ASK anyone familiar with economic matters what is the basic problem with Pakistan’s economy and they will say it’s the current account deficit. And that would be the correct answer. The boom-and-bust cycle of our economy is precisely because we run into a current account deficit every time we try to achieve growth. (The fact that we remain poor is due to our low productivity, but that’s a separate discussion.)

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Current account deficit is the difference between foreign exchange going out (imports) and foreign exchange coming in (exports plus remittances). In Pakistan’s case we have always had current account deficits (except for three out of 75 years), meaning that we have always had less to sell to foreigners than our propensity to consume their products. Of course, such an arrangement is not sustainable forever, and we have reached a stage where it is not.

There was a time in the 1950s when Pakistan’s exports were more than South Korea’s and a time in the 1990s when our exports were more than Vietnam’s. Today, South Korea’s and Vietnam’s exports are 18 times and six times more than Pakistan’s respectively. So the story of our relative decline is both old and consistent. However, it has taken on a sharper edge in this century.

The default risk won’t vanish even after the December bonds are paid off.

When Gen Pervez Musharraf imposed martial law in 1999, our exports were 16 per cent of GDP. When General Sahib at long last left, our exports had decreased to 12pc of GDP. In 2007-08 the government kept the rupee propped up to an unsustainable value of about Rs60 to a dollar, sold petrol at a loss, and ran the highest current account deficit in our history. (We aren’t particularly innovative in our policy errors; as you will see below — even our mistakes are recycled.) When the new PPP government came, it had to devalue the rupee and run to the IMF. Although there wasn’t much that was stellar about its governance except for the Benazir Income Support Programme, the PPP should get the credit that it increased exports to 13.5pc of GDP. Next came the PML-N and whereas it did solid work in building energy and transport infrastructure and ushering in CPEC, our exports declined by a debilitating 38pc to only 8.5pc of GDP and we ran the second-largest current account deficit in our history. Again, the issue was a currency pegged to a dollar that highly subsidised imports and made them surge even as our exports were getting priced out.

We tried to make amends in the five months I worked as Shahid Khaqan Abbasi’s finance minister through devaluation but the solution lay in the IMF, which could only happen after a new government was formed post-elections. In the event, the incoming PTI government dithered for a while before agreeing to a new IMF programme.

With the advent of the coronavirus pandemic, which the PTI government handled quite well, IMF conditionalities were lifted even as loans kept coming. This allowed it to spend borrowed money without raising tax revenues. The push for unsustainable growth turbo-charged our imports and with export-to-GDP remaining almost stagnant we ran into the third-largest current account deficit in our history. Although in December last year, the PTI government had restarted the much-needed IMF programme, in February, faced with a vote of no-confidence, it opted to sacrifice the national interest for political interest and scuttled the IMF programme, giving unfunded subsidies for electricity and petrol, and another amnesty to business. It was this breaking of the IMF agreement that set in motion the upward trend in our default risk.

When the new government came, we did what we had to do to renew the IMF programme and avoid default. This obviously involved some hard choices and I was relentlessly criticised from all sides. The main criticisms were about our letting the markets decide the rupee-dollar parity, increasing fuel prices and raising taxes.

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We would’ve been happy if the dollar had organically depreciated, but I wasn’t in favour of either, spending money or issuing administrative fiats to keep the dollar at a certain rate. I don’t know what is the optimal rate of the dollar; I think only the market can determine that. Last year, our imports were $80 billion and exports only $31bn. Surely the number one priority of the finance minister should not be to make imports cheaper and export harder, which is what an appreciated rupee does. We have been down this road before in 2007-8 and 2017-/18, without any joy. (A complaint that Western countries had in the 1990s was China keeping its currency depreciated to promote its exports. We, on the other hand, like to promote imports and restrict exports and remittances by keeping the rupee overvalued and then complain when we run out of dollars.)

Today, there is a large and persistent difference between the open market and the interbank exchange rates. This suggests that the State Bank is informally guiding banks on the exchange rate. The large difference is also detrimental to our exports and remittances and is encouraging imports.

The other criticisms were increasing the price of fuel and imposing new taxes. But should our government be selling petrol at a loss? Moreover, if there are 2.2 million shops in Pakistan and only 30,000 pay income tax, is it not fair to ask them to pay just Rs3,000 per month?

Today, our default risk has climbed up again and reached dangerous levels. This risk won’t vanish even after the December bonds are paid off. At the risk of sounding an alarm, I have to say that we have no room left for error. Concrete measures that reassure markets and lenders are urgently needed.

There comes a time when the national interest must prevail over political interest. This is that time. This government will have no right to criticise PTI or anyone else if, having eagerly decided to come in power, it is unable to do what is right for the country.

The writer is a former finance minister.

Published in Dawn, November 27th, 2022