According to the Austrian school, economic growth is linked with periods within a time cycle where capital expenditure is planned for economic activity.

The spread between the US Treasury two-year and five-year bonds indicates investor sentiment on economic circumstances and its inversion is a key indicator to determine a recessionary phase. That sign surfaced in the last quarter of 2022, post which there was high inflation, increasing interest rates for major central banks, dollar index peaking and falling oil prices, marking a period of declining economic activity globally.

Given how international economic circumstances are, growth through capital expenditure is not a possibility until the circumstances allow them. The internal political chaos adds to the complexity of the challenge, placing Pakistan at a point that could be declared a ‘red alert’ for its economy and for it to move forward both local and international factors need to align, which hasn’t been a likely scenario over the last year, nor does it seem possible for the next one.

As the country moves forward on its current trajectory, its total public debt and liabilities are estimated to be about Rs63.279 trillion, which is 89 per cent of GDP and is ranked 67th out of 125 countries in terms of the growing deficit between demand and supply of infrastructure requirement, placing it in the bottom 20 out of 144 economies on global competitiveness.

Having a state-owned fund that trades based on global macroeconomic trends could assist the country in navigating uncertain times

This formulates an important question: what can the country do to address the growing infrastructure requirement and increasing debt servicing cost while its economic output is declining? Energy, water scarcity, inadequate health facilities, outdated rail network and public transportation, are key areas which require investment to increase the standard of living for the masses.

There is a realisation and acceptance in society with key corporate leaders emphasising an increase in development funds in the annual budget and private investor participation, but it does not present a solution or a road map to addressing this challenge when the country is failing to meet its current expenditure.

There are factors inherent in both infrastructure project financing and the domestic capital markets that hinder private participation. The very nature of infrastructure project financing is challenging since funding is required for long tenors and cash flows only start to materialise after a certain time.

In the past, guarantees given while soliciting investment have not been fully adhered to, which naturally results in an unwillingness to lend, especially given the limited recourse the investors have under the current legal and political framework. This poses a concern regarding private sector funding as an approach, with investor sentiment shaped by the political and economic context of the country.

Countries that have modern infrastructure and have delivered a high standard of living for their citizens, in regions such as the Middle East, Europe and Asia, have sovereign wealth funds that are part of their funding sources.

Trading of gold exchange-traded funds can generate an absolute return in the 60-64 per cent range and a five-year annualised average return of 12.4pc, an allocation that the government can make through a state-owned fund. In Pakistan, we rely on foreign aid, prefer to sell country-owned assets and engage in loan agreements that further increase the current account deficit.

Norway, Finland, UAE, and Saudi Arabia all have state-owned funds. India founded a state-owned wealth fund in 2015 that manages $4.4 billion in assets — roughly the size of the entire holdings of the State Bank of Pakistan in the last quarter of 2022.

We must understand contemporary global developments through an international relations scope, a changing landscape, with Russia Ukraine war in its second year. Iran, Saudi and China’s alliances further substantiate a threat to the petrodollar system.

If we relate these developments to history, every 40 years, the culmination of a super cycle has led to the collapse of the monetary system, as the yield curve inversion reaches its deepest level since 1981.

First, the gold standard, then Breton Woods and now the fiat currency system prevalence is being questioned, with the rising influence of China and Russia. In the likelihood of such an event, Pakistan does not want to increase debt servicing costs where exploiting its relationships for further aid would be futile.

Having a state-owned fund that trades based on global macroeconomic trends could assist the country in navigating its course through uncertain times.

The writer is Director of Strategy & Planning at Megatech Trackers

Published in Dawn, The Business and Finance Weekly, March 27th, 2023