Pakistan needs a "Deus Ex Machina"*

Ashraf Jehangir Qazi in The Dawn

WHAT is happening to Pakistan? Anyone interested in the question knows the answer. Who is to blame? Opinions differ.

However, there is broad agreement on the cast of culprits: political leaders; political parties; political institutions; non-political institutions; the security and intelligence establishment and its institutions; the civil services; comprehensive corruption; the dysfunctional state of the economy caught in a permanent debt trap and outrageous inequality; complete external dependency and a consequent lack of policy independence; a general lack of education and a scientific outlook; the media contributing to an uninformed, partially informed and misinformed public opinion; the deliberate misuse of religious fervour to obscure the true teachings of our faith; an obsolete social structure preserved by a voracious and unaccountable power structure; a judiciary that demands but does not command universal respect; uncontrollable population growth; irreversible climate change; a forever threat of nuclear annihilation, a security environment that challenges rational resource allocations; palliatives presented as solutions, etc.

We are taught that one should neither hate nor act in anger. This is true as far as persons are concerned. But actions that deliberately undermine the welfare of a whole people can and must be hated. When they threaten the survival of a nation and render its dreams and aspirations impossible they must be confronted by the elemental force of rejection.

If, instead, political observers and commentators couch their opinions in euphemistic and safely coded language they become complicit in the perpetration of a national crime. They convey a pathetic message of resignation, surrender and betrayal. There comes a time when Faiz Ahmad Faiz has to give way to Habib Jalib. Either Quaid-i-Azam was much mistaken or we are all complicit in insulting his memory and murdering his legacy. We prefer, however, to slander the father of our country instead of becoming the citizens it required.

We are today, accordingly, reduced to being spectators of a daily goon or puppet show in the guise of a morality play — without any wit, humour or goodwill. There are no good guys in the unfolding drama of our national tragedy.

The Baloch are killed. Their killers are martyred. When one political character attributes unspeakable and unforgiveable crimes and misdemeanors to his rival we know he speaks the truth. When his rival returns the charges redoubled we know he too speaks the truth. They are of course transparent partners in a single, massive and lethal crime against the people and the country.

So what else is new? What should be new is the realisation that we who are aware and do nothing are just as guilty. If one can live with this realisation so be it. If not, we need to do what we can and without delay. The chances are we won’t. The chances are we have already lost our country. Unless…

Another wasted year of political posturing by rupee multibillionaires representing their victims beckons. While the US contemplates a climate emergency, Pakistan is beset by an existential emergency that commands no contemplation. All the challenges confronting Pakistan will be ignored. Technocratic servants of the elite will continue to spin fairy tales about stabilisation and progress invisible to the eye of the uninitiated. They will be well compensated for dressing their employers in the finery of their analyses and assessments. Other servants or experts will do much the same in their own spheres. The people must learn to eliminate the word ‘sarkar’ from their political dictionary if they are to stand any chance against the forces arrayed against them.

When a country’s ‘leadership’ fails to address fundamental existential issues at home it can have no external policy to speak of. The rest of the world sees this and refuses to take its foreign policy seriously, however well articulated and reasoned it may be. Pakistan has itself become a major stumbling block to the success of its principal foreign policy issue: a principled, peaceful and lasting settