The conundrum

By Khurram Husain
Published in Dawn on September 21, 2023

A SERIOUS conundrum has arisen for the economy. It cannot afford to grow, and at the same time, it cannot lie in the doldrums for very long either. There is no clear answer about how to get out of this situation, hence the choice of the word ‘conundrum’.

The most tempting path forward is to do whatever it takes to arrange for another multibillion-dollar bailout from abroad. But all this will do is postpone the inevitable reckoning by a few more years, and make the eventual adjustment that much more painful. In fact, we are in this situation because we have been postponing the inevitable rather than actually working to resolve the underlying weaknesses in the economy that keep bringing us to this pass.

There are two critical underlying weaknesses that are at play here. One is the progressive erosion of productivity versus our trade partners, and the other is fiscal. Productivity loss means our economy is increasingly unable to fetch dollars in quantities sufficient to pay for its own import requirements. The fiscal dysfunction means the state is increasingly unable to fetch the revenue required to pay for its own expenditures.

Over the years, successive governments have opted to finance these dysfunctions through borrowing or printing rupees, driving the country into a downward debt spiral. As a result, in the year 2019, debt service expenditures surpassed net federal revenues of the government, meaning all other expenditures had to be met by borrowing.

For a couple of years following 2019, these debt service expenditures came down, but that was only because interest rates were pushed down to an unsustainably low level in the aftermath of Covid-19, and kept at that level for far longer than they should have been. When interest rates had to revert to where they were supposed to be, reality reasserted itself once again.

There is no way to pump growth anymore. If a foreign bailout arrives against some sort of asset transfer, as is being envisaged under the so-called Special Investment Facilitation Council initiative, it will provide little more than a fleeting, short-term and very temporary boost. Once those dollars are consumed, it will leave behind an even larger debt overhang, and even heavier outflow obligations to meet.

We have been postponing the inevitable rather than working to resolve the underlying weaknesses in the economy.

At the same time, the economy cannot be left moribund amid high inflation and unemployment for too long. If pumping growth aggravates the underlying economic pressures the economy is trying to absorb currently, then leaving growth to languish exacerbates the underlying social pressures that are increasingly taking us towards some sort of detonation point that nobody wants to try and envisage. This is the conundrum, and there are no convincing answers as to how to go about addressing it.

There is a search on for rapid, quick-fix solutions. Some are arguing that rolling back the NFC award can help claw back some of the fiscal space that had been ceded to the provinces, and help stabilise federal government finances for the time being. Others are suggesting rolling back corporate tax exemptions that according to some estimates, total more than a trillion rupees. Another suggestion is to pile on the pressure on the common citizenry by extracting these taxes from energy imports (primarily fuel) for the short term, in order to lay the groundwork for later growth.

None of these are convincing. Rolling back the NFC award will require decimating our Constitution, a document that is already in tatters. It will alienate the provinces and weaken the federation. It can at best fetch up to Rs1tr at the absolute upper limit (assuming provincial allocations are rolled back to where they were in 2006).

That will seem significant in the short term, but it is a one-off action and the underlying dysfunction will reappear in one, or at the most two, fiscal years. Rolling back tax exemptions will throttle what little private sector dynamism there is left in the economy, and aggravate unemployment, and eventually hit the point of diminishing returns as corporate incomes fall under a rising tax burden. Burdening the populace further is no longer an option. They are already burdened far beyond their capacity.

The space is now ripe for another narrative to emerge which is powerfully persuasive, finds traction among the people, and sounds seductively simple and is easy to act on for the rulers. This narrative will say that we are in our present mess because we deviated from divine commandments and entered into interest-bearing relations with our creditors.

It will point out that last fiscal year, the federal government paid three quarters of its total tax collected as interest payments. It will ask the people ‘did these rulers ask you before taking these loans?’ And when they answer in the negative, it will say ‘then why are they asking you to shoulder this burden by depriving your children of yet another meal?’

It will be very hard to build the argument that people ought to bear more sacrifices just so that the government’s covenant with its creditors can be upheld. What about the rulers’ covenant with the citizenry as contained in the Constitution? If that is so easy to discard and little more than a “piece of paper” in the famous words of Gen Musharraf, why is the covenant with the creditors so important that millions must be pushed into poverty so it can be upheld? These questions can gain traction under the conditions created by the conundrum, and there will be no convincing answer.

It is critical that right thinking is applied in the search for the country’s path to the future. Trust is the most vital pillar upon which power stands, and if remaining in power means cannibalising trust, then legitimacy is eroded. And there are few things that prove more costly than the damage left behind by illegitimate rulers.

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