Author : Sushant Sareen

Originally Published 2018-11-02 05:14:03 Published on Nov 02, 2018
A near-bankrupt Pakistan has only two choices. It can go to the IMF and suffer reforms. Or it can carry on with its lies, vagaries and economic wet dreams
The 'Sheikh Chilli' economics of Imran Khan
Pakistan’s (s) elected Prime Minister Imran Khan should thank the murdered Saudi columnist Jamal Khashoggi for the success of his begging bowl diplomacy to Saudi Arabia. According to reports, the Saudis have agreed to deposit $3 billion in the State Bank of Pakistan to window-dress the balance sheet of the government of Pakistan. This money cannot, however, be used to either buy anything or service Pakistan's external debt. Alongside, the Saudis have announced an additional $3 billion annually in deferred oil payments for the next three years. Both these measures will give a modicum of relief to Pakistan's bankrupt economy — but will neither be a panacea for the deep structural problems that bring Pakistan to the brink of economic collapse every few years, nor will they be enough for Pakistan to avoid the bitter medicine that will be administered by the IMF. Most of all, it will do nothing to bring Pakistan out of the 'Sheikh Chilli' economics — the Pakistani variant of voodoo economics — that has reduced economic policy-making into a bit of a farce. In a country where chartered accountants (adept at dressing up company balance sheets) and business executives (many of whom have a very poor record of handling their own companies) are considered to be economists, economic mismanagement is no surprise. Adding to the mess is not just the overbearing interference by utterly clueless military men, but also completely ignorant politicians who are high on rhetoric and low on facts and knowledge. The result is that economic policy is pretty much made of Sheikh Chilli-like wet dreams. Figures are first plucked up from somewhere and then, like the proverbial Sheikh Chilli, the economic managers start imagining how, if these figures were to be factored into the economy, things would turn around. For example, a top bureaucrat floated a ridiculous figure of $200 billion in Swiss banks. This was then bandied about by the Chartered Accountant finance minister in Parliament. The opposition latched on to this fictitious number and built an entire political campaign around it. The Prime Minister of Naya Pakistan, who has a proclivity to take every nonsense whispered into his ear as gospel truth, never tired of declaring that once in power, he will bring back this money and make Pakistan the land of milk and honey. The only problem was that there was never any $200 billion. Similarly, ‘economists’ who specialise more in the voodoo part of the ‘dismal science’ are now claiming that they will address the Balance of Payments crisis by cracking down on the $10 billion annual money laundering that takes place from Pakistan. This, it is being said, will solve the financial bind in which Pakistan finds itself. Ask any question on economics, and the government’s spokesman — who claims to be an economist — will only talk about corruption, malfeasance and misfeasance of the previous rulers. As for future plans of the government to get out of the mess that Pakistan finds itself in, it’s back to the Sheikh Chilli school of economics. A prime example of this is the grand housing plan of Imran Khan and his cronies, which is being sold as the project that will kick-start the economy. But till now, none of the czars of the Sheikh Chilli model of economics have explained the voodoo math behind this project. Pakistan is, in many ways, emblematic of a political economy in which policy is based on alternate facts and both the polity and the society live in alternate reality. The only problem is that the rest of the world lives on facts and hard numbers. More importantly, the rest of the world is seeking answers from Pakistan’s regime, but is only getting allegations of wrongdoing by previous regimes. Worse, the Imran Khan government has made an already difficult situation even more difficult with its inexperience, indecision and constant U-turns on policy issues. And, of course, there is also the spectacle of contradictory signals, which has deepened the uncertainty about the economy and spooked investors, including the Chinese. The fundamental problem of Pakistan is that it thinks — nay believes and is convinced — that the rest of the world owes it a living; that it can go on living on other people’s money; that it can merrily treat debt as disposable income and when payback time comes, borrow some more; that it can endlessly cash its nuclear arsenal by convincing the world that it is too dangerous a country to fail; that it can upend the laws of economics on the basis of nothing more than economic wet dreams. The Pakistanis only really care about the money and freebies flowing in — the payback is always someone else’s problem. In a sense, Pakistan’s economy resembles a pyramid scheme in which the investor loses. For instance, there are serious voices being heard in Pakistan that if the Chinese want a return on their investments/loans, they need to invest/loan more money to Pakistan. And if China is not ready to revise the terms of the China-Pakistan Economic Corridor (CPEC), it must be prepared to