Pakistan has faced recurrent balance of payments problems since the last three to four decades. Every round of crisis leads to knocking at the doors of so-called friendly states and the IMF and, in the latter case, submission to its conditionalities. The current round is the most serious, given the magnitude of the gap. Gravity of the present round can be gauged from the fact that, apart from the conditionalities, IMF has taken direct control of the Ministry of Finance and of the State Bank.
Clearly, Pakistan has forfeited its economic sovereignty. Incidentally, loss of economic sovereignty is almost always followed by erosion of political sovereignty. This is the situation Pakistan is beginning to face. The Kaula Lumpur summit fiasco has driven home the point that Pakistan is no longer free to choose who it does business with or what business it does. And this is the beginning; more serious capitulations are certain to follow.
It is important to trace the route that has brought us to this point. The first stone was cast in 1993, with the imposition of imported caretaker Prime Minister and Governor of the State Bank. The more organized process of control was set in place over 2000-2007. Tax and trade policies were tweaked to create an import-dependent economy. Imports began to be liberalized with a vengeance, with the result is that imports have replaced many locally manufactured goods. Many industries have shut down, causing job losses; these jobs have been created in other countries from where imports originate! Industrial slowdown has also meant loss of capacity to export. After all, we can only sell if we produce.
Import growth was also facilitated by keeping interest rates low and opening a window of consumer banking. Demand for automobiles and electronic goods shot up – most of which was imported or assembled with imported components. Rising imports and stagnant exports meant that net dollar outflow increased and the trade deficit ballooned. Over the period 2000-2007, imports grew by 177% and exports grew by 109%. In 2000, we imported US$ 117 worth of goods against US$ 100 worth of exports; the deficit was 17%; in 2007, we imported US$ 155 worth of goods against US$ 100 worth of exports; the deficit was 55%. The gaping trade deficit is the main reason for the balance of payments hole the country has fallen into.
Monetary policy created mechanisms to enable banks – privatized to foreign interests – to make enormous profits. One of these mechanism was to allow large ‘spread’, meaning the difference between the interest rate paid by banks to depositors and the interest rate charged on loans to borrowers. Resultantly, value addition in the finance sector in two years, 2004-05 and 2005-06 averaged 40% – 4 to 5 times the normal! Profits were repatriated to host countries, causing large outflows of foreign exchange.
Foreign exchange outflows were also facilitated by FDI policy. FDI in China was in manufacturing for export. Thus, assume for example that a foreign producer in China exported 100 dollars worth of goods and remitted to their home country 99 dollars as profits; China also benefited to the extent of one dollar. In Pakistan, almost all the FDI has been in service and consumer goods sectors: telecommunications, clothing, restaurants, chocolate and ice-cream parlors, etc. Foreign companies operating in Pakistan earn their revenues in rupees and remit their profits in dollars; there is little by way of export/dollar income for Pakistan. The cumulative effect of all of the above is a large and growing Balance of Payments deficit. The hemorrhage of foreign exchange continues. Foreign interests continue to rake in profits. Pakistan’s dependence on foreign loans keeps growing.
The recent rise in interest rates to a high of 13.25% was unjustified on economic grounds. It has resulted in raising the cost of doing business; many businesses have curtailed their production or shut down altogether – causing job losses. However, high interest rates have attracted the attention of international money traders who have brought in over one billion dollars as investment in government securities; most of it of short term (less than one year) duration. They will earn large profits and repatriate them in dollars; however, when interest rates will be brought down (and they will be), these money traders will take their money to other more profitable havens by just a click of the mouse! Foreign money traders are benefiting at cost to Pakistani businesses and the economy will be left reeling from the resulting volatility.
And now to the subject of current account surplus. A surplus is beneficial to the economy if it is generated by export growth, which boosts incomes and employment. A surplus can also be beneficial if it is achieved by reducing consumer imports – advantaging domestic industry and employment. However, a surplus can also be achieved by curtailing industrial machinery and raw material imports; which will cause industries to cut back production and employment. The latter is how Pakistan has achieved the current account surplus!
Further, a current account deficit causes foreign private capital to flow in – import of capital a la FDI or even short term speculative investment, as in the current case of Pakistan. Conversely, a current account surplus causes local private capital to flow out – export of capital a la Pakistani investment in other countries. The irony here is that private capital will be investing Pakistani capital abroad – money that the Government has borrowed from abroad! Private money traders will profit, with Government repaying loans by taxing businesses and the poor within the country.
The resultant rising foreign debt on account of the above developments has created a situation where Pakistan is hostage to international creditor organizations and to individual creditor countries as well. It is, however, time to reclaim our economic sovereignty. The economy of Pakistan must be managed for the benefit of the people of Pakistan.