Behind Pakistan’s economic meltdown, a web of subsidies for the super-rich?

uh hi and welcome to this week's special edition of the prince crosshairs as you know we usually uh do one show a week uh but we've got a second one this week because of the unfolding economic crisis in Pakistan uh we've had a lot of people write in and ask uh if we could unpack what's going on there a little more not always clear quite confusing and we're privileged to have with us Jose Eunice who uh is one of the smartest guys of all things Pakistan economy uh consultant Economist um and someone who's been watching events unfold uh uh very very closely so I'll get to the number of this uh news last week that Pakistan prime minister Shahbaz Sharif saying that Pakistan uh is has finally decided to or has no option other than to sign on to IMF conditionalities uh I I understand there was a lot of reluctance in this government come on board with these terms and conditions can you explain a little bit about why if Pakistan needs this cash so badly uh why why it was so reluctant to accept the terms that came from the lender um uh for this deal well thanks for having me and look I'll start with the fact that much of the reluctance stems from uh the political implications of agreeing to the imf's conditions um this is a program that began in 2019 when Imran Khan was prime minister and even he was reluctant after coming to power in August 2018 uh to quickly go to the IMF and get a program uh in place to get things going uh famously uh if you go back in time at that point um Assad Omar who had sort of uh been in this role as Shadow Finance Minister everybody knew if PTI or Khan never came to power as sadhumar would be the Finance Minister who was let go of uh for his uh failure in so many ways to negotiate this agreement and then Sheikh came in um who is no stranger to negotiating with the IMF has always rescued uh governments across the board in various times program back on track that program was once suspended during covid and then resumed in February 2022 right before the Khan government went out um but the challenge as as sort of a new government led by Shabbat Sharif came in was to unwind some of the decisions that Han himself had taken most famously the petroleum subsidy he had provided um which was unfinanced um right before he left power or was removed from Power um the Sharif government took almost two months to unwind this even though they knew that this was going to be a sticking point um and then as the political implications of higher inflation higher energy prices lower economic growth um uh entered The Fray um an internal tug of war within the pmln in particular uh broke out which is when we saw Dr mifty smile a PhD in economics who understands some of these issues very very closely in terms of the economic situation in Pakistan was removed as Finance Minister and ishaghdad a relative of the Nawaz family uh the Sharif family came and flew in from London and took over the Helm of the finance ministry in September 2022. um that political resistance so to speak has continued uh to this day where you know what was demanded back when Mr smile was Finance Minister and what had been agreed upon in his negotiations with the IMF was delayed and now Pakistan and the Prime Minister have no choice but to accede to the imf's demand and in in my opinion there their pushback saying that the IMF is being very difficult or very strict um you know is a bit of a cop-out it's not true all the IMF is saying is you agree to certain things and you need to follow through on them so I'm going to come back to the strictness of these terms in just a second but uh you know if I'm not wrong Pakistan has since the 1950s been to the IMF some 22 times if I'm if I'm not very wrong if this loan a solution to a problem or is it just part of a fix for a problem we've heard you know we've seen articles saying that the real problem is that Pakistan doesn't export enough that it spends too much on subsidies and that this cash bailout will will help but it's not going to fix the problem could you unpack that a little bit for us sure um yeah it's been it's been to the IMF close to two dozen times it's hard to remember the Full Count uh because it's been happening so many times in fact are himself famously said I have experience negotiating with the IMF because I've been doing it for 25 years he said it as a matter of Pride um to which my point was nothing to be proud about like you know if you're going if you're if you as a finance minister and so many times you dealt with the eyes actually an indictment of your own performance but that's beside the point um in terms of where the IMF comes and look it is basically the lender of Last Resort that helped stabilize the economy um and the parallel in this discussion right is is India when India went to the IMF in the early 90s it helped stabilize the economy but then it was up to Indian policy makers to restructure and reorient their economy liberalize and the license Raj regime Etc and India is a thriving economy that the world wants to invest in today um in Pakistan that has not happened what has happened is that time and time again successive governments um have agreed to the IMs uh program and terms uh only to renege on them uh quite quickly um in fact out of the nearly two dozen programs that Pakistan has been in it has only successfully completed one of them which was his haagdar's last one in 2014 to 2017 when it was completed but within a year of completion of that program Pakistan was back to the IMF because everything was Unbound and the situation was slight dire in 2018. um so I think it's been a reluctance of Pakistan's political and ruling Elite political and Military lead to not recognize that the days of extracting geopolitical rents are over um that they need to reorient their economy and be a modern economy that is linked to the rest of the world that there's drawing in investments into productive sectors um and their refusal to do that is primarily the reason why the country tree keeps going back to the IMF the IMF is not saying that Pakistan should you know have a regressive taxation system it keeps saying successive programs keep saying widen the tax base well why didn't the tax base is up to the political Elite and they refuse to do that because the first people who would have to pay the higher tax rate in that Equitable system would be the elites themselves so is someone old enough to remember India going to the IMF and those very troubled monks I I remember that they weren't you know at the time hugely popular with Indians there were hikes in prices across the board um uh you know things like bus fares for the first time went up and there was a huge huha about it and that was at a time when India let's say you know was not as dependent on imported goods as it as it is today I assume that for Pakistani politicians there's also a dilemma here which is that if you do what the IMF is asking you raise prices reduce subsidies uh you know jack up taxes for everyone this is not going to be something that's going to make a politician loved right absolutely and I think this is the fundamental challenge in particular with the current negotiations going on because what's happened since the end of the musharra dedicatorship um is that every new government has gone to the IMF so we saw in 2008 the People's Party Coalition did that in 2013 it was the pmln in 2018 it was the PTI but in this instance Shabbat Sharif has to agree to the INF terms um at a time when within at the most within the next four or five months he has to go to the polls Imran Khan is agitating for early elections the Punjab and assembly stand dissolved so in this instance when you know inflation is about to reach 40 percent if the IMs uh you know agreement terms are met which they have to be um going to the polls in that instance is not a recipe for Success any politician knows that um but I'll in my review on this is that the Prime Minister and his party themselves are to blame here because had they continued on the path that Dr Mr Ismail had agreed to back in the summer of 2022 by now all of the things that the IMF was demanding had already happened inflation would have peaked and you would have made the case to the people that we've stabilized the economy from the disaster of Imran Khan that's the narrative they would have gone with um now they're basically saying all of it is Imran Khan's fault well almost a year has passed by since he was removed from office and as you very well know and your listeners know constituents have short-term memory loss they now don't remember how things or what things were like in the Han era they remember that over the last eight months prices have shot through the roof and their purchasing power has been eroded significantly so I I hear fascinating uh things and by the way for our viewers some great articles from mefta Ismail who's been writing in public uh on this issue just Google them or we will try and post some um links uh in in in in in in on YouTube uh but one of the things he says is that look uh the problem hasn't come about because of just ordinary people you've had some structural inefficiencies like subsidies uh to big uh public sector corporations Industries Airlines and uh of course this big gun to and spender the military um and Pakistan would be justified in saying would they not that dug this hole affecting us uh to sort of pay the price for clawing our way out that doesn't seem very fair uh does it no absolutely not and I think that's been uh you know even my own argument in the discourse has been and I'll give your audience a couple of examples um the total loss and damages of the floods the catastrophic floods in 2022 monsoon season are about 30 billion dollars um Pakistan according to the undp um spends or gives out handouts perks privileges roughly about 17 and a half billion dollars a year to Elites in society um so one could say that roughly you know two years worth of handouts the rich would cover the loss and damages of a catastrophe that has Afflicted a few weeks ago Dar sort of came on TV and said we're gonna cut petroleum prices by four rupees a liter because we wanted to give relief to the people now if you actually do the analysis on in terms of energy consumption per capita and Pakistan for an average citizen um that relief was worth two Nan's a month for their whole household right right six people in an average household your relief is two a month but if you want a Land Cruiser and you have a convoy of cars that you used to commute to your factory and back that's 200 to 300 nons so your relief actually is giving 300 Nance to the rich man with the Land Cruiser v8 car and a convoy of security guards um and two naans to the average citizen and oh by the way when the peg breaks and inflation goes through the roof because you followed a disastrous policy inflation hurts the poor the most