111 510 510 libonline@riphah.edu.pk Contact

After the IMF tranche

On December 16, 2021 at a Hamdard University seminar where Dr Miftah Ismail was another speaker, I had said that Pakistan as a state is no longer a ‘going concern’. At that time most Pakistanis disagreed and stated that I had unnecessarily and unjustly used an accounting term for a country. One of the top private TV channels relayed my speech and its conclusion repeatedly to assert that it was considering the same an admission of failure of the Imran Khan government by a person who was close to him and had been a part of his government as the Chairman of Federal Board of Revenue (FBR). At the same seminar, Dr Miftah Ismail had said that there is nothing to worry about and there is no major economic problem. I was shocked with his observation in his speech that the concept of ‘import substitution’ is a farce. What I meant then was simply that both our current and fiscal accounts do not balance and therefore ultimately the system will choke and then collapse. In this context there is no difference between economics and accounting. A bankrupt country, except the USA, is one which is not able to repay its debts (local or foreign) from its own sources in the foreseeable future. On December 31, 2022, Pakistan was and still is one such country—whether we like it or not. We can play around with fancy words as regards the fiscal deficit jargon but as regard the current account that is in US dollars, there is no possible way to confuse people. Pakistan cannot service and repay its debts and finance its imports in the foreseeable future from its expected inflows of dollars. The report attached with the IMF last review considers us as a ‘viable entity’ by placing a ‘balancing figure’ by way of Foreign Direct Investment. I, as a financial advisor to most of foreign investors, do not see any substantial foreign investment inflows in the foreseeable future. Accordingly, the real picture should be before us. The IMF is here to provide support as far as possible. However, the fundamental issue which I am unable to understand as an accountant is whether our books will balance even if we are able to unlock the stalled IMF lending after accepting the lender’s conditions. Accordingly, the title of my article is ‘After the IMF tranche’. My candid and straight answer is that this presumption is wrong. There is a hole of over $ 50 billion (over the next four years) in the IMF cash flow statement, which they have presented as Table 3a on Page 35 of their report available on the website. I have discussed the projections of this report in an article in this newspaper on September 22, 2022. In that article it was stated:

‘It is our problem. We have to sort it out; otherwise; as I said in December 2021, the state is not a going concern. I will be discussing this matter in the subsequent articles, however, the primary concern for me is the over aggressive projection about foreign direct investment in Pakistan of over US $ 50 billion over the next four years.’

The purpose of the aforesaid discussion is to state that the IMF programme and its compliance alone is not the answer. It is a prerequisite and a way forward but not a cure. All Pakistani stakeholders generally consider that once they are in an IMF programme the problem is solved. It is, in fact, otherwise. The IMF has confined its role to hospitalisation of an ailing patient or economy. What follows in the hospital may be surgery, chemotherapy, radiation or transfer to hospice for terminally ill patients. This situation is more painful than the present state of affairs where only an ailment has been identified. All the possibilities of a cure are painful, difficult and require a strong will and spirit to survive. Otherwise, hospice is the answer.

Pakistan requires immediate and medium to long-term solutions. The immediate solution for the period 2023-24 and 2024-25 is as under:

1. Completion of the present IMF programme and entering into the next five-year programme with complete transparency before the people at large. If the doctors are saying that the patient is suffering from lung cancer then relatives and well-wishers are not to be told that it is only influenza;

2. Arrange portfolio investment from the US and other countries to the tune of 5 to 10 billion dollars. The assets to be disposed of are loss-making State-Owned Enterprises (SOEs) after listing them on the stock exchanges. The real asset of Pakistan Steel Mills is not the steel plant but the industrial real estate and facilities which can be unleashed. Similar is the case with unrecorded assets of PIA and other SOEs. PIA has an asset in the shape of Roosevelt Hotel in the US. Its shares should be quoted on Pakistan Stock Exchange and disposed of in dollars, retaining a majority ownership by the Government for the time being. Let the market determine the real value instead of wasting that asset for over 40 years. There is no point in selling OGDCL and PPL. A big industrial park can be located on the land owned by Pakistan Steel and everybody who knows the business in Pakistan can evaluate the prices of such plots even at a time when the industrial activity is down. In my view, not selling Pakistan Steel is a national intellectual crime;

3. Announce the ‘National Energy Conservation Plan’ with the prime object of maximizing the use of daylight for economic and social activities. The energy bill of $ 28 billion can be brought to around $25 billion by these measures.

