Beyond Default
Pakistan has suffered from chronic governance problems for several decades. Heir to a post-colonial bureaucracy and a manageable population of 30 million (West Pakistan, 1947), the country managed to survive early on.
The population continued to grow, reaching 70 million in 1971 and 130 million in 1998, but talk of harmonizing the country’s demographics remained outdated and politically incorrect. We have failed to develop settlement systems in line with the modern world and as a result Beyond default, we are at an altitude of about 250m with a growth rate of over 2% per year (i.e.15,000 births per day).
This rapid growth in employment has been left to the mercy of modest investment in education and skills development. The average education budget, both provincial and federal, hovered at a meager 4% of spending, or less than 1% of GDP.
But even these 4 cents have never been spent sensibly. Fostering cognitive thinking in children was never an option, and much of that budget was spent on physical projects or politically motivated programs like “handing out laptops” and lining the pockets of officials and business owners Beyond default.
Worst case scenario, with Washington’s approval, Pakistan can turn to Tehran for oil if some 80 million people are willing to train skills!
This results in low per capita productivity compared to other low- and middle-income developing countries. This “low productivity” is at the root of Pakistan’s balance of payments crises Beyond default, which now take precedence over the fundamental government crises that prevent the country from earning foreign exchange to finance the imports it ultimately consumes.
Domestically, the country also has a habit of spending far more on taxes than it generates, with Rs 10 trillion in expenditure versus Rs 7.5 trillion in revenue. The result is the twin deficits – fiscal and monetary – for years to come, offset by constant debt, which has now reached unsustainable levels with no longer willing creditors to lend us money.
As a lender of last resort, the International Monetary Fund (IMF) is now the only hope that can open the door to more credit, but at great cost.
Pakistan’s financing needs for the next three years are estimated at $25 billion annually, and even with the green light from the IMF, any relief would last only a few months. There appears to be no strategy to improve the country’s stubborn productivity Beyond default, which in turn could lead to prolonged balance of payments crises and eventually cause the country to default on its debt obligations.
In an apocalyptic scenario, if Pakistan goes bankrupt, how would an ordinary Pakistani citizen suffer?
Let’s take a look at Pakistan’s foreign trade profile for the answers. The country is on track to import about $50 billion worth of goods after a major import shortage. Imports were US$81 billion in 2022.
On the other hand, exports are expected to be about US$25 billion, up from US$32 billion in 2022. The forecast trade deficit of US$25 billion is expected to be narrowed to $26 billion in worker remittances funded, compared to $31 billion in 2022.
Oil & Gas (34 pcs.), then agrochemicals (16 pcs.), textiles (8 pcs.), machines (8 pcs.), steel and aluminum (7 pcs.), cooking oils (7 pcs.), vehicles (3 pcs. pcs.), Grain (2 pcs.), Tea (1 pc.), Telecommunications (1 pc.). The main export is dominated by textiles (61%), followed by rice (7%), sports & surgical products (5 pieces), leather goods and shoes (4 pieces), pharmaceutical and chemical products (5 pieces), and cement (1 piece).
These statistics show that if Pakistan cannot meet its external commitments, it will immediately face serious energy shortages.
This will trigger a series of catastrophic events where gas stations will run out of gas, transportation will likely stop, power generation will stop Beyond default, the load will reduce for days and factories will close leading to rampant unemployment followed by similar riots to those seen in Sri Lanka but with much greater intensity and impact.
Domestic and international sea trade and air travel are suspended, causing difficulties for families with loved ones abroad Beyond default. It’s only a matter of time before the mobile and internet industry collapses.
Pakistan will have to learn to survive alone. With its vast resources, it should be able to replace cooking oils and agricultural needs. Tea drinking is in danger of becoming a luxury. With a pool of incredibly talented entrepreneurs, if the biggest energy problem is somehow overcome, the industry will survive.
It appears that Pakistan’s economic turmoil will ultimately prove to be more of a foreign policy issue than an economic one Beyond default. Relations with our oil and gas friends are being tested, but given their recent lack of support, significant help seems unlikely.
So the larger opening appears to face west. Foreign Secretary with Ministers for Finance, Energy, and Petroleum & Gas, he may have to board a plane to Tehran to negotiate a fuel shipment from Iran.
Our State Department will have to work overtime with our American and European counterparts to apply for exemptions for Pakistan, consistent with exemptions for China, India, Turkey, Japan, South Korea, Italy, Greece, and Taiwan, to derive the embargo and avoid buying oil from Iran.
If successful, it will be Pakistan’s greatest foreign policy achievement and breathe new life into its economic recovery Beyond default. Iranian oil is likely to more than halve oil import bills, while various payment mechanisms – barter, eligible local currencies, etc., can be negotiated with Iran to pay for the goods. Rs260
per USD is likely to rise sharply. However, with imports set to fall significantly, this should have little impact on inflation Beyond default, assuming the government can control food hoarding and prop up the country’s agricultural sector on a war base.
Remittances from workers will continue to flow and should begin to increase the country’s foreign exchange reserves in the absence of major imports. This in turn will start to stabilize the rupee.
The above scenario illustrates the serious economic vulnerabilities Pakistan faces and their likely impact. Finally, it may not be out of place to focus on our foreign policy to protect ourselves from the threats facing our economy Beyond default. Before the ship sinks, it might be worth flying to Tehran via Washington.
The author is a management professional and former Advisor to the Chief Minister and Chief Minister of Punjab.