There is an IMF standby agreement, but what next?

Solving our balance of payments challenge

$4.4 billion. Pakistan’s foreign reserves with the SBP at the end of June. Equal to less than four weeks of our import bill. Our balance of payments challenge may be our most difficult economic problem to fix.

For the layman, this is basically the difference between the outflows and the inflows of foreign exchange from the country. It is critical because almost all international payments require foreign currency, mostly US dollars. Outflows include things like import payments, foreign loan repayments, and other capital going out of the country. Inflows include things like proceeds from exports, remittances of overseas Pakistanis, foreign direct investment, and loans taken.

Whenever we have a balance of payments deficit, as we almost always do, the deficit is financed by burning existing foreign exchange reserves. When we embark on spurts of growth, the deficit has been as high as $2 billion a month. So, when reserves deplete to as low as four weeks of import cover, as they have every few years (from immediate memory, 1999-2000; 2007-8; 2013; 2017-18; and now) we get to the brink of default; that is, at risk of not being able to honour due international payments. The consequences of default would make the current economic pain we are going through seem trivial.

Our solution; beg the IMF and our friends for an injection of dollars; simply put, fresh loans. We have done this again, and again, and again. 24 IMF programmes to be exact. Einstein says that insanity is trying the same thing repeatedly and expecting different results. Well, we seem not to agree! Going to the IMF is not the issue; continuing to not execute either the IMF’s reform prescriptions, or to have any better ideas ourselves – is what is shameful. It is almost as if we have reconciled ourselves to a state of economic mediocrity, that we will talk about till death, but do nothing about.

Pakistan has so much more potential than what we’ve achieved, and truth be told, we cannot blame anyone but ourselves for our economic woes. Politicians, bureaucrats, the judiciary, and all others who have ruled this country have either played a direct part in creating this crisis, or at a minimum, resisted reform. The media, barring exceptions, has also played into populist, uninformed narratives, making reform that much more difficult.

The good news: things don’t need to be like this. Pakistan can be economically much more resilient. It can be a powerhouse. But it will take years of sustained work. And it will take an attitude of not shying away from difficult reforms, much of which will not be popular and may be misunderstood. To date, that process has not begun in earnest.

Having spent my time in government primarily at the provincial level, this is an area where there are people much more qualified than I am to comment, but just a few thoughts from my experiences from the ground.

Imports are not the issue they are made out to be

Whenever there is talk of our forex challenge, our import bill gets all the heat. “Let’s use less fuel, it’s all imported.” “Close all the markets at 8 PM to save electricity and forex”. “Ban all luxury items.” With time on hand these days, I looked at our import bill in detail. At $70 billion, it is roughly equal to 20% of GDP. Bangladesh is similar. For India, imports are 26% of GDP (around $600 billion). The world average is 30%, and the EU is at 55%. Even in terms of the absolute value of our imports, we rank 50th globally, lower than where we are placed in GDP (ranked in the 40s).

According to 2021 data, energy imports are around $20 billion, or only around 27% of Pakistan’s import bill. Remember, Pakistan has amongst the lowest per capita consumption of energy globally; we rank 167th globally with 29 vehicles per 1000 people; 164th in electricity consumption per capita – just behind Laos, and just ahead of Cambodia, Zimbabwe, and North Korea. Other large categories of imports; electrical and electronic equipment; machinery; iron and steel; pharmaceuticals; edible oil; vehicle related imports; plastics and organic chemicals; together account for another 46%; no one category accounts for more than 8% or $6 billion. Everything else is minor in value. Contrary to our belief, this is not a market that consumes a lot. We don’t really import that much.

Or at least, suppressing imports is not the silver bullet required to fix our balance of payments challenge. You could argue that whenever we get our economy on track sustainably, imports will grow, they must grow, as a percentage of GDP and in absolute terms. We will consume more fuel, more electricity, and need more machinery and more raw materials. But in parallel, this must happen with greater investment in an economy with the capacity to export more.

Stifling imports doesn’t work. This PDM government has tried it the entire past year. Implications: to completely stifle economic and industrial activity, and lose the export momentum built in 2021-22, after a decade. This is other than the rent seeking opportunities created by choking imports at Karachi port and giving babus the discretion to decide who will be allowed to import into the country and who won’t.

