Prime Minister Nawaz Sharif told a business gathering in Washington last week, “there are few places in the world today that so uniquely offer the promise of land, geography and people as does Pakistan”. This sounds a bit delusionary.
On the other hand, within five months into his term, he seems to have lost both the opportunity and the momentum to launch some desperately needed economic reforms.
Foreign exchange reserves continue to fall and are down to $4.1 billion; just enough to cover five weeks of imports. Getting the $6.5 billion loan from the International Monetary Fund was hardly an achievement. The IMF didn’t have a choice with letting Pakistan default being the only other option.
Some believe the elimination of $4.8 billion in circular debt (it’s accumulating again and touched the one billion dollar mark this month), raising electricity tariffs and thereby reducing subsidies, hiking sales tax, and announcing the privatisation of 31 state enterprises are measures in the right direction. This is a simplistic and superficial view.
Pakistan has been down this path many times before and back to square one. Is this time any different? It is not an industrialised country like Britain, where major issues could be addressed by just privatisation. The Asian Development Bank recently warned that the IMF’s new programme is at risk, as “most of the required reforms have political and governance dimensions which posed formidable barriers in the past”.
The greatest barrier is the unwillingness of the ruling elite to tax the rich and powerful, that is, themselves. The second is the patronage-based personalised style of governance.
These barriers, not the IMF, are principally responsible for persistent fiscal deficits, inflation, misallocation/abuse of resources, and under-investment in physical, social, and administrative infrastructure.
If the PML-N believes it can produce a miracle by attracting huge foreign investment through privatisation and by launching mega projects while doing just enough to get the next few tranches from the IMF, it is wishful thinking, not a plan.
Pakistan is unlikely to attract large-scale private sector foreign investment now or in the foreseeable future, given its precarious security situation and a weak state with dysfunctional institutions that are often at odds with each other.
Pakistan’s chronic economic issues are affecting the viability of state structures, and can no longer be addressed by prescriptions offered by conventional thinking (of both local and foreign experts), because it mostly focuses on the symptoms, while the rot turns into a gangrenous mess.
Take, for example, the energy crisis. The core problem revolves around the energy mix and the generous terms given to the independent power producers. Subsidy in that context is a misnomer, because it’s a consequence of a structurally flawed energy policy and not a simple case of providing goods below a price determined by the free market.
Re taxes: it would not take more than a few months to raise the rate of collections from direct taxes, but no government wants to do it, as one World Bank official once told me.
The security situation needs a revolutionary approach to strengthen the capacity of an out-of-date state apparatus to control terrorism. For instance, why do we need 20-22 infantry army divisions, given the tectonic changes in the nature of both external and internal threats? Shouldn’t we at least think about redeploying resources away from 4-5 of these divisions to form a well-trained, well-equipped and technologically sophisticated modern counter-terrorism force?
The very act of convening the all parties’ conference to initiate talks with the un-named militants signified the government’s lack of will to do what’s really needed: take the bull by the horns. Instead, it chose to pass the buck. Sharif does not want to assume responsibility for making tough decisions and take any risks. He would have to take risks — unless he just wants to survive in the office like his predecessor — to address issues of the state’s credibility and investor confidence.
These intangibles are of far greater importance than some traditional economists might believe, and are directly linked to Pakistan’s acute crisis of governance. If the state is widely perceived as weak and ineffective, rest of the issues become rather secondary.
Mr Sharif’s style of personalised governance hasn’t changed much since the 1990s, although Pakistan has become too big and complex — with its society violently fractured and institutions dangerously weak — to be governed by a kitchen cabinet of loyalists and relatives. It must restructure its predatory institutions — particularly the police, lower judiciary, and bureaucracy — through radical reforms to institutionalise governance.
Unfortunately, the federal government is in a limbo for many practical purposes after the devolution of significant powers to the provinces, because while it has taken place on paper, the provinces’ governing capacity is quite limited, as they have long suffered from under-investment and been undermined by a meddling security establishment.
What does it all mean for businesses and investors? I had stated in an interview given to a foreign news agency, published May 15, 2008: “Pakistan’s economic performance in the next few years will be weak, with an average GDP growth of not more than around 3.5 per cent, high inflation, weak currency, dwindling foreign exchange reserves, a large current account deficit and low investment levels.”
The outlook is even more clouded now, given the worsened situation and because the government has demonstrated neither the will nor the capacity to meet the extraordinary challenges Pakistan faces.
Mr Sharif’s own conduct has done little to inspire much confidence. One hoped that his clear majority would enable him to start a new era of an assertive civilian leadership, but he apparently wants to please every ‘stakeholder’ and rule with ‘consensus’. Mr Sharif may draw on Machiavelli, who wrote in his classic political treatise The Prince, “any man who tries to be good all the time is bound to come to ruin among the great number who are not good”.
Pakistan is in urgent need of a bold and courageous leadership style at this point and not a dithering one which hopes to somehow muddle through whilst wishing the problems would just go away when they are actually getting worse.