wow that's quite a staggering number that's a really staggering yeah exactly right so to restructure that I mean you know really you want to restructure the economy it's not that there aren't resources in it it's that the resources are flowing to the wrong people I'll give you another example this recently broke in Pakistani news because the case is ongoing um uh in Lahore is you know where the elites go to play a bridge and hang out and play squash and all of that much like Delhi or Mumbai has is the similar gymkhanas as well however the Virgin Khana has a multi-year lease I think it was a 50-year lease that was signed where they pay 5 000 rupees a year um in rent to the government um I asked some friends of mine who are in the real estate sector well if this was a market uh based uh rent that was demanded what would it be and their answer was it would be at least 30 crore a month wow and I did the math so now now let me do the other flip side of this map when I did that math and said well assume that you pay 6000 rupees a month as a stipend for students get needing a good education that's 50 000 students worth of monthly salary that is being stolen from them for the playground of the rich um right and that debate is going on in Pakistan and people like miftai smile have flagged it out even though he himself is in the lead he's an industrialist um but many are beginning to argue that enough is enough there is there are resources in this country it's just that you choose not to tax and not to take out resources from the few uh and in in in successive IMF programs you decide to put a bigger and bigger burden on the many even though they have nothing to do in creating this crisis so I want to you mentioned General musharraf's years in office and again you know the way I think most Amber it from the headlines was that hey Pakistan was doing really well at that time we were we had all these articles about the booming stock exchange and how General Musharraf was creating a modern reformed economy um firstly was that impression correct and if it was correct what went wrong we also see some reforms and some action was taken indeed by the musharra rafiers um exports grew um there was more investment coming in um a pretty good local bodies system was introduced to devolve power to the local level I'm I grew up in Karachi and Karachi has this weird romance with General Musharraf to this day um right because they always you will hear them is a frequent line you will hear and drawing rooms out of Karachi at least Karachi and other parts of the countries too as well um but see this is linked to that boom like previous booms um people forget was linked to the fact that Pakistan at that time was closely Allied to the United States um there was a Paris Club debt restructuring right after 9 11. prior to that the economy was in the dumps um the dollars then began flowing in because the Pakistan was a Frontline Ally state of the United States in the war on terror next door in Afghanistan um and this is a pattern we saw some Miller growth boom happen in the aubera we saw a similar boom happen in the Zia al-haq era and then as you said in the musharaf era the challenge was that once these rents geopolitical rents as we described them ended uh you kind of very quickly found out that the economic growth was really nothing um and so it was the same thing with the mushaira Farah by the time he was out there was a huge current account deficit 18-hour power crisis in major cities forget about small towns and Villages um uh terrorism through the roof and so the country paid a huge price for the short-term speed of growth that he had generated in Alliance with the United States and when the dollars stopped flowing in um the economy sort of collapsed and then the next boom came in 2013 onwards uh when the Chinese decided to right so I wanted to ask about that because we also saw all these headlines about trillions of dollars with CPAC roads and railway lines and then all of that suddenly seem to disappear somewhere what what happened yeah so I think that that again is a less you know people uh in the west and in India use the term death trap diplomacy quite frequently and I kind of disagree with the broad use of that term in this sense look Pakistan borrowed uh money from the Chinese to build power plants which Pakistan needed as I said 18 hour load shedding uh it used it to develop a pretty good Road and Highway infrastructure which is needed in any economy to connect um but then the challenge is domestically how do you reorient and restructure the economy to effectively utilize that infrastructure right I.E exports in any any developing economy let me just let me just get this right for my understanding and those of my viewers if I build a road I need to create Industries which will send out trucks to use that road and carry their goods to Ports which is taking a loan to build and so on exactly especially if you know if let's say in the Indian case the roads are built through rupee denominated debt taken out by the government in domestic out of the domestic economy then it can be about internal Market Goods right that you can sell something from Maharashtra uttar Pradesh or whatever um in the case of Pakistan because the debt was taken out in dollar terms you have to earn dollars to pay it back which doubles down on the thing that you have to export now if you don't reorient your economy and instead of promoting Capital intensive