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Pakistan's economy which was already in the intensive care unit (ICU), has since February this year gone into a tailspin deepening further the on-going recession induced earlier by an IMF- driven austerity program launched in April last year.

To subdue the recessionary forces, the authors of next year's federal budget are likely to apply a textbook prescription by exploring the possibility of a substantial cut in the interest rate bringing it down to say, 5-6% and introducing at the same time fiscal stimulus, with the SBP issuing debt to pay for more government spending aimed at spurring economic activity. The substantial reduction expected in the oil import bill, thanks to the collapse of world oil prices, also offers the budget makers a significant leeway to reduce equally substantially the domestic electricity rates as well as the prices of fuel oil and gas during the next fiscal year.

Meanwhile, the liberal policy announced to give a leg up to the construction industry by boosting the real estate business would surely trigger economic activity in a number of associated industries and as well open up all kinds of job opportunities. However, this policy is not likely to improve in any significant way government's revenue income as an entrenched safe haven for dirty money - the real estate sector - can hardly be expected to change its fundamental characteristics just because it has been offered generous tax concessions or for that matter accorded the status of industry. If anything, the sector is likely to become even more attractive for people looking for safe havens to hide their corruption tainted millions.

The private sector house building activity in the country though has remained very brisk all these years has, however, miserably failed to resolve the escalating housing problem in the country. As a result, benami luxurious properties owned by a handful of rich people have mushroomed all over the country. Many of these dwellings usually remain vacant because of the exorbitant rents that they carry. On the other hand lately housing has been getting out of the financial reach of even the middle classes what to talk of those living on the verge or below the poverty line who with the passage of time are finding it impossible to afford a shelter even in katchi abadies and shanty towns.

Also, the real estate business while expanding at an accelerated pace in the four corners of the country has eaten up a lot of valuable agricultural land as well. Indeed, in the real sense of the term the real estate business does not on its own generate any real economic activity as such and in the final analysis most of the resources that go into it turn into dead investment.

It is in this context that the authors of the next federal budget should be taking a second look at the new construction industry policy and consider the option of launching construction of roads, rail-roads and bridges in the public sector, completing as well in the process the physical infrastructure projects envisaged in the CPEC by connecting at a faster pace the wide disconnects that presently render the Corridor non-functional. The Naya Pakistan Housing Project could also be brought into the ambit of the public sector, rather than leaving it in the dubious hands of the private sector.

But then how do you fund such a massive economic activity in the public sector when the state has been existing for ages now in a hand-to-mouth state? Thanks to Covid-19, commodity prices have collapsed, and with them, the developing countries' main export revenues. The widespread mass unemployment in the oil rich Middle East as well as in the developed first world, in the meanwhile, is expected to substantially reduce the flow of remittances from migrant workers. Pakistan is estimated to suffer a loss of 23 per cent in these flows. Large amounts of the so-called hot money have already flowed out of developing countries.

It is in response to this resource crises in developing countries that Bodo Ellmers writing for International Politics and Society (The Global South needs debt relief--published on April 21, 2020) refers to a very generous UN proposal which has called for a $2.5 trillion coronavirus crisis package for the Global South. According to the UN Conference for Trade and Development (UNCTAD), the package should have three components:

"First, $500bn for a Marshall Plan to finance the healthcare sectors of poor countries. UNCTAD thinks it's appropriate to fund the plan through grants from rich countries that have not met their official development aid commitments over the last decade. Time to pay up.

"Second, an additional $1 trillion in grants would be made available to developing countries through special drawing rights, the international reserve assets maintained by the International Monetary Fund (IMF).

"Third, another $1 trillion could be released indirectly through debt cancellation. This is not about transferring money to poor countries but rather waiving future transfers from them. Debt relief would provide low-income countries fiscal leeway to rebuild their economies.

"The G20 decision grants developing countries some breathing space but not debt relief: Beneficiaries have to settle this year's unpaid instalments over the next three years. If they can. But what is needed is debt cancellation to prevent bankruptcies.

"What's more, the G20 rescue package comes with conditions. Countries must already be involved in an IMF program, which generally entails 'fiscal consolidation', the Fund's euphemism for austerity policy. Fulfilling IMF conditionalities has gutted many countries' healthcare systems, making them more vulnerable to the crisis caused by the coronavirus.

"But in order to effectively release funds, short-term debt moratoriums and long-term debt relief also have to apply to multilateral loans, like those of the US-dominated World Bank, and especially loans from private banks and low-income countries' government bonds. The latter are mostly held by big mutual funds based in the US and Europe. Developing countries' foreign currency bonds have annual interest rates of up to 10 per cent - which weigh heaviest on the budgets of poor countries. Addressing that should have priority.

"First, payment deferrals must be changed into real debt relief. Second, private creditors must also be involved in debt restructuring. That being said, the G20 cannot dictate private debt restructuring. Its role is to provide legal and political support to low-income countries that stop servicing private debt during the corona crisis. The UN Human Rights Council's guiding principles on foreign debt and human rights declare that when resources become scarce, states must prioritise human-rights-related expenses like those for education and healthcare over debt payments."

However, there appears to be no sign on the international donor scene that the UN proposal has caught anybody's fancy yet or that the G20 countries are likely to agree to write off the developing countries' bi-and multilateral debt.

Since in the case of Pakistan the treasury does not have enough spare money to fund an expanded public sector activity and nor is the government in a position to add further to its unbearable debt burden by borrowing from commercial sources for the purpose, perhaps the budget makers may after all think of nothing better than the unthinkable--printing currency notes.

However, there is this specter of hyperinflation when you print currency notes without the backing of genuine assets of equal value.

Interestingly enough, however, even the rich countries are now opting to print notes to fund their huge stimulus packages. The Bank of England has offered to lend money directly to the UK government. In the US, the Federal Reserve announced it will buy $2.3 trillion in bonds, injecting cash into the economy in exchange for them.

Adair Turner, an academic, policymaker, and member of the House of Lords, in his new book, "Between Debt and the Devil: Money, Credit, and Fixing Global Finance" (Princeton), argues that countries facing the predicament of onerous debts, low interest rates, and slow growth should consider a radical but alluringly simple option: create more money and hand it out to people. He insists that money supply and inflation have been decoupled in today's economy, and it may be better to stop dressing up monetary injections as bond purchases and just print the cash.

Turner points out another possibility. Since one arm of the government is effectively lending to another arm, the public debt owned by the central bank could simply be written off. If that happened, a country would have created a great deal of money and used it to reduce its debt burden-a form of money finance and also spurred vigorous economic activity. And it's hard to see how this would generate a spike in inflation.

The key point to note here is that the government would be stimulating the economy without issuing any new debt. It wouldn't be accentuating the problem of debt overhang, or creating the conditions for yet another boom-and-bust cycle. To use the phrase Turner picked as his book title, it is, indeed, a choice between debt and the devil.

Copyright Business Recorder, 2020

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