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Passage of Penance – by the many for the folly of the few

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Javed Hassan |

We could have had the Archangel as our leader, with the combined wisdom of John Maynard Keynes and Albert Einstein to guide his rule, but the economy would not have been any better than it is today. The Rupee would have depreciated to what it had to with the accompanying inflation and interest rate hikes. If anything, without the loans from friendly countries, garnered by PM Imran Khan during his whirlwind round of trips, the economic slowdown might have been faster and deeper.

A legacy of incompetence and wastage by the few cannot be undone without the painful path that the many collectively have to now travel. Dar’s absurd obsession with maintaining the Rupee at 104 saw Real Effective Exchange Rate (REER) rise from a near fair value of 104 in June 2013 (published by SBP) to a massively overvalued 127 by April 2017. Such gross overvaluation not only stimulated demand for imports but also ensured the decimation of Pakistan’s export competitiveness.

Sadly, a government more focused on the optics rather than substance frittered away much of the borrowings on grand infrastructure projects such as a metro bus in Islamabad or orange train in Lahore.

Consequently, the country’s imports ballooned from $45 billion in FY2014 to $61 billion in FY2018, while exports fell from $25 billion in FY2014 to $20 billion in FY2017. The external current account deficit, which stood at $3.1billion in 2014 exploded to $18 billion in FY2018 (5.8% of GDP) – the highest ever in absolute terms. In the same period, Pakistan’s external debt rose from $65billion to $91billion.

At the start of the PTI government, the current account deficit monthly run rate stood close to $2billion. Corrective measures such as a sharp depreciation of the currency and tariff hikes on non-essentials were imperative to prevent the economy from imploding. The latest current account deficit figure for February stood at a significantly reduced level of $356million, which indicates that the tough policy measures might be starting to work.

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The wild binge of borrow and spend by the PMLN regime might have made sense if it were directed to boosting long-term investment export-oriented industries and much needed human capital development. Sadly, a government more focused on the optics rather than substance frittered away much of the borrowings on grand infrastructure projects such as a metro bus in Islamabad or orange train in Lahore.

The zeitgeist being to borrow, spend and let the devil take the hindmost, the regime merrily crossed the mandatory limit of 60% set under the fiscal responsibility and debt limitation act. The Sultans of Spend had no qualms in taking the total public debt (external plus domestic) to over 72% of GDP by June 2018.

If PM Imran Khan were to stop making a ruckus about corruption, the gargantuan circular debt of approximately Rs1.4trillion as of January 2019 would not be any smaller. PML-N’s policy of adding approximately 10,000 MW of power generation capacity on long-term take-or-pay contracts, which guaranteed ever so generous returns to the producers, also ensures that the country remains in a capacity trap for the near future.

Asad Umar may take to wearing a hair shirt and prostrate himself to a nation of self-appointed expert advisors, but it the economy will care little for his humility.

It is estimated that this additional capacity shall contribute approximately $3.5 billion annually to the total capacity payments pool of Central Power Purchasing Agency. While the few shareholders of power generating companies will continue enjoying the sovereign guaranteed returns provided, the burden of additional capacity payments will be borne by consumers as they pay ever increasing electricity tariffs. In the spirit of equity, natural gas prices will also further increase to meet the cost of imported LNG and provide a return on investment for the expansion of pipeline transmission network.

There are no magic bullets in economics and certainly no miracles, but salvation can be attained through toil and tears. Asad Umar being a better listener will make little difference to the harsh times that the many will have to endure for the folly of the few who cared little to invest in the people or building a robust export base.

Read more: How PML-N lies on economy?

Stock market analysts who rejoiced at every uptick of the index as it rose to new peaks during the spending spree of PMLN, did not once warn punters of the sea of troubles that was about to burst the bubble. They are unlikely to seek redemption by telling that simple truth that borrowed prosperity almost always ends in tears. It is not for them to celebrate the passage of penance that entails a significant structural change of the economy towards more equitable and sustainable prosperity than the past.

It was never going to be an easy journey to a Naya Pakistan after decades of sustained decay in almost every sphere of public policy. The necessary reforms might mean that conditions get worse in terms of the hardships borne by the working masses, but now little choice is left not do what has to be done.

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Hopefully, the government is successful in its efforts to minimize the burden on those least able to bear it. Asad Umar may take to wearing a hair shirt and prostrate himself to a nation of self-appointed expert advisors, but it the economy will care little for his humility. It will, however, respond to the many steps taken to the redemptive reality of structural change that steers the nation to economic rejuvenation.

Javed Hassan is a graduate of Imperial College London and an MBA from London Business School. He is an investment banker who has worked in London, Hong Kong, and Karachi. He tweets as @javedhassan. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.