manufacturing uh that that is globally competitive instead you allow amnesties to happen for example in the real estate sector where there is currently a casino economy has been a casino economy in Pakistan for a number of years now that's unproductive so you've borrowed in dollars you have to pay back dollars but you haven't done anything to earn those dollars in the meantime and that has what has exacerbated this crisis because Pakistan has to pay pay the world back in dollars but it has not been able to earn as much dollars as it should have catalyzed by those same investments in infrastructure so on this uh specific issue of China we've we've heard Sri Lanka uh and some people in Pakistan complain that you know China hasn't been doing enough to forgive debt or reschedule that that it hasn't been generous with understanding the impact the pandemic years uh had on these countries in your view that is not the whole part or the whole story correct and it is not the whole story in the sense that in Pakistan you're seeing a similar response from the Saudis uh as the Chinese and yeah marathis and the qataris which is what is your plan um and we want you to reform your economy and this has been consistently stalled at Davos by the Saudis for example most recently but even in private conversations that Pakistan is a friend we want to see a stable Pakistan even the Americans say it but the point then is what is your own plan to reform your economy and restructure it such that you stabilize right nobody wants to in today's world keep putting money into a country that basically Burns it away or gambles it away because a financial minister in this case for example follows through on disastrous policies of pegging the currency right you will end up where you are because of policies like that and Pakistan's friends including China are saying we will help you but why don't you first sort your own house in order and show us a credible plan that you're willing to follow through on and the first step of that is getting back into the IMF program so I want to understand a little bit more about this difference of opinion between Mitha Ismail and uh Isha on this dollar question now as I understand it crudely as a layperson's argument was basically that if we prop up the rupee we pay less for a fuel Imports that keeps prices low for Ordinary People reduces inflation why is that unsound thinking why did that lead to this sort of meltdown of the rupee anyway we'll see because uh you know if you look at a country like India or the East Asian economies that built uh you know firewall of reserves after the 1998 financial crisis um you can manage your currency if you have 100 200 300 billion dollars in reserves you can spend some of them to stabilize the economy but when you don't have dollars and you can't generate more dollars how are you going to keep the price of a currency pack number one that was the fundamental economic question that people ask me if that in fact my own career um in terms of focusing on the economy began with a long read on in October 2018 critique in 2016 critiquing ispeg at that point in time and here we are back to this question that you just asked six seven years later um but the other problem with the the whole idea as you said right you keep the price packed it lowers the cost of imports particularly fuel um that essentially is the problem with that policy in the sense that price is a signal so if you are giving consumers the a 20 discount by keeping your currency artificially more expensive or keeping the dollar cheaper people will consume more of that thing because it's cheaper and you saw that in when Imran Khan cut prices through the fuel subsidy consumption went through the roof when I saw decided to pack the currency people had this view that you know things are cheap we can keep continuing with the path that we're on and the third element of this where things got messed up was that the decision to prop up the currency was done by rationing Imports which meant that now you had a soviet-style bureaucratic economy where the central bank got a list every day from different banks uh saying well here's the 100 things we need to clear as Imports and the bank would say well do 25 of them ignore the other 75. all of a sudden that led to distortions Across the economy where now you see Toyota has shut down its production Miller tractors has shut down in its production virtually every single industry is operating significantly below capacity at this point in time why because you introduced import rationing as a means to prop up the currency and oh by the way you violated the agreement you had with the IMF which was that you would run a market determined exchange rate which in my view was always the right policy because it allows you to tell the public as Imports grow and reserves decline that things get extra and you need to cut the consumption of imported Necessities uh you refuse to send that signal and now as we were talking about earlier and there will be uh an upwards adjustment of prices because the dollar finally is founding its true market value um so my last question but one um is really this um Shabbat Sharif now agreeing saying there's no other way we've got to do this it's you know uh no options left uh the clock's ticking do you expect progress I know you're not sort of sitting in uh some IMF conference room but do you have a time frame or a sense of how long we are talking about for the deal to be done