A couple of weeks before the elections we had to call an emergent distributors meeting at our company offices as the sales team informed the management that production’s off-take was slow and inventory was piling up. When the problem was presented to the distributors there explanation was that given the uncertain Pak Rupee situation in the market the wholesalers have adopted a policy of wait and see and are not investing their capital in stocks. This argument somewhat surprised us since the Pak Rupee at the time was in fact rapidly shedding value and was expected to slide even further, meaning the resultant inflationary wave in the coming days and months would only make the product prices more dear and likewise the stock in warehouses also dearer accordingly; so why the reluctance to invest at today’s price levels that can only go one way: Up? Not satisfied with the distributors’ stance, the following day on management’s behest a meeting with our main wholesalers was organized where we tried to convince them that it was only in their interest to lift and cover the stock now. Our efforts however were without any success, since they were of the opinion that uncertainty on Rupee’s parity and on what the policies of the new (in-coming) government may entail was at present for them a much bigger risk than even a nose-diving Rupee. Ironically, almost now a month on in the post-elections’ period, the situation still remains the same. Investors of every type are waiting and seeing how this government behaves with businesses. The general fear amongst them being that the notion, once just considered to be a mere callous opposition’s rhetoric on excessive governmental oversight, it is now suddenly haunting them by staring right in the face – as almost every day the media heroics of the new leadership threaten to convert cheap (but populist) election time slogans into real time policymaking!
The fear of a worsening economy and deteriorating economic climate has perhaps been the single main reason for PML-N’s defeat in the recent elections. Foreign investors and brands – especially from Europe and the United States, including Citigroup corporate banking, Bank of America corporate sector, Barclays, American Express, ICI, American Cyanamid, etc. – of late started pulling out of Pakistan amidst a developing business environment of social, political and economic instability aided by unhealthy political and institutional rivalries; poor governance per se in almost all spheres; crowding out the private sector; and a skewed economic leaning towards China based on excessive borrowings on some unsustainable projects. Whereas, Pakistan’s primary business relationship – or at least the one that is profitable – still continues to be with the West (mainly the USA and Europe), the trigger for the latest crisis has been an unhealthy trade relationship with China and an anti-American wave in the nation (foolishly stoked by some political parties) that has led to a strained relationship between the two countries taking it to a low never witnessed since the 60s. The danger now is that if the new leadership does not act prudently by shunning some of its pre-election political populism and instead settles to only take reality based decisions in its real time foreign policy initiatives, Pakistan could also well end up like Turkey.
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The latest crisis in Turkey’s boom-bust economy raises questions about a development model in which a country witnesses moves towards populist rule of one man who encourages massive borrowings to drive economic growth. The debt-driven approach sparks remarkable economic growth with living standards being significantly boosted and huge numbers of people being lifted out of poverty, yet it leaves the country (Turkey) more exposed to economic cycles. Turkey, given its greater vulnerability to the swings and sensitivities of international financial markets, is today simply witnessing the limitations of such a development model. It’s a model that in many ways also prevailed in Pakistan over the last 5 years and if we are not careful it is a model, which minus the one-man, could again be well repeated. Countries along China’s Belt and Road, including Pakistan, that leaped head over shoulder into the funding opportunities made available to them now see themselves locked into debt traps that in the case of Sri Lanka and Djibouti have forced them to effectively turn over to China control of critical national infrastructure or like Laos that have become almost wholly dependent on China because it owns the bulk of its unsustainable debt. The litmus test for us would be as the newly sworn-in Prime Minister, Imran Khan, confronted with a financial crisis, decides whether to turn to the International Monetary Fund (IMF) or to just to keep on relying on borrowings from friends like China, Qatar, UAE and Saudi Arabia, for relief. The very (compound) financing portfolio this government chalks out will tell us about its mind-set and approach to financial management. By all accounts, unless the current trade equation is addressed the gap for the required external financing at the present deficit rate could be well around $78–80 billion over the next 3 years. So really, if IMF has to be approached (which almost looks a certainty) then what are we waiting for? The earlier it is done the better, as not only will it help in negotiating better terms (including the future Pak Rupee parity), but also more importantly, the quicker we get into a financial-discipline straight jacket the better it will be for us!
As pointed out earlier, the fear though is that if this government is not careful with its shenanigans vis-a-vis the West, particularly the US, the economic situation will continue to slide and the pressure on the Pak Rupee will continue to mount – we have only recently seen what this can do to currencies, e.g. Turkish Lira & Egyptian Pound. On a lighter note, one can only hope and pray that Trump has not come across Asad Omar’s recent (rather pointless) point scoring on debt, because we just saw in Turkey the damage his tweets can do! However, on a more serious note, what this government needs to realize is that the problems confronted by the Pak economy are ‘now’ and therefore the remedies must also be the ones that take effect ‘now’: Like an economic emergency that momentarily (but immediately) halts all un-desire able imports, raising fuel prices to bring them at least with par with levels in South Asia, crack down on under invoicing and on outright smuggling and many such more. Once the deficit hole is somewhat plugged, the long-term measures can of course always follow.
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Lastly, while no denying our strong relationship with the Chinese and the need to strengthen it further, the reality today is that we provide China with a trade surplus of almost $12 billion per year. And by the way, this in addition to absorbing (in debts) a part of its Dollar investment portfolio of almost an equivalent amount every year. For China there couldn’t be a better cum safer proposal for parking its surplus, since almost all it’s lending to Pakistan is covered by our sovereign guarantees! In comparison the West (USA & European Union) today gives us access worth $17 billion in Pak exports every year and is an annual source of nearly $7 billion in-coming remittances. Given a looming air of protectionism and an imminent slowdown in the world economy, the global economic environment going forward will only get tougher and if this new government wants to truly succeed in providing a sustainable economic model to Pakistan, both in its dealings at home and abroad, it will be of paramount importance that it strives to:
- Engage the West in a more constructive way and not just look to find short-term borrowing solutions from China and Saudi Arabia.
- Act to calm and not panic the markets. Uncertainty and needless fear spreading invariably creates a negative perception, which ultimately takes down an economy. Key here would be to not raise any unnecessary expectations and to just tackle the basic doable things first, albeit, without making unnecessary noise!
The writer is an entrepreneur and economic analyst. Email: firstname.lastname@example.org
(This news/article originally appeared in The Nation on August 29th, 2018)