wait for decades for returns. While the civilians play ‘bad cop’ with the Chinese, the military plays ‘good cop’, with the army chief visiting China to convince the Chinese to cut some slack for their ‘iron brother’ and all-weather friend. It is entirely possible that the Chinese, Saudis and some other countries and institutions might bail Pakistan out once again — but this will once again provide only temporary relief, because it won’t address the deeper structural problems in the Pakistani economy. The structural problems can be summed up as Pakistan living beyond its means. This is reflected in the three deficits, all of which are inter-related: current account, fiscal and saving-investment. While Pakistan is not the only country in the world to have these three deficits, it is probably the only country which has gone through multiple IMF programs without meaningfully fixing this problem. The trouble is that going through the IMF programs without fixing the problem makes the problem worse next time. And this is precisely what is happening currently. What Pakistan has been doing since the late 1990s is that it goes into a IMF program, implements some conditionalities half-heartedly, gets the relief for a few years, then once again goes into a tailspin. In 1999, when Pervez Musharraf ousted Nawaz Sharif, the economy was broke. 9/11 saved Musharraf by opening the floodgates of Western aid. The economy boomed — but it was all artificial and debt-funded growth. By 2007, the oil shock, and later, the global financial crisis, proved devastating. The PPP government went to the IMF in 2008 but by 2011, it walked out of the IMF program. The economy limped until 2013, when Nawaz Sharif once again approached the IMF. The three-year program ended in 2016 — the first time Pakistan successfully completed an IMF program. But soon, political turmoil and economic drift set in, and the economy tanked. Now, in 2018, Pakistan is once again broke — its energy economics is totally broken; its debt has been doubling every five years; its budget numbers are completely untenable, with defence and debt servicing consuming almost the entire tax revenue and all other expenses being managed from debt; its external account is unmanageable. Pakistan has no choice but to go to IMF once again. The problem in going to the IMF is, however, partly political and partly economic. The IMF conditionalities will, among other things, involve devaluation in the rupee, rise in interest rates, rationalising energy and other prices, cutting subsidies and privatising loss-making state owned enterprises. All this will cause immense economic distress — the cost of living will go up, growth will fall, employment opportunities will be severely curtailed, government subsidies and development expenditure will fall drastically, rising interest rates will lead to a rise in debt servicing as will the depreciation in currency — and will, in turn, have a major political fallout on the ruling dispensation. But the choice is between not going to IMF and risking the economy’s collapse — or going to the IMF and inflicting great pain on the people. Although Imran Khan and his cronies are promising that this will be the last time Pakistan will go to IMF, such promises have been made in the past too. One reason why this promise cannot be taken seriously is because Imran Khan and his lieutenants are being economical with the truth. Instead of telling the people of Pakistan the full magnitude of the problem, they are busy selling dreams: only the next six-odd months are going to be difficult, after which all problems will be over and the economy will be up and running. Anyone with a modicum of knowledge of economics knows this isn’t true. Structural adjustment is a long and difficult process. But given Imran Khan’s proclivity for selling pleasant lies to the people of Pakistan — he promised to end corruption in 90 days; he declared he would commit suicide rather than go with a begging bowl around the world — and his reliance on cosmetic measures — selling buffaloes to give an impression of austerity — he thinks he will be able to fool them again. Even now, there are some signs that the government of ‘naya Pakistan’ is hoping it will get enough from China and Saudi to not have to go for an IMF program. But, if forced, Pakistan will go to the IMF and gamble on getting out of the program much earlier than the duration of the program. The reason is that the pain an IMF program will administer is difficult to bear for long because of the social and political impact it will have. But if once again Pakistan ducks the necessary structural adjustments, then it is quite possible that Imran’s promise of never going to the IMF might just come true — not because Pakistan’s economy will be out of the hole it has dug for itself, but because there might not be much of an economy left to go to the IMF next time.
This commentary originally appeared in DailyO.
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Sushant Sareen

Sushant Sareen

Sushant Sareen is Senior Fellow at Observer Research Foundation. His published works include: Balochistan: Forgotten War, Forsaken People (Monograph, 2017) Corridor Calculus: China-Pakistan Economic Corridor & China’s comprador   ...

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