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Why Pakistan is facing economic default?

Financially speaking, Pakistan defaulted in 2018, but the IMF loans and friendly donors kicked this down the road. However, PTI's government did little to reform the economy structurally. This restructuring would have required addressing the intellectual default so that better decision-making could occur.

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Pakistan is facing the worst economic crisis of its history since its inception. Over the last 75 years, Pakistan has faced multiple political and economic problems and lost East Pakistan in 1971. As a result, the Pakistani exchequer was at the IMF’s doorstep countless times. People have repeatedly presented theories blaming the military, judiciary, corrupt politicians, and nefarious external powers. Looming economic bankruptcy is a logical continuation of Pakistan’s intellectual bankruptcy, which led to its moral bankruptcy, writes a faculty at Brown University.

This does not discount the fact that Pakistan’s economic structure is deeply flawed and unsustainable in the modern world. Any import-led economy with minimum productive capacity with an unskilled workforce surviving on rollouts from the US or other international lenders will eventually collapse. There is much noise about the IMF program and its management by the current or the previous government.

Read more: Pakistan economy in long term ICU – Editorial

Understanding IMF program workings

But that is a very microscopic view; the real problem is way more extensive and requires intelligent decision-making. Even if the IMF issued the latest tranche of funds, Pakistan would be back in the same situation again one or two years later. However, this time, the decision-making has been completely taken away from an incompetent finance ministry to the powerful “Pindi”.

Actual decision-making will take place and is taking place in Washington DC, and others will have to comply come what may!

Above reality is poorly understood by many, especially by the PTI and its leadership.

The notion that IMF will save us, the Chinese, the US, or the Russians will save us by giving us cheap gas is entirely unintelligent. Another argument presented is that “nuclear power cannot default”—all these arguments are outside the paradigms of reality and our poor understanding of economics and, most importantly, history.

In the last century alone, the republic of china defaulted in 1921, 1932, and 1939. The Japanese defaulted in 1942 and 1946. Turkey defaulted in 1931, 1940, 1978, and 1982. The Germans defaulted in 1932, 1939, and 1948. More recently, Greece defaulted in 2015; the Soviet Union in 1991; and Argentina defaulted in 2001, 2005, 2014, and 2020.

Going back further, the Ottomans, the Spanish, and the French have defaulted

So the argument that nuclear power cannot default on its sovereign debt is beyond the limits of an educated mind. Now, if we can accept the reality that default could be an outcome of the current economic mess, therefore, one must unwind at its fundamental reasons.

This can be summarized in 7 words.

“Our exports do not match our imports.”

The gap between our imports and exports has widened exponentially in the last 2-3 decades. Pakistan’s import bill was around $9 billion in 2001, which surged exponentially to $61-63 billion in the previous year of the PML-N Govt in 2018. Import bill remained around $45 billion from 2012-2016, but the rapid development of some of the CPEC projects, which were import-driven, led to $63 billion from $45 billion. The current account deficit will continue surging, and rupees will continue to devalue. CPEC would have been a great project if some of its value chains were built and made in Pakistan instead of import-led. Import-led CPEC development was and is a bad idea. The situation can be rescued but requires fundamental correctional steps, which I will discuss in another article.

Read more: Did Pakistan economy really progress under PM Khan?

Exports rise where the productive capacity of a society is increasing. However, this productive capacity is directly linked to our intellectual default. Our intellectual default stems from poor investment in human development and our educational sector. This intellectual default led to rampant corruption and eventually our economic bankruptcy, which we are facing now.

While in Pakistan, you see exponential growth in the private schools and universities, a minimum effort has been directed to ensure research-based academic ecosystems. As a result, our doctors, engineers, scientists, IT professionals, and business leaders acutely lack research profiles. They cannot even think at the same level as their international peers, let alone compete in a globally connected World.

This intellectual default brewing for the past 3-4 decades has produced an entire generation with a complete inability to execute intelligent decision-making.

I am not trying to create despondency here among my fellow Pakistanis but providing a realistic image of the situation at hand. This intellectual default is most visible in our Media and Bureaucracy, Parliament, Judiciary, and powers to be. While this default completely went unnoticed, a moral default was a natural consequence of this intellectual default. Therefore, when we achieved this milestone, it was only a matter of time before we would arrive at economic bankruptcy.

Finally, we have arrived at this unfortunate juncture

Unless we address this intellectual default, there is little chance of rescuing the economic default. While every government boasts of foreign remittances, it is terrible for the economy in the long run. High foreign remittances mean that your better brains are shifting elsewhere, and you cannot find jobs in the local economy.

This is brain-drain paying back some dividends, which is counterproductive in the long run. Ignoring this simple fact, I see many tweets by famous Pakistani leaders about how much money the overseas Pakistanis are sending, and these are retweeted hundreds of thousands of times.

In addition to stopping this brain drain, an emergent research-based transformation of higher education was needed yesterday. So that our younger generation does not only ask “why but why not”

Financially speaking, Pakistan defaulted in 2018, but the IMF loans and friendly donors kicked this down the road. However, PTI’s government did little to reform the economy structurally. This restructuring would have required addressing the intellectual default so that better decision-making could occur. Otherwise, we are doomed as a society and, this time, reliant on foreign intervention, which will be very unpleasant, to say the least, for all of us.

 

The author is a graduate of the University of Oxford’s Said Business School and currently works as Faculty at Brown University in the United States. The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space. 

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