Mr Shaukat Aziz, the finance minister, has managed to wrap up US$ 4 b in foreign debt rescheduling. He has also swapped three Pakistani Eurobonds worth US$ 608 million with a 10% six year bond (this is no mean achievement, considering the donor community wanted Pakistan to default on the bonds). It also seems that for the first time in several years the government may achieve its tax revenue target of Rs 360 billion or so by end-June. At the same time, exports, which have been stagnant in the last three years, have risen by about 8% during July 99-January 2000 compared to the same period last year. Inflation is down, interest rates have been reduced by 2%, privatisation is on the anvil, loan defaulters have coughed up Rs 12 billion, a good cotton crop of over 10 million bales has been harvested and the stock exchange has woken up from its deep slumber. Finally, General Zulfikar Ali, chairman Wapda, has chipped in by renegotiating tariff rates with all except two power producers, and thereby saved the country a billion dollars or so over the life of these projects. Not bad going, eh, in only 100 days?
Alas, if truth be told, the picture is not so rosy. Debt rescheduling was clinched by the Nawaz government in early 1999 and the Musharraf regime has simply put the finishing touches on it. The good cotton crop (and therefore the rise in textile exports) is, of course, due to Allah’s blessings rather than any great policy prescriptions by either government. Also, inflation is down not because of any prudent fiscal fix but because there is a recession in the economy. Finally, the duel between the Wapda chairman/finance ministry and the managements of Hubco/Kapco has scarred the economy for a long time to come.
Indeed, the fact is that the government’s economic performance could have been much better in the recent past if hard economic decisions had been taken and might be much worse in the near future if hard political decisions are not taken. For example, if the revamping of the tax structure, including the imposition of GST on retail trade and a tax on agricultural incomes, had been effected earlier, Mr Aziz might have been laughing all the way to the bank next June. Similarly, the delay in negotiating further assistance from the IMF, whether under the old Extended Structural Adjustment Facility/EFF programme or the new Poverty Reduction and Growth Facility, is not to be shrugged away simply in terms of a delayed “tranche” of US$ 280 million — it underlines some very basic and potentially crippling balance of payment and debt repayment problems which cast a deep shadow over our economic and political future. What do we mean by that?
Pakistan’s total domestic and foreign debt is now statistically equal to about 105% of its GDP. By itself, that means little, considering that some fairly affluent countries are equally up to their ears in debt. Nor is the burden of domestic debt, which is more than our foreign debt, bearing down too heavily upon us. When it becomes due for payment, we have the legislative and political freedom to simply replace it with a bigger, and sometimes more expensive, debt. But foreign debt is a different matter altogether. If we don’t pay it back on due date, or we are unable to have it rescheduled on mutually acceptable terms, we run the risk of defaulting on our loans and being declared “bankrupt”. And “financial bankruptcy” is no laughing matter for any country. It can lead to currency crash, runaway inflation, shortages, rationing, and great economic hardship followed by political turmoil and social upheaval. Countries which have actually slipped into default have taken a decade or two to recover from its ravages.
Pakistan has been teetering on the brink of financial default for many years because our foreign exchange earnings, whether through exports or inward capital remittances, have always been less than our foreign exchange expenditures, whether for imports or profit/dividend/debt repatriations. But no big deal was made of it because our international goodwill was sufficient to enable us to borrow afresh year after year not merely to plug the continuing gap between our imports and exports but also to repay outstanding foreign debt. In 1998, however, our goodwill ran out when we tested the nuclear bomb and alienated the international community. Faced with economic sanctions, and unable to repay our foreign loans because of inadequate reserves, we stumbled headlong into potential financial default.
Fortunately, however, we were able to avoid a fate worse than death when the international community relented and allowed us to reschedule over US$ 5 billion in debt due 1999-2001. It did so partly because it was persuaded that we had been pushed into nuclear testing by India and partly because we promised to address some of its outstanding concerns as soon as possible. How do we fare on all these fronts today?
Rather precariously, we fear. The balance of payments gap is threatening to hit US$ 6 billion in FY 2000, of which about US$ 2.5 billion will be on the current account and about US$ 3.5 billion on the capital account. The reason for such a large gap is the additional burden of US$ 1 billion on account of an unprecedented rise in the price of oil from US$ 14 per barrel to US$ 23 per barrel, falling inward remittances (thanks to the freeze on forex deposits necessitated by nuclear testing), a rising trade gap and negative foreign investment flows. Out of this, we have already rescheduled US$ 2.5 billion, leaving US$ 3.5 billion to be paid. In FY 2001, after the 1999 rescheduling has run out of steam, this net gap will have risen to about US$ 5 billion. Where are we going to find the money to close these gaps, year in and year out?
Privatisation is the answer, we are told, surely we can raise at least US$ 20 billion by selling the family silver. Rubbish. In the current circumstances in which leading domestic businessmen are either being put behind bars for loan defaults or evading taxes or are emigrating in the droves to more hospitable climes like Canada or Australia, it is wishful thinking to imagine that foreigners (clutching their local embassy’s “advisory” cautioning them about the pitfalls of venturing forth in Pakistan) will be lining up to grab the goodies.
Clearly, the goodwill of the international community in terms of fresh economic assistance to tide us over our restructuring problems will be the critical factor. And if this goodwill is not forthcoming, we will come face to face with financial default and everything that it entails. What is the way out?
We could, of course, tell the world that we are unable to pay our debts and it can go to hell for all we care. For various reasons, some angry people in this country actually advocate this route and are prepared to pay the price for it. But most of us would like to remain within the global village while restructuring our economy in such a way that in time to come economic dependency becomes a thing of the past and healthy balance of payment surpluses a matter of business as usual. How do we bring that about?
If Mr Shaukat Aziz is to go down in Pakistani history as the “economic man”, he must fight to get some medium-term economic “space” in which to set the economy right on its long-term path. The “space” he requires is freedom to manoeuvre radical reforms in the social, industrial, trading and agricultural sectors without being bogged down by shortage of foreign exchange to retool the economy or pay international debts. At the very least, he will require an international debt write-off or long-term rescheduling of another US$ 10 billion or so in the next couple of years in order to have elbow room to revamp the economy. How will he get this space?
This space can only be made available by our national security establishment on the basis of a review of our foreign policy options. Such a review should enable us to address pressing international concerns like nuclear proliferation, international terrorism and regional peace without jeopardising our national security so that significant debt rescheduling or write-offs can be claimed as a matter of our right as a responsible member of the international community. This is not an impossible task. Nor are there insuperable contradictions between our quest for security and the demands of regional peace. All it takes to devise an appropriate foreign policy strategy is to have the courage and vision to comprehend the role of the economy in national security and build its centrality into it. Any other status-quo strategy will be revealed, sooner or later, to be clever-by-half and plunge us into the jaws of international default and isolation, followed by domestic anarchy and upheaval. The sooner this is understood where it matters, the better. The time for huffing, and puffing and bluffing and blackmailing our way out of trouble has run out.