks that a certain candidate is financial non-corrupt, then he has popular support with votes and money. There are about 6 million adult overseas Pakistanis loving Pakistan and missing their homeland. Not everyone can move back to Pakistan but everyone wants to help Pakistan from where they are.
More than “Brain Drain” being reversed, which it will Insha Allah, we need financial assistance. One temporary solution is to ask all the overseas Pakistanis to remit funds in Dollars to Pakistan. It will help but temporarily. What we need to do is to establish an investment fund. A fund where both overseas Pakistanis and foreign nationals can invest in. It can raise billions in funding. Have that fund invest into Pakistan and let that fund be listed as an Exchange Traded Fund on multiple stock exchanges around the world, London, New York, Hong Kong to begin with.
It will invest in Pakistan in revenue generating projects and can easily generate returns in double digits. People can invest large sums of their savings from overseas into it. Much more than the remittances that they can send at this moment. This fund will not only create jobs but will bring in new technological advancements, permanently into Pakistan. It can have the mandate to invest in all fields, Healthcare, Education, R &D, ICT, Start ups, and whatever the Government deems necessary and in need of capital. 10 years from today, with returns and fresh investments, my experience of having country funds tells me that I would not be surprised if the investment crosses a $100 billion mark. More than the CPEC and 10 times more than our current foreign reserves.
I am the biggest proponent of privatization. Governments should never be in the business of running business. They should be in the business of regulating businesses. It goes against the basic theory of competitiveness in any economy if a government runs a business.
Secondly in a country where we have more than 150 government owned entities and more than 80% of them are making losses, it defies logic to continue to run them. These government owned entities not only make losses that run into billions of dollars a year, and those billions are not only a loss against potential profit to the people of Pakistan, these entities are given more cash every year to sustain their losses. Billions of dollars a year are injected by the Government Of Pakistan into these companies.
To top it all with a bigger irony, these government corporations have become a rewarding grounds to show loyalty to their own party member by giving them jobs in these corporations in thousands upon thousands from the lowest to the highest levels of corporate echelons. A company that can be run on efficiency with only 800 employees has 8000 employees.
And once these employees are given a job they immediately become part of the all powerful unions that exist in each of these corporations. If you try to downsize the excess baggage of these over employed corporations, there are public protests, road blockades and even violence. Phenomenon’s that have nothing to do with running a corporation anywhere in the world.
The popular narrative in Pakistan amongst the people who equate patriotism to having these loss making entities is that, these institutions are our national pride and should never be privatized. Patriotism when it comes to economic matters is seeing the reality and loving your country to the point where you admit that this corporation is hurting the financial health of my beloved country and I need to fix it.
Out of these 150 corporations, the ones that are listed in Pakistan stock exchange alone are worth more than $30 billion dollars. Add another $25 billion at the least as the value of other 150 corporations, if we begin the process of selling them today, within the next 5 years we can retire 70% of our external debt. And in addition we can save another $3 to $5 billion a year that we keep funding them to cover their losses. The savings alone from not funding the losses in the next 5 years will be $25 billion approximately. This is in addition to the $55 billion we will receive from the sale of these assets.
Once these corporations are privatized the chances are, based on the evidence on hand of the banks that were privatized a decade ago, they will turn profitable. Almost all of the banks that were once owned by the government of Pakistan were used to bleed them dry by obtaining loans by the politicians and friends of powerful politicians and those loans later on were used to be written off and used to become a burden on the national financial health.
These same banks now are a huge profit centre.
And with huge profits come huge tax collection on those profits by the government. So it becomes a win situation for any government, specially the all politically influenced Pakistani governments, to privatize these companies. Collect a onetime upfront sale amount which runs in billions of dollars and then let them run independently, efficiently, productively and collect taxes on their profits instead of giving them money year after year to cover their losses.
Margaret Thatcher came to be known as “The Iron Lady” when she was the Prime Minister of England. Because she was pro privatization and she would not budge from her stand to privatize British owned entities. The voters disliked this decision of hers or let’s say the stubbornness of her in favor of privatization, at that time. Today, fast forward a few decades, you can hardly find an economist or a banker or a business man who would not praise what she accomplished with her adamance.
We need such adamance in Pakistan. We do not need misguided patriotism when it comes to economic matters.
- Capital Markets Reforms
Capital markets, specially in Pakistan are a representation of an economy more on the perceptional basis than through a direct link. Anywhere in the world people usually watch the closing numbers of the index as News. Then they draw a perceptional inference if the economy is doing well or not. This may be the most primitive or the naive way of looking at an economy’s growth or the lack thereof but this perceptional microscopic observation by the masses of the markets is a reality. Albeit a silly one.
But once a perception is accepted as a norm around the world then it becomes the duty of the government plus the regulatory authorities to create a benefit out of it for the public at large and the economy in particular. If you hear that the stock market is dropping 10 days in a row, you immediately start to think that the economy of the country might be in trouble. Political upheaval also comes to mind but economic upheavals are more a reality based linked to the markets and the perceptions.