Of course, this is not to say that we should be turning a blind eye to our imports. Controlling the exchange rate, as Ishaq Dar did through 2013-17 and this past year, an import subsidy has been given to everyone, specifically the rich, and demand artificially inflated. A market determined exchange rate would itself regulate demand. We need to look at the structure of our imports also, rather than just the quantum. It is dominated by finished or near finished goods. Or looked at differently, our import basket doesn’t result in the sort of value addition that other countries achieve; nor in exciting the world to invest in Pakistan.

The answer lies elsewhere. Think about it. Why do Bangladesh’s exports total $50 billion today, twice what we export. With an apparel industry are we not better placed to develop? Why is it that Vietnam, decimated by war till the late-1970s, had exports equal to Pakistan of $10 billion in 1996, but today has exports of $340 billion? Why is it that Pakistan, the 5th largest market in the world, attracts foreign direct investment of just over $1 billion per year; 84th globally, below Ethiopia, Congo, Belarus, Gabon, Turkmenistan, Bangladesh, and Cote D’Ivoire.

Cracking these questions holds the key to solving our balance of payments challenge.

The Exports and FDI challenge

Consider three numbers:

  • Exports: $28 billion (down $4 billion from PTI’s last year in government)
  • Remittances: $27 billion (down $4 billion from PTI’s last year in government)
  • FDI: $1.3 billion (down 22% versus PTI’s last year in government)

Now remember Vietnam’s export numbers. $340 billion.

Since we need to finance imports of $70 billion plus debt repayment of over $20 plus billion every year for the next three years, the three numbers above mean that we face a balance of payments crisis like never before. Clearly, if our economy performs to its potential, a market the size of Pakistan should be much more attractive to investors. It should also be able to produce and export more. The problem; our economy has never developed in the way it could have.

Growth in FDI and exports is key to solving Pakistan’s balance of payments challenge in the medium and longer term. The issues and solutions involved in solving both issues are similar; and tied to the state and structure of our economy. The challenges and what needs to be done have been written about, talked about, and discussed extensively. There are manifestos, plans, studies, policies, papers upon papers, all saying good things. Result? Very little change.

Here are a few of the important challenges and actions, and the state of the union on each:

  1. Political stability and continuity of policy is key to building private sector and investor
    confidence, yet this has never happened and remains elusive today.
  2. The right tax policy and incentives will encourage FDI and exports. This will also help create a level playing field, encourage competition and innovation. Yet our tax policy and implementation do the exact opposite. By overtaxing the formal economy, we tend to consistently encourage informalization and discourage scale, ambition, and innovation. Investors shy away. Firms do not attain the size and scale necessary to develop the capabilities to compete and export in world markets. Money finds its route to the easiest investments there are – real estate for example.
  3. Ease of business efforts and  the cutting of cumbersome regulatory processes are critical to create a conducive business environment. While Pakistan moved up significantly in the Ease of Business rankings in the PTI government; we must be honest. There is still a long, long, long way to go. The amount of red tape businesses and investors face remains a huge challenge to solve.
  4. Providing a level playing field will encourage competition, drive innovation, develop export capacity, and make investment attraction easier. Yet, with our culture of red tape, privileged access, and rent seeking as a means of getting things done, most sectors don’t develop to scale and are dominated by a few players. All these factors act as barriers to competition, and privileged businesses exist by extracting reasonable profits in a protected local landscape. This, as much as anything else, stifles the ambition in these firms required to grow, and to export.
  1. Anchor investors from the corporate sector, facilitated by the government, can help to transform sectors, develop value addition capacity, improve product quality, and develop export potential. Yet the corporate sector is viewed with suspicion, over-taxed, over-regulated, and this last year, not even allowed to repatriate profits. Why would they invest in Pakistan?
  2. Quality infrastructure such as roads and reliable energy are basic building blocks required to make Pakistan a more competitive business destination. Yet, today, infrastructure remains such that we cannot even guarantee 24-7 energy availability, to businesses or to homes.
  3. Special Economic Zones can be used as islands of excellence where investors can be given one stop shop services; yet there is not a single special economic zone anywhere in Pakistan that we have got right and can show as an example to replicate.
  4. Access to finance is a critical issue, and while we have talked about this as an issue for ages, we have developed no viable solutions.
  5. Our Boards of Investment can work as dynamic organizations that facilitate investors, resolve issues, cut through red tape, and help build a vibrant “Brand Pakistan”. Yet, like every other public sector entity, each of our boards of investment have been bureaucratized.
  6. A robust legal framework can give investors the confidence and protection they need with their money. Yet, whether it is our courts, or government after government, we have a track record of scaring investors away from investing in the country.