or are there still things to be hammered out and negotiated there's a lot to be hammered out and negotiated but they basically have 72 or 48 Hours February 9th is sort of when the delegation is expected to leave and there should be and the market is watching uh for the announcement of a staff level agreement with the IMF a lot of stuff has not yet been hashed out for example uh the plan on what they call the circular debt management plan it's essentially a plan for the power sector um to you know reduce the amount of debts that being built up in that power sector the IMF wants a credible ban uh as of Sunday um to my conversations a credible plan had not been presented and the agreement was still far off I think is one that will be familiar to many Indians it's where we as consumers don't pay enough uh for the price of the fuel that gets passed on to the Distribution Company which passes on that debt to the production company it just sort of turns into an endless loop um yeah okay exactly it um and India has that in the distribution sector of its electric Tracy system as well um now so that has to be hashed out there is a tax uh tax uh but uh impact that has to be hashed out um there are details around the withdrawal of certain subsidies that have to be hashed out so there's still a lot on the agenda but this is the crucial week if there is no agreement uh by this week um already uh the oil and fuel industry had said last week um that they have not been able to open new letters of credit to import fuel because banks are refusing to honor that commitment uh which means that Pakistan roughly has two weeks worth of uh excess supplies of fuel um so if there's no agreement this week uh by next week you will begin to see fuel shortages in Pakistan as I said the supply chain already has been significantly distorted Toyota others have shut down production um and so if we do not have a positive uh sort of communication on the agreement by February 9th um all terrible can break loose in Pakistan and my final question I can't escape this question in India Pakistan uh conversation sadly but how important is trade with India we've seen some sort of comments about this saying you know it's time to just put Kashmir to one side for now and if we can buy cheap Tomatoes then buy cheap Tomatoes or whatever whatever else is that a small part of the puzzle a big part of the puzzle can you give us a sense of what this actually means look I think this is again basic uh economic common sense right that no countries or no regions in the world can Thrive and and become developed without integrating with each other um and might use the same between India and Pakistan India is a huge economy uh has significant uh production capabilities and capital that can be you know have a positive impact on Pakistan um and we need to move toward normalizing trade um there were a couple of at least two opportunities in the recent past that I think were let go of unfortunately uh at the cost of the people of India and Pakistan because politics came in the way and I think in Pakistan there is a broader sentiment uh growing um that why not trade with India why not allow the flow of goods and people uh and normalize things and yes Kashmir is a distribute and Kashmir can be talked about and should be talked about uh but you know China does trade with Taiwan uh even though it doesn't recognize Taiwan right so it's a Chinese can do it if the Saudis can do it with Israel and the amaratis can do it with Israel why not India and Pakistan and I think it would broadly benefit uh the people of both countries especially Pakistan but I think I would also add that this is this is not just the only thing that will solve Pakistan's problems Pakistan's problems first need to be solved by restructuring its own economy and taking the resources that are currently handed out to the few um take them away and give them to the many because without that we will continue going down this cycle of IMF programs time and time again so thank you user I mean my takeaway as an Indian looking at this crisis next door is of course to worry about what happens Pakistan uh all said and done a very large country uh and whatever happens there will have consequences whether it's economically integrated or not with India uh but also as a cautionary tale because uh you know the fascinating part of this story is how often politicians put off uh giving the bitter pill to their voters only for those problems to build up and build up and build up and and I think there's a cautionary tale there we've seen countries from Sri Lanka to Myanmar to Pakistan now sort of end up down this trajectory and probably voter citizens should be paying a lot more attention to this uh much as I might deeply resent paying my taxes there's probably a reason I should be doing so for the good of my kids and my community uh so thank you very very much for joining us I know it's a unearthly and early hour of the morning for you but thank you and we look forward to having you back on process whenever you can make the time uh thank you no would would love to come back on and again thank you thank you for having me on [Music]

Channel: ThePrint

Views: 109,563

Keywords: theprint, shekhar gupta, ThePrint, ThePrint news, ThePrint videos, ThePrint Hindi, Pakistan economic crisis, Pakistan's elite and economy, Pakistan's current crisis, Pakistan and IMF

Id: bzWJ_yO7Yi0

Length: 29min 28sec (1768 seconds)

Published: Wed Feb 08 2023