Pakistan is facing the worst-ever economic crisis in its history. Fiscal and current accounts do not balance; and there is no sign that they will in the near future. As reported, the circular debt, which is effectively a ‘subsidy’, is hovering around Rs 4,000 billion. All these indicators are the result of our flawed policies of the past. Whatever is happening is not unexpected, at least, for this writer. It is a logical answer. Anyone who has some knowledge of Pakistan’s economic setup and the policies that were adopted, at least in the past thirty (30) years in the name of deregulation and undesired incentives for foreign direct investment, would reach the same conclusion. However, the author is firmly convinced that this is not a ‘crisis’ per se. Instead, it is a ‘compulsive correction’ for Pakistan. We, as a state, are not attuned to precautions against illnesses unless we are landed in Intensive Care Units (ICUs). History reveals that we persist with the same habits even when we return from ICUs with the support of the IMF (International Monetary Fund). We have done this twenty (20) times in the past. This time, however, we have reached the ‘ventilator’ stage and the switch can be set in the off-mode anytime by the Fund. They will not do so; however, for the first time our nerves are shaken in the last thirty years. I, however, see a fine silver lining in this crisis too. Unlike individuals and businesses, states do not go bankrupt. They default, internationally and domestically, and then in some cases disintegrate if the state is not viable in its existing model. This has happened to the then USSR and Yugoslavia in recent history. Geopolitics and foreign affairs are not this author’s subject, however as a commoner, he see a united Pakistan for the foreseeable future. This state is required, in the present geographical form, by the triangular players i.e. the USA, China and India. This region cannot afford any resettlement and there is no need for it either. Sufficient safeguards are available.
On the economic side, I see a silver lining in the form of ‘Economic Resettlement’. The outline of the same is discussed in this article which will be followed by other articles on specific subjects.
The first crisis which has partly developed and will further aggravate in near future; — formal and informal compulsive restrictions on imports. Notwithstanding its negative effect on the sector, the question from another angle is whether or not it will provide some desired space to the local manufacturing especially in the consumer goods industry. Due to our discriminative policies, favouring trade, our local manufacturing industry, which is the second largest employer after agriculture, has been brought to the morgue. Whether our elite culture likes it or not, in times to come, Pakistan will not be able to finance the imports as it used to do. We cannot drink imported mineral water anymore. The population of 220 million people with a reasonable sustainable base for basic manufacturing will fill the gap by import substitution. For example, we are used to consuming imported butter; such lavishness would not be possible anymore. The overall consumption of butter will reduce, however, there is a minimum threshold and the gap will be filled by local production for which we have reasonable raw materials and infrastructure. Similar compulsions would surface with many other products including almost all the items of daily consumption starting from pencils to textbooks. We all know the syllabus books of A and O Level used in Pakistan are mostly printed in Singapore. Another example is edible oil. For example, before the 1980s we were almost self-sufficient in edible oil. Cottonseed, mustard and other edible oils used to cater and satisfy the whole demand of the country. However, once we dropped our guard and opened our country to imports as if we are a developed economy, all flood gates opened. The result is that 95 percent of our edible oil is imported. This luxury has to end as the country cannot afford it anymore. In the 1980s, 1990s and 2000s we used to travel outside Pakistan using our local airlines. But now thanks to the open air policy of Mian Nawaz Sharif we spend over dollar 1 billion in the form of international fares. We give thousands of reasons for the failure of our local airlines; however in that excitement we forget that even a rich country (Canada), for example, allows only one station for landing in their country. In our country we allow foreign airlines to land in every nook and corner of our country. The present policy may be good from some viewpoint; however, it is not affordable in the present current account scenario of Pakistan.
Another big example is of tiles and ceramics. All of us use imported under-invoiced Chinese and Spanish tiles. Our local marble industry is closed. Now it will compulsively restart. The gist of the argument is that as a result of this compulsive shrinkage of imports there will be twin benefits to the country. Firstly, foreign currency will be saved and secondly, the local manufacturing and agricultural sector that have become uneconomical over a period of time will be revived. In this regard, it is important to emphasise that, unlike the general perception, the main reason is not the compliance of the WTO (World Trade Organisation). The WTO provides reasonable space for local industry if justified. The question is whether or not Pakistan has the capability to justify its case. This is a matter of intellectual bankruptcy. In our case the problem has arisen due to politically motivated ‘Free Trade Agreements’ (FTAs), especially the one with China. Unlike the policies of all the governments between 1990 to 2018 Pakistan is required to follow an industrial-cum manufacturing model of economics, not the trade-based one. Now this opportunity is arising not by wish but by compulsion for the people of Pakistan. It is high time to cash in on the opportunity and place further restrictions, within WTO’s prescriptions, on unnecessary imports, and facilitate manufacturing. This will help revive Pakistan’s economy. There is no other option. This process will require a transition in which elite classes will suffer. They will try to create chaos in the meantime. It is about time people overcame that barrier if the country is to be made sustainable.
