It has once again become crystal clear who really holds the reins of power in the political arena. The only way forward to steer the country out of the sandpit is to bring the economic house in order.
The country and its inhabitants have faced immense economic misery through rampant inflation, savings and purchasing power erosion, and unemployment. The gains from these hardships, euphemistically labelled as “technical adjustments” - but which are really reparations for the past economic crimes, should not be wasted.
Even now, and despite enormous sacrifices, the path is much less than crystal clear. The clarity must have been there even before the crisis started; more wanting on the economic reforms front, at least. There can be no shortcuts to reform, even if there is absolute clarity. The country needs massive economic surgery, of the type where most operating rooms fail and where the doctors must provide more than ample forewarnings and disclosures to take the patient – the public – into confidence.
As things stand, there are two options. The first includes ‘reforms’ advocated by the vested interests – where no one has control. If this option is undertaken, even more economic misery would befall us resulting in social unrest.
The other option must be pursued willingly, together as a nation. Here, the writ of the state must instill economic reforms – taxing the untaxed, selling-off of state-owned enterprises, reducing the government size, and rationalizing subsidies. This shall require the assertiveness of the type that can only be undertaken once the instinct for national survival and self-preservation kicks in.
The patchwork approach and dirty bandages cannot work anymore, no matter who leads them. The macroeconomic picture over the last year has worsened to an extent that simply cannot be managed by using the usual tactics. I shall go to the extent and say that even the prevailing situation cannot be perpetuated; the spiral will lead right in to the abyss for those who dare to flirt with its boundaries, and Pakistan has been strolling on these boundaries for ages.
From the extent of currency depreciation; high level of interest rates; imports restrictions in place to prevent imminent default; the widening fiscal gap; the debt levels relative to the servicing cost; these cannot be whacked back into line by relying on organic economic growth. The patient must undergo surgery, painful as it shall be and unavoidable as it usually is, but is a price that must be paid for ignoring the root cause for too long.
Let us elaborate a bit more on the two options. One is to continue with half-hearted reform attempts while not touching the sacred cows. For example, if the federal government announces a populistic budget – large increase in government employees’ salaries and pensions, enhance development budget, and provide subsidies with unachievable tax targets by imposing higher tax on those who are already in the tax net without any meaningful effort to tax the so-called non-filers. The government wishes to take IMF’s help; at the same time, is also insistent to not comply fully with its conditions. Some of these neo-liberal economic conditions are indeed harmful to our interests, but most of them are designed to fix the house!
In this manner, irrespective of who is in power, usual suspect aside, and with or without elections, technical default would be inevitable, economic default being already dealt with since the past year. The technical default would make the private sector imports on credit (using LC mechanism) almost impossible. All the imports – essential or not—would have to be cash backed. This would not only reduce the volume of imports but also make them significantly costlier. There would be massive shortages of everything, save the nation’s will to find a saviour.
Similarly, technical default would entail a higher likelihood of domestic debt restructuring that shall cripple the domestic banking system, if not managed properly, since over 50 percent of the sector assets consist of government bonds and bills. Bank-runs may not happen, but despair shall certainly prevail among depositors. The currency shall lose its value sharply. Hyper inflation may abound, and further dollarization shall lead to greater informality of the economy. Under such situation, no one is usually in control. Surgery of the economy will then need to be undertaken as a fait accompli, without anaesthesia. Some nations succeed in pulling through it, others not so much.
The second option need not be discussed; it is well known, well publicized, and repeated every time like a clockwork, albeit never implemented. Suffice it to say that no patchwork is going to cut the bill, under this option.
The state must exercise and establish its writ in taxing the untaxed, period! Subsidies must be rigorously optimized and rationalized; not doled out to the political favourites or those who offer kickbacks of sorts. Import substitution and export promotion should be the economic religion of the
state in word and in deed. There is much more to the list, of lesser order in importance, which can successfully be implemented if strong national political will is in place. Many nations have achieved these goals in shorter time and with fewer resources than it takes us to implement a 5-year plan, which by the way never gets implemented.
Capitalists unilaterally understand the benefits of this approach; opportunists, rent seekers, and free riders do the same, of costs.
On one hand, the powers that be show no restraint on certain aspects and are slave-in-shackles on other aspects. The state has failed to take politically unpopular measures to the detriment of the entire nation. For example, closure of SOEs that rack-up billions in losses every year or unoptimized subsidies that have been distorting our economic landscape for decades. One wonders in estimation of the economic costs that the nation had to bear.
No wonder, government machinery is a massive blob of inefficiency, non-existent service delivery, and lacking structural integrity.
‘Option two’ is the only way out, not taking it is parallel to sleeping on the train tracks; in a drunken stupor. Economic surgery is the order of the day! The rest shall follow, as only disaster has followed us thus far!
Copyright Business Recorder, 2023