This is not an exhaustive list. There are other challenges; the impact of the exchange rate manipulation on businesses; the importance of labor productivity, and the poor state of our universities and technical and vocational training; to name a few. The longer we have not solved these problems, the more complex they have become to solve. They are not solvable in a day.

But what should be clear is that in increasing exports and attracting FDI, there can be no shortcuts. We need businesses in the country and outside to develop confidence in Pakistan as a market. This needs to be based on some fundamentals of performance; consistent growth; good profits; and a favourable business environment. None of this can happen overnight. Building confidence is a function of time. What we can do though is to begin now, and with elections just around the corner, it can be the starting point for economic stability. This should be our India 1991 moment.

One fundamental question is to decide whether we believe the solutions to our problems lie in truly committing to an open market economy. I believe they do, and that fundamentally, the 250 million strong Pakistan market with its cheap, young labor should be attractive to the world. But we must stop fooling ourselves that the environment we live in today is welcoming to the private sector. It is not. Recognizing that reality is the first step to solving our problems. And given the state of the economy, there can be no bigger burning platform than now.

The reflection in the mirror

Many voices will agree with much of what has been stated above. It’s not rocket science. At any given time, those in government will always tell you we are making progress in all these areas to boost exports and investment. The billion-dollar question then; why then doesn’t that progress translate into results?

We must recognize that the reality on the ground may be very different to what is told to us. This may be worth illustrating with a few personal anecdotes.

In 2009-10, while working for a consulting firm, we were engaged by the Planning Commission precisely to tackle the question of increasing exports and FDI. I was personally looking at the opportunity in the horticulture sector and visited Fruit Logistica, the world’s largest fresh produce show. In discussions with the three largest players in the sector, all told me that they would be very interested in investing in Pakistan. This, despite the risks of the war on terror, at its peak then. But they questioned why it was me, a consultant talking to them, rather than the government, through its words and actions, showing them that the investment was worth it. The horticulture export opportunity was sized at more than a billion dollars incrementally back in 2009-10. Thirteen years later, the latest fruit and vegetable export strategy shows that Pakistan’s exports remain stagnant, the problems remain the same, as does the prescription. Nothing has moved.

This article talked earlier of creating “Brand Pakistan” to market our exports better. At the same fair in 2010, it was very interesting to see the Pakistan stall and compare it to others. The stall advertised Pakistani citrus and mango, but the mangoes on display were not even Pakistani mangoes. Most of the time, the poorly lit stall wasn’t staffed. By comparison, from India, to Morocco, to Mexico, countries aspiring for a footprint in the food export market had spent money, and their work on branding was more than visible. Pakistan got this right at Expo 2020 in Dubai, but to build a country brand, we need to do this consistently.

We also looked at the pharmaceutical sector then. Given low labor costs and the large domestic market, the pharmaceutical industry in Pakistan should be importing less, while being a great potential source of increased export revenue. But just consider, when an industry is not allowed to recover the cost of manufacturing Panadol, as happened a few months ago, why would it invest in Pakistan to the extent that it develops export capabilities, or to serve more local market needs with domestic manufacturing?

More recently, as minister, I remember engaging with the two large e-taxi companies in creating a legal framework that could regulate the sector but do so in a manner that incentivized them to invest and create jobs, while solving our urban mobility needs. Try as I might to explain to the government officials involved that the primary goal here was not raising revenue, the bureaucracy working on the draft legislation would bring it all back to high service tax rates, and draconian regulations that would only have made both companies pack up and leave the market. We fixed the issue, but it dawned on me how dealing with the government for the corporate sector was a complete nightmare.

