Nothing was ready for the war that everyone expected!

The time is long gone where small countries like Pakistan could survive by being allies, it is time to be a contender.

Pakistan seems to be in a similar state as Russia was in the 1800s, that is “with no plan of action” while facing an inevitable war. The country seems to be in a busy circus merry-go-round where from a distance it seems that everyone is very active doing ‘things’, yet no one is doing anything and that too for a long period of time now. The wounds that were once bleeding the country have become incurable cancers, yet the response by our successive policymakers seem to have been extracted from a book of fiction. Is this a result of general degradation of human resource capabilities, skewed power structures, or being completely oblivious to the nature of the problems? Rather than giving an opinion, I let the reader self-infer this—yet all three factors are strongly relevant.

The number of issues facing the country are numerous and spread across domains of economy, social development, poverty, law and order, political instability, and others. Instead of filling the space writing a few general lines on each problem and depicting ChatGPT skills, I take the approach of discussing two examples. There is hardly anyone in Pakistan who will dispute the reliance of the economy on textile and the garments sector. The sector represents 60 per cent of the exports and 8.5 per cent of the GDP. The value-added segment of the sector was recently called to the US for a trade hearing. In addition to Pakistan, regional comparator countries also participated. The main question asked during the hearing was about the quantum of Chinese inputs and Chinese investments in their textile export value chains. Pakistan ranked the best in the lot as it had no Chinese investment or input in its existing value chain—barring small plastic caps on yarn spindles. The offering by the US was simple: US is going to shift its textile garment purchase from China, which at present is over $45 billion per year, to a country that has no Chinese footprint in the value chain. This is music to Pakistani exporters, being the only country qualifying the criterion.

However, this music can just be a bit too loud to handle. China is a clear strategic partner of Pakistan and has made substantial investments under CPEC and has advanced huge loans (payback of which is to start from FY 2024-25). The only reason we have not yet had Chinese private investment in our textile and garments value chain is because they found the environment not conducive and instead preferred Bangladesh, Vietnam, Myanmar, and India. Is the government prepared for a policy response or shall I say selection of preference—we need exports to pay our debts, but we need to maintain a strong relationship with China to keep it easy on loan repayments and rolling over deposits. What if China offers some immediate flow of dollars to ease our pressure, will we give up a huge perpetual market that will bring a lot more? The opportunity is contingent as the US consumers are not going to wait to buy their products. This is a clear question that the country’s industrial, trade, investment, foreign policy need to answer in an integrated manner.

The old school medicine of ‘classic trade economists’ vehemently pushing for a zero-tariff regime is not an option available in the current geopolitical environment. The policymakers need to understand that the aforementioned is not just one occurrence but is the new world order where developed countries in the name of climate, national security, and building resilient value chains are offering incentives for inward investment and industrialization.

The EU Green Deal, China’s over capacity investment in green technologies, US erecting tariffs and restricting outside investments are just the start of the new era of global economic restructuring. What will our policymakers do—work on the usually myopic view or use the opportunity to really negotiate a better space? The times are long gone where small countries like Pakistan could survive by being allies, it is time to be a contender. One wonders whether our policymakers appreciate the conundrum and the likely impact about to hit us.

The other headline issue scaring the ‘so many in number’ Pakistanis is the risk of sovereign default. The position of Pakistan remains weak no doubt with State Bank’s reserves hovering just under $10 billion for the last several months. However, is this the only debt issue that is critical for the government. It seems all the focus of governments main machinery is saving the external default and the essentiality of the IMF Programme. The programme is required, is an inevitable choice and is fully supported, but what is the government doing about the underlying messages in the IMF plan? There seems to be reluctance or ignorance to address the statistic that 70 per cent of taxpayers’ money is feeding an extremely inefficient banking system. Just to give the reader an idea about the quantum of the amount, it is roughly more than $25 billion a year, which is more than twice the country’s forex reserves and roughly the size of Chinese debt we need to repay every year for the next five years.

In a year when the large-scale manufacturers posted negative growth, Pakistani banks recorded double digit growth of revenue and profits—some have growth as high as 50 per cent in their net interest income. The other anomaly is with global trends where the traditional commercial banks are on the squeeze because of digital currency and services taking over. The old model of expanding business by scale expansion of branches (more physical branches) is no longer an advantage. However, given the comfortable earnings of banks through double digit interest spreads on major part of their portfolio, with loans to government as advances and position in government debt as investments being roughly 70 per cent of the portfolio, while majority of deposit base (close to 50 per cent) remaining in current accounts, has led to banks marketing services like a ‘free cheque book’ as a premier service. To avoid the risk of diverging away from my argument, I plan to write about the inefficient yet profitable banking of Pakistan in another piece.

However, coming back to the issue of fiscal space, will a prime minister in power who is known for his meticulous delivery of mega projects uplifting Punjab be able to find the money to do so in his new role? It looks challenging if the exchequer continues to pay 70 per cent or more of the tax revenue to the inefficient banks who are just producing deposit grabbing marketers with no real skill. It is a positive sign that Prime Minister Shehbaz Sharif has selected a top banker as the finance minister, as that may indicate that the premier understands where the problem is. Only time will tell if the agenda of the greater common good supersedes that of feeding billions to incomes of a few top bank executives. Will the finance minister leverage his banking skills to negotiate a better deal for the country or will the status continue to resonate the title of this blog?