The second silver lining is re-adjustment/realignment in Foreign Direct Investment (FDI) scenario in Pakistan. We may be among the few countries in the world that has allowed hundred (100) percent FDI even for mineral water and biscuits. The ultimate result is that for over a long period of time the net FDI in Pakistan is less than the dividends we pay on past investments. Now the dollar crisis has emerged which was inevitable. No dividend has reportedly been remitted after March 2022. It is not expected in the near future. This is not a good sign and the state must comply with its obligations. However, the net result which is going to arise out of this scenario is gradual divestment by foreign entities. Some people may consider it bad. There is also a completely different perspective on this subject. We have yet to see one industry where real technology has been transferred to Pakistan. It is all packaging and consumer goods. In fact, in the automobile sector the deletion percentage has gone down. Pakistan has the capability to run industries which are at present run through foreign investment. We may like the words ‘open world’ and ‘globalisation’ however those luxuries are for the countries which are self-sufficient and have run their countries well in the past. We cannot afford it. The primary question is whether we want FDI in a pharma company making over-the-counter ‘aspirin’ which can be made by any company in Pakistan especially when even the Multinational enterprises are buying raw materials from India and China. In short, in the years to come 2023 to 2027 I see a huge divestment by foreign enterprises from the consumer goods industry. This will be a blessing in disguise for Pakistan. It will rectify the mistakes we have made in the past thirty years with respect to FDI. Only those enterprises will stay in Pakistan who add value in the real sense. The policy for foreign direct investment is not a rocket science for any developing country. Only those industries are allowed to have foreign direct investment where there is a transfer of technology. In case if there is no transfer of technology then 100 repatriation is not allowed.
As an accountant this writer knows the reason for what we have done with FDI. In the developing economies, FDI is attracted for industrial investment. In Pakistan for the last over 30 years it is desired for balancing our books of our external account. Our Finance Ministers, who were really Finance Managers, wanted dollars, therefore they agreed for anything that is coming in without realising that it has to be repaid without any meaningful value addition in the economy. This simple economics that had been forgotten is now compulsively applicable. Portfolio investment is not an investment in an economic sense. It is currency management. States do not run on principles applicable on individuals.
In short, this readjustment will provide an industrial base to Pakistani entrepreneurs and stop the ultimate drain of corporate dividends out of Pakistan by selling potato chips and soft drinks. There is nothing against real foreign direct investment in this scenario. However, such investment will compulsively be allowed only for those industries which are vital for Pakistan, and not for balancing the external account books.
Most of the industries where divestment is expected are effectively consumer goods industries such as pharmaceuticals, FMCGs like soaps and shampoos, confectionaries, ice cream, automobiles, etc., etc. It is not the intention to suggest any sort of compulsive divestment by the present foreign owners. The only difference which is going to emerge is that on account of stringent dollar availability conditions Pakistan would have to compulsively adopt policies on the principle of doing ‘business in rupees and return on investment in rupees. This can only be done by Pakistani entrepreneurs. We have to create Tatas and Birlas in Pakistan, not foreigners selling fried chicken. Private sector businesses have to flourish with only one condition: earn in rupee and spend in rupee.
The third silver lining emerging from the crisis is with regard to values of real estate. It is observed that a very large size of real estate in the form of plots and houses belongs to by local and foreign investors. In the past, on account of easy availability of dollars in Pakistan and easier ‘hawala’ structure the values were directly or indirectly related to dollars. The prohibition and shortage of dollar will result in a disconnect and there will be a substantial reduction in the real estate values, bringing them closer to correct values. Pakistan still has the cheapest real estate in the region as compared to Dubai, Delhi and Mumbai. However this crisis will take Pakistan out of that league and the value of real estate will come down to the economic values. This will discourage parking of wealth in the form of open plots, etc., and make the capital available to other local industries. The only check we require is to stop outflow of rupee converted into dollar, for which the State Bank of Pakistan would have to be extra vigilant.
At present, Pakistan’s tax revenue collection is directly related to the value of imports. In the forthcoming future the value of imports is expected to come down substantially due to non-availability of dollar. This will lead to reduction in tax collection. Since Pakistan is in the IMF programme it cannot therefore afford to reduce the overall tax collection. This quagmire is expected to result in real efforts for expansion of the tax base and disguised reality is expected to be exposed. The complacency in the Finance Ministry and Federal Board of Revenue with reference to tax collection is expected to end in order to align with real economics of Pakistan.
Whatever has been said in the aforesaid paragraphs reveals a completely new paradigm for the general economic mindset of Pakistani people. Nevertheless, as a country, we have to realise that in the midst of ‘dollars’ and ‘Dubai’ environment we had forgotten the real strength of Pakistan’s economy and society. We have many inherent strengths and the biggest one is human resource. Only two examples are enough to demonstrate that fact. First, it is the ‘female-driven clothing’ industry. Pakistan at the moment is one of the best manufacturing jurisdictions and our local brands have shops in major malls in London. If we can do the same in this product line then we can do the same in basic pharma, confectionery, soft drinks, ice cream and pizza as well. Second, we have two IT-listed companies being Systems Limited and TRG where the net asset values are above dollar 1 billion with a very humble start. When they can do that, others can follow in their footsteps.
It is high time to sit down and collect the positive attributes from the present crisis and demonstrate that this country of 220 million people can survive with limited dollars if it learns to live within its own means. This writer’s immediate solution is ‘import substitution’ in every sense as the same can be done immediately whereas it takes time to marginally increase exports. The motto should be ‘earn in rupee and spend in rupee’.Syed Shabbar Zaidi, "Solution: import substitution," Business recorder. 2022-12-28.
Keywords: Economics , Current account , Circular debt , Economic resettlement , Investment , Pakistan , China , India , FDI , IMF , TRG