The independent Economic Advisory Group (EAG) is concerned that the recent National Security Council (NSC) statement has failed to address the challenges Pakistan is currently facing. The lack of emphasis on the need to address the increasing external debt servicing burden, and endorsing antiquated policies such as import substitution as a way forward, does not restore confidence.
Winston Churchill is famously credited for saying, “Never let a good crisis go to waste.” It is for policymakers to decide if they will use the ongoing crisis as an opportunity to transform Pakistan, or will pursue policies that have continued to fail the country.
Pakistan’s external debt servicing has increased from $6.5bn in FY13 to close to $26bn in FY23. This is equivalent to 66% of Pakistan’s exports and 37% of exports and remittances. The external debt servicing burden (as a percentage of exports and remittances) that Pakistan faces today is one of the highest in the world.
EAG emphasizes that policymakers must acknowledge the difficult choices the country faces. If Pakistan is to honour its external debt at a time when international financial markets are not willing to lend, then policymakers must let the exchange rate adjust and actively take measures that will reduce consumption and generate required savings to service the external debt. This process will involve considerable economic pain, and will result in low economic growth for the foreseeable future.
Alternatively, policymakers can choose to approach creditors and initiate a debt restructuring process. This will again come at the expense of meeting additional conditionalities agreed with the creditors, who will bear the cost of restructuring. None of these options are without economic pain, but a well-managed restructuring process can allow the economy to recover sooner than later.
EAG notes that the third option that the policymakers continue to hope for in the form of ‘friendly’ countries stepping forward with financial assistance is irresponsible. With Pakistan’s credit ratings significantly downgraded, foreign investment contracting sharply, and foreign governments less forthcoming to continue to finance consumption, policy paralysis can have dire consequences if it leads to disorderly default in the foreseeable future.
EAG hopes that policymakers will not let this crisis go to waste. Unfortunately, interest groups in Pakistan have continued to capitalise on earlier crises to further their vested interest at the expense of the nation.
In a recent paper, Adeel Malik and William Duncan show that at the onset of the 2013 crisis, organised sectors and businesses linked to powerful families in Pakistan successfully lobbied to increase trade protection in the form of non-tariff measures to protect themselves from international competition. The 2018 crisis also saw a sharp increase in import duties in sectors linked to powerful families.
The 2022 crisis is no different. In response to the crisis, the policymakers started with increasing protection in sectors that were already enjoying some of the highest rates of effective protection across the economy. In its 40th meeting, the National Security Committee (NSC) again advised the government to adopt import substitution as the country’s development strategy going forward. The Pakistan Business Council has also historically lobbied for import substitution policies, even when sectors benefiting from such policies have failed to compete internationally despite decades of protection.
A disastrous consequence of this approach has been poor export performance due to rising anti-export bias in the economy.
East Asian economies that had adopted similar policies during the 50s and the 60s were quick to appreciate the limitations of import substitution and changed direction. They opened up their economies and minimised, if not entirely eliminated, protection of domestic businesses from international competition. This is best appreciated by noting that the imports and exports to GDP ratio for the East Asia & Pacific region increased from 10% in the early 70s to 35% just before the 2008 financial crisis.
Nearer to home, India continued with protectionist policies for much longer. Its imports and exports to GDP ratio remained below 10% up until 1990. This also resulted in a chronically low GDP growth rate during much of this period. The Indian policymakers used the 1991 currency crisis as an opportunity to reverse course. The Narasimha Rao government initiated a range of reforms that included liberalisation of both international trade and domestic economic activity, public sector reforms, and better macroeconomic policies, to name a few.
EAG hopes that policymakers will use the ongoing crisis as an opportunity to move away from antiquated policies that have continued to fail Pakistan, and will undertake necessary reforms to transform Pakistan into a globally competitive economy.