Pakistani markets have gone from being the best performing markets to the worst performing Asian markets within a span of 14 months. To go from the best to the worst within this short period of a time is a feat accomplished by very few governments in the world, Pakistan has taken the cake or might I dare to say, the entire bakery when it comes to this dreaded award.
What is done is done. How do we fix it ? If perception is one of the major key points of a stock market then perception let’s fix. The best way to fix the perception of any market around the world, and I have seen and dealt with 26 markets around the world running an investment bank on Wall Street. Capital Gains tax plays one of the biggest catalysts for a stock markets’ growth or vice Versa. Instead of being penny wise and pound foolish, we need to lower the capital gains taxes immediately. It will give a boost to the confidence of the investors specially in an economy where I foresee interest rates to climb continuously in the next few monetary policy meetings of the State Bank of Pakistan. Higher interest rates can further kill the prospects of any gains in the stock markets bar a few banking stocks.
It will also help the foreign investors who will get an indirect message once the stock market stabilizes and starts to go on a positive trajectory that the economy is getting back on its tracks. That would give confidence not only to the Foreign Portfolio investors in the stock market but it might also give some confidence to the foreign direct investors. The point is to put the fire out at this point, the fire that is spreading in the landscape of our economy.
Another thing that needs to be done to create huge number of jobs through the stock markets is to provided a mechanism for the young companies and the ideas of the youth of Pakistan to raise funds through listing of their companies onto the exchanges.
Our stock exchange listing requirements are simply the most aristocratic and rich-people favoring than any that I have seen around the world. We talk about technology innovations that at needed in Pakistan. We talk about IT exports from Pakistan. We talk about uplifting the youth and bringing them into the realm of Entrepreneurship but the reality is that not a single company with their founders being under 25 is listed on our exchange. Why ? Because the listing requirement dictates that your company must be worth Rs 250 million for it to be qualified for a listing. Where in the world, especially in a country like Pakistan where the youth have ideas but money, where the per capita income is one the lowest in the world, can come up with Rs 250 million to list their ideas.
If we lower the requirement to Rs 50 or even Rs 30 million and create am altogether new small exchange then we can see hundreds of new technology companies getting listed on exchanges, raising funds from the public for their operations and expansions and during this process create tens of thousands of jobs and billions in taxes for Pakistan.
Before you jump out of chair you are sitting in and begin to believe that I am suggesting to take the route that Donald Trump is taking by adding tariffs upon tariffs on every item in sight, there is a flip side to protectionism based economic policy as well. And it’s beneficial rather than damaging.
America and it’s protectionist economic approach is damaging because America has a huge number of countries that it imports from. Items that Americans have become dependent upon and cannot live without. Pakistan has no such problem. Our imports are largely ostentatious based and luxury driven.
Protectionist policies will forever consumers at large to buy domestically provided goods. That will increase economic activity and decrease imports further. Giving us an immediate relief on our Current Account Deficit front.
Economics may seem like rocket science but in reality it is common sense based. If you are the head of the household and you lose your job, what is the first thing you do until you find another job ? You cut your expenses down to a bare minimum. You don’t buy a new car or take vacations to the South Of France or to Milan and stay at The Principe De Savoy Hotel. You find an alternative.
Pakistan is losing its metaphoric Job if not has lost it already. We need to cut any and all expenses from our budget. Closing down a few Governor houses around the country is not the solution in itself. As suggested by many candidates running for the spot of the Prime Ministership. It is definitely a start in the right direction but it is not the journey itself. We need to bring austerity measures willingly before we are forced to face them without a choice.
A few billion dollars a year can be saved by putting freezes on travel expenses, salaries, new vehicle purchases for the bureaucracy and the elected officials, cutting down oversized staffs at Secretariats around the country, finding and firing ghost employees that exist almost in every province of Pakistan from department of education to health and to large municipal corporations.
All in all, there are so many more measures that we can take. Of course we will grow our economy and get back on track but at this time the goal is not to grow the economy. The goal is to save a sinking economy from going into an abyss. None of the above suggestions that I have given are popular. Whoever comes into power after July 25th 2018 elections, I do not envy them. It’s a ginormous task he is facing as a PM.
But there is also an opportunity hidden in all this chaos waiting to be faced, if the next leader decides to put the popularity above national interest, and takes these and many more measures to save Pakistan from a financial meltdown, he will go down as a hero in the history books and might even become popular towards the end of his 5 year term to win the election again.
The decision is tough. But the rewards of the decision, if not guaranteed with popularity in this country, are guaranteed with a beautiful afterlife by Allah SWT because bringing betterment in the lives of helpless and the hopeless people of Pakistan is nothing short of KHAIR E JAARIA.
Mir Muhammad Ali Khan is the first Muslim founder of an Investment Bank on Wall Street. He is the author of 4 books and has published over 800 articles. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.