Once, a hotel developer bringing an international chain to KP came to me for help. The authorities were telling him he couldn’t build the hotel where he wanted because it was forest land. There were no answers to the question as to how a hotel had existed at the exact same spot for half a century, or why the relevant department had not objected when it was part of the decision-making process in conceiving the project. An identical case recurred with a chair-lift developer.

Another time, I talked to another hotel developer who had expanded to 16 properties in the country, to gauge his interest in leasing properties in the public sector. His reply was very interesting. He said he stayed miles from any government engagement, and that that was the key to his success. He had no confidence in the government being consistent in its policies.

There are examples upon examples I can quote. The above examples serve as enough of a look in the mirror. The reflection isn’t pretty. The irony is, I feel we did a decent job at KP, in trying to overcome some of these challenges. But this didn’t seem to make dealing with the government much easier. Imagine how much more we could do if the government administration were embracing a culture of encouraging the private sector to invest in Pakistan?

Our commitment to a market economy cannot just be on paper, or in political statements, but continuously in action after action, over time.

Manpower: Our best export

We do have one success story. Pakistanis abroad.

While we bemoan, with some justification, the exodus of people from Pakistan, remember that overseas Pakistanis, white or blue collar, remain an asset. Pakistan’s corporate sector is so small, migrating abroad allows middle class professional Pakistanis opportunities to thrive in a competitive, merit-based job market and improves their quality of life. Life abroad also gives blue collar workers and labourers the opportunity to support their families back home. Pakistan has the 3rd largest diaspora in the world, and they are an asset. Witness the economic impact back home of millions of Pashtuns in the GCC. If you take out the $30 billion overseas Pakistanis remit back home, Pakistan does not stay solvent. It is overseas Pakistanis that save this country from default.

The next time some of you visit Dubai, or anywhere in the GCC, do notice how few Pakistanis you will see behind a counter at a Starbucks, or at a hotel reception. Note how so many jobs where a slightly more advanced skill level is required, you will see Indians, Filipinos, and Sri Lankans, but almost no Pakistanis. And therein lies an opportunity for us. If we can upskill people wanting to gain employment abroad even in basic professions; as drivers; nurses; gardeners; retail and hospitality staff; by teaching them better language skills, and better professional values; these Pakistanis will start to command better jobs and better pay in the job market; and this will result in increased remittances. In my pre-political career, we helped the Punjab Skill Development Fund do exactly this, by creating partnerships between employers, training providers and trainees, in the hospitality industry in the gulf. The question is, are we willing to dismantle our archaic TEVTA based vocational education system and adapt it to the needs of the private sector to achieve these aims?

Certainly, a focus on utilizing and upskilling our overseas Pakistani community is better than their illegal migration through touts, with occasional tragedies such as happened off the Greek coast. 


Our balance of payments crisis may have no pain-free or easy solution, but all the fixes discussed are doable. India, China, Vietnam, Morocco, Singapore, Korea, all these countries have their economic transformation stories. Why can’t Pakistan have its own?

The choice is ours. We can be perennially stuck in cycles of foreign exchange shortages and five-year export and investment policies we don’t intend to execute. Or we can commit to an open market economy, a lean government without the red tape and hostility towards the private sector of today, and reforms that continue through electoral cycles; and reap the dividends.

Pakistan is a real economy, with a resource base, and talent. There is no reason we cannot make a country of 250 million, the 5th largest globally, an attractive investment destination for the world.

Taimur Khan Jhagra
Taimur Khan Jhagra
The writer is former Finance Minister KP


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  2. While we bemoan, with some justification, the exodus of people from Pakistan, remember that overseas Pakistanis, white or blue collar, remain an asset. Pakistan’s corporate sector is so small, migrating abroad allows middle class professional Pakistanis opportunities to thrive in a competitive, merit-based job market and improves their quality of life. Life abroad also gives blue collar workers and labourers the opportunity to support their families back home. Pakistan has the 3rd largest diaspora in the world, and they are an asset.

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