These three actionable items can provide oxygen for our survival for 2023 and 2024 and we can get the time to plan for future sustainability.

The ultimate solution requires the following actions:

1. Goods Exports: Pakistan cannot survive with 30-35 billion dollar exports. Maximising Home Remittances is no solution either. The only answer is an increase in export of goods to $ 45 billion by 2025 and export of services to $ 5 billion. At present, every 1 $ export requires around 30 to 40 cents of imports. This means that for goods export of 45 billion we will require import of dollars16 billion. At present, the net exports are dollar 30 billion with imports for that of around 8 to 9 billion dollars.

2. In my view, this is not possible in the present setup. It is my personal estimation that we would have to adopt Bangladesh and Vietnam models where there is very large exports with equally large imports. In Vietnam the exports are around $ 360 billion. What is the exact import for that country is not known but in my view the ratio exceeds 60 to 70 %. Accordingly, Pakistan in future will require an export of $ 50-60 billion with an import for that export of $ 25-30 billion. In our case, the imports will not only include raw materials being fine cotton and other material, but energy. Accordingly, the model for Pakistan is specific export processing zones with cheap energy and imported raw material using the cheap labour force of Pakistan. This is what Bangladesh and Vietnam are doing. These zones will have to be close to the coastline to take advantage of seaport, i.e., around Karachi as we have no alternative. It therefore requires an ‘export city’ near Karachi like China and Vietnam did. If we consider that for exports there is any other solution then we do not have a proper understanding of economics of the world at present and days to come. These exporters have to service disguised subsidies in various forms available around the world.

3. Services exports: For services exports the concentration can be made at Lahore and areas around Lahore on account of availability of present and future manpower. For that purpose we would have to start from the scratch. Pakistan cannot compete with India in this field. However, Indians are becoming expensive as compared to Pakistanis as we have a currency advantage now. The hundred million dollar question in this regard is whether we have to have a solo flight competing with India or collaborate with Indian companies in this field. It is my experience that real value- added business is held by Indians and there is no harm to learn from anyone if it economically benefits. The first action required for that purpose is to provide infrastructure support to the businesses. Although it would be a totally out of box solution, one of the ways to support it may be to declare the Governor’s House Lahore spreading over one square mile as an IT Park and lease it to exporters of IT free of cost. One man sitting in that mansion cannot be afforded by this nation. Service Exports include education, health services, etc.

4. ‘Pakistan Land Bank’: It is estimated that Federal and Provincial Governments are sitting on over 40% of the land in all the municipal corporations of the country. This includes cantonments. Around 20% of that land is unoccupied and is being gradually grabbed by land grabbers who are supported and encouraged by the Governments. Pakistan is to declare a programme for land utilisation for the settlement of local and foreign debts. As a first step out of the total debt due to the Federal Government respective portion will be allocated to the Provinces on the basis of the ratio of tax distribution. Then both Federal and Provincial Governments should settle their debts by selling the unutilized land and premises in a transparent manner. If India can transport its gold reserves to Switzerland in 1991 to avert sovereign default then why Pakistan cannot dispose of the state land which is being grabbed regularly by Pakistani residents or Pakistani diaspora. The author is aware of the fact that successive governments have sold valuable agricultural lands to the sheikdoms. If we can sell the productive agricultural land to foreigners then why unutilized land cannot be sold properly to Pakistanis to repay debts.

I have identified only three major solutions. There is no need to go into details. The solutions are obvious and easy. Now it is for the nation to adopt them. If such measures are not taken then we cannot be sure whether we will be able to pass through June 30, 2023 with gasoline in our cars and lights in our homes.

Syed Shabbar Zaidi, "After the IMF tranche," Business recorder. 2023-02-14.
Keywords: Economics , Economic crises , Economic change , Goods exports , Energy crises , IMF programme , Miftah Ismail , India , China

Leave a Reply

Your email address will not be published. Required fields are marked *