Opportunities in crisis

The exchange rate undervaluation is at levels last seen in 2001. Real interest rates were too high back then as well. The economy was struggling and the looming debt trap was the case. The situation is not much different today either. There were efforts to reset the economy by deregulating a few sectors like banking and telecom. Rest was supported by the flurry of foreign flows - US 'blessings' to Pakistan after 9/11, and by restructuring external debt - Paris Club.
There are similarities in crises. Will there be a matching resolve to recovery this time? It's a difficult question, the quantum of support required is higher as economic size is expanding; and the important difference today is that the crisis is more of domestic public debt and balance of payment gap. The need is similar - further deregulation of sectors, enhancing productivity of exporting sectors, and investment money to pour in. One important variable now is bigger potential in domestic investment as the pockets of domestic economic players are deeper now.
The foreign money is required for reserve building; concurrently a need is to restore domestic investors' confidence. Even, the foreign direct investment that came in 2002-07 was mostly to cater domestic demand. New services - telecom and banking - were opened up, employment opportunities were created, but no foreign exchange was earned. Later, to capture higher consumption requirement, other foreign companies invested in to fill in domestic demand of food, beverages and other products. Now, all of them are repatriating profits, to further strain the balance of payment.
The power was in surplus at that time and the capacity payment problem was looming, and the puzzle was resolved by increase in consumption. Again, the problem is similar, but the quantum of energy sector-related excess payments and supply is greater. The solution is not only in increasing consumption, but also in deregulating the energy sector. That is one area that can lower the inefficiencies and create new job opportunities.
Resolving energy sector woes is the key; otherwise the painful efforts of bringing macroeconomic stability will be short-lived. So far the energy sector mega problems are not the focus of the current economic team. The efforts are to bring fiscal stability and to build foreign exchange reserves. The economy undervaluation is for a purpose to attract foreign - short to medium term, debt in government papers. The next step would be to issue Euro bond, Sukuk, and a serious attempt on Diaspora bond.
These all apart from friendly country support, the IMF and other multilateral lenders will be needed to service the existing debt. The higher interest rates and currency adjustments have increased government debt servicing from Rs 1.5 trillion to Rs 3 trillion in two years, and similar amount is budgeted in tax revenue enhancement. The money to be fetched is for debt servicing, not for deployment in social sector or infrastructure to boost economy - an unfortunate pain has to be incurred.
This misery of 2-3 years would be of limited use, if the structural governance, revenue and energy reform efforts do not exhibit similar zest. The existing domestic informal economy is rightly being stressed on to be documented, and to pay the due share of taxes. This is to slow down the economy further as a few may lower the business volume and others may pass on the impact to consumers.
The need is to build a new generation of entrepreneurs not addicted to rent seeking. The need is to reduce the regulatory entry barriers and to spur the environment for innovation. The need is to find new champions by moving away from feeding white elephants and rent seekers.
But all these require confidence - and that will be restored once the accountability spree is over. The economic potential can harness once the energy sector-related bleeding is stopped - increasing tariff is a stopgap solution. And for all that fiscal stability, one has to think beyond FBR revenues and energy tariff adjustments.
To start with, the government should talk about reducing its expenditure and enhancing efficiency. The white elephants need to be privatized and government land pockets in urban centers be better utilized. Concurrently, energy sector needs serious restructuring and deregulation. Tourism should start bringing foreign exchange, and agriculture has to think beyond a few major crops. Investment in new exporting sectors should be explored.