Chats With Folks

Pakistan has witnessed a steep decline in its currency reserves over the last two years, maybe the steepest in its post-partition history. If there is one overarching trigger or issue that is at the heart of these symptoms of national decline, it is that ‘there isn’t enough money’.

Short-Term Fixes and Long-Term Money Planning

There seems to be a nationwide worry about how serious a problem this is. But even now, at every step of the way, the Pakistani authorities are consistently seeking to fix the problem by doing the easier (and more unsustainable) things.

Many parts of our country’s life often involve avoiding problems and not thinking about the future.

The finance minister has explained that ‘there isn’t enough money’ problem in detail over the last several weeks. The government is trying to build on his important work to elaborate on the challenge and implement solutions for these issues.

Rupees and Dollars for Pakistan’s Prosperity

There isn’t enough money for the country to grow and prosper.

But there are two kinds of money Pakistan and especially the Pakistani government needs, which are rupees and dollars.

The government needs money to pay its bills here at home – the biggest component of these bills are the debt servicing on loans the government takes from banks here at home, in Pakistan, and the salaries and pensions that the government pays to public-sector employees (including at many totally dysfunctional organizations).

Urgent Need for Foreign Reserves

The government needs foreign reserves to pay its bills both here at home and abroad – the biggest component of these bills is the debt servicing on loans the government takes from other countries, from multilateral organizations like the IMF, from banks like the World Bank, and from investors that buy Pakistani bonds.

But Pakistan also has other kinds of dollar-denominated bills – like the fuel it needs to run its power plants, the gasoline, and diesel it needs to run cars and buses, the weapons Pakistan needs for safety, the machinery and electronics that it needs to buy to keep factories and power plants functional, and the raw materials and value-added inputs that help those factories manufacture what Pakistanis consume every day.

This is a classic example of how the biases end up ruining the very foundation of the understanding of the key problem and as a result end up manufacturing half-solutions or solutions to second-order problems.

Addressing Imbalances

We see this problem at every step of the diagnosis.

The focus on the dollar problem is fine if it were to be accompanied by a focus on the rupee problem, but there is a massive imbalance in the problem identification process and so the solutions themselves are completely imbalanced.

Illusion of Infinite Money

It isn’t that the wrong problems are being identified or that the wrong solutions to those problems are being pursued – whether it is putting the foreign exchange smugglers on notice and rationalizing the rupee to dollar rate, or trying to establish bodies like the Special Investment Facilitation Council (SIFC) to create transactions in which Pakistan receives dollars from buyers of its assets.

These are fine solutions, for the time being, to real problems. But they are not the most urgent or even the most cancerous problems within the ‘there isn’t enough money’ crisis.

The power to print more money allows them to avoid the real world. In the real world, when you run out of money, you either find more money, or you stop spending money, or a little bit of both. But here it’s not the case.

Balancing Act

Very few countries do this in the most just or egalitarian way, but most stable and prosperous countries have done enough and keep doing enough to keep their systems from falling apart, by not printing huge amounts of money.

Pakistan’s own data shows that the government revenue to GDP ratio last fiscal year was 11.4 percent. The government expenditure to GDP ratio for the same year was 19.1 percent. This 7.7 percent of GDP gap is not small.

It is Rs6.5 trillion. It seems the government also borrowed domestically to repay some of the external loans (around Rs680 billion, or around $2.26 billion). These are insane numbers because of the huge gaps they represent.