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Is sovereign default inevitable? – I

Dr Rajendra Prasad, the first President of India, in his book ‘India Divided’, that he penned in 1945 stated that the areas of ‘North Western India’ are expected to face serious economic crises in an isolated position unless there is a complete socio-economic structure revamp of society of that area. He further stated that these societies have historically flourished on spoils of wars or invasions. Our ancestors disagreed with Dr Rajendra Prasad and separated from other parts of the subcontinent. We their present generation were supposed to at least see what he was actually saying. Unfortunately, however, we wasted as many as 75 years under the illusion that we have been endowed with a very prosperous region where we can live a luxurious life entangling us in misdemeanors and misadventures on the military and political sides. At present, state’s sovereign default appears inevitable unless we change. People blame the political system, military, judiciary and other factors for this state of affairs. In my view, however, all these reasons are secondary in nature. There has been a problem in the economic structure of the country since its very inception, which intensified after the 2000s.

This import-led consumption oriented society with minimal expenditure on real development of infrastructure is leading to a natural collapse as no country can afford to live on loans and grants forever, especially when such loans and grants are used to pay for day to day expenses and pensions. Now the time has come for (a) understanding the gravity of the challenge and (b) deciding the future course as now the reins are neither in the hands of Islamabad nor in Rawalpindi’s. They lie with the policymakers/lenders in Washington who appear to have lost trust in our inherent desire to change our habits. Pakistan, unlike the general perception, is not faced with governance issues; it is, in fact, faced with a primary sustainability issue that existed since independence, which worsened after 1971 and now in 2022 has reached its peak. In simple accounting terms, the books are not balanced and while the nation is not ready to accept the foreseeable problems. They believe in notions that ‘in the presence of the IMF (International Monetary Fund) a country cannot default’, ‘a nuclear power cannot default’, and ‘this is not the first time’. The purpose of this statement is not to create despondency in society. These statements are being made to have a ‘reality check’, which is essential for any corrective action.

In the following paragraphs I will like to explain the primary reasons for this situation which I was foreseeing for the last twenty years or so. In all my speeches from 1995 onwards my constant argument was that ‘Pakistan has to adopt the Korean model of economics not the Dubai model’. People were not ready to accept, however, there is one very cruel truth which is present in every case. At the end the books have to be balanced and the external account being in US dollars cannot be stuffed with new currency notes. Exorbitant imports not matched by exports constitute the only and only reason for the country’s present economic woes. In simple terms, ‘living beyond means’ in every sense of the word. In the years to come it is almost certain that our honeymoon is going to be over and this society would have to substantially change its habits, cultural norms, practices and ways of living if the country is to be taken out of the looming sovereign default.

A study of Pakistan’s imports is very revealing. From 1960 to 1973, our imports were of less than USD 1 billion. This means that before the separation of our left wing (East Pakistan) we were doing reasonably well on our import side. From 1973 to 2002, the gap between exports and imports began to widen as the import bill gradually reached USD 11 billion in 2002. This was unsustainable. However, instead of correcting this imbalance we continued proceeding in this direction with the result that the import bill for ‘goods’ other than services reached USD 63 billion in the last year of the PML (N)) government in 2018 (services imports were another 8 to 9 billion USD). This is an almost 600 % percent increase over a period of 20 years [2002-2022]. Whatever we presume, conceive or project, the country had become insolvent and bankrupt in 2018. The sovereign default was only postponed through support from the IMF and rollover of foreign debts. In other words, the die was cast in 2018. At that time a new government was brought to power to test a new model without realising that the problem is with the vehicle not the driver. The vehicle needed a complete overhaul with new engines of export and import substitution. This exercise was in my view being done, albeit slowly, when the reins have again been given to old drivers without the much-needed change of engine and consequently we are back on the road to disaster. It is therefore imperative that the primary issues as discussed below are addressed first before any further experimentation.

Whilst dealing with the import bill it is equally important to see the status of exports. These were equal to USD 1 billion till 1973 and in 2002 these were to the tune of USD 9 billion. The maximum exports we recorded was of USD 30 billion in 2013 (around 32 billion in 2022). This shows that exports increased by around 300% while imports registered the 600% growth. This gap is widening; it leads to a completely unmanageable current account position for Pakistan. In this situation only ‘miracles’ can save us from a sovereign default unless we really correct our waywardness.

The question before us is to identify the major items we import. The first item is energy (POL products, crude oil and LNG). In short, if the present problems of Pakistan economy are to be summarized in two words then it would be ‘Energy Economics’. It is estimated that with these increased prices of petroleum and products the bill for this item will exceed USD 25 billion. This is a sum that Pakistan cannot afford but we are spending without considering that with every passing day we are coming closer to the danger zone. With respect to energy imports, Pakistan is almost similar to Sri Lanka in the sense that over 70 to 80 percent of energy requirements are met through imports whether they are crude or refined oil or gas for transportation, heating or for generating electricity. Pakistan will have a requirement of around 28,000 MW electricity during the peak season and cannot afford to produce if around 65 percent of production is to be made by importing fuel. According to US government statistics, Pakistan’s energy mix is 64% fossil fuels, 27% hydropower and 9% other renewables and nuclear power. This is simply unworkable. The question before the nation is not load-shedding, or the cost of energy price for the people. On the national level, the issue is that the country can no longer afford to pay the energy bill of over USD 27 billion. This is a simple equation. The second problem which has exacerbated this issue is IPPs (Independent Power Producers). IPPs import fuel to generate power. They are provided an assured revenue stream that covers an adequate return on the significant project capital investment in USD (17 percent return). This is no less than national suicide. The immediate solution for the country is to reduce the consumption of energy and make efforts for the conservation of electricity and gas. We, as a nation, do not use daylight for our work. Almost all the business activities in the markets start at 1 pm in the afternoon and continue late till midnight. The question which every lender or independent reviewer of our economy is expected to ask is, whether a nation with these habits has the right to survive. We have not built any big dam since 1973. Some of the policy mistakes which have led to this situation are summarized as under:

1. In the last seventy five years we have not been able to make a dual track railway from Karachi to Peshawar. Even if there is such a track there is no railway for transporting containers in an efficient manner. Thus all the major transport activity is done through road, which is expensive from an energy view point. Any country with this geographical structure cannot exist without a proper railway where 50 percent of our export-oriented sector are located almost 1,000 miles away from the port;

2. There is effectively no public transport facility in any major city, including Lahore. MRT is a very nominal entry. Whole public transport operates on fuel in an inefficient manner;

3. Gas is used as feed stock to make urea and supplied through pipelines for heating and cooking to nook and corner of the country, say including hill stations such as Murree, which is around 5,000 feet above the sea level;

4. There is constant free import of vehicles above 1500CC without realizing the fact that fuel for such vehicles is not affordable for the country;

5. Power plants are located on political grounds such as the location of a coal-powered power plant in Sahiwal, a place around 1000km from the port from where the imported coal arrives.

We should fight to identify the financial corruption made during the last 75 years; however, at the end of the day, it appears that most of the accused will be acquitted by the courts because of weak prosecution. Economic policymakers are to be blamed for this intellectual corruption; however, our ‘intellectuals’ and academia are equally responsible for not properly and strongly presenting to people the intellectual corruption committed on the economic policy side that has devastated the economy.

Syed Shabbar Zaidi, "Is sovereign default inevitable? – I," Business recorder. 2022-07-06.
Keywords: Economics , Economic policy , Political system , Monetary fund , Economy Dr Rajendra Prasad , Pakistan , India , Dubai , Sri Lanka , IMF , USD , POL , LNG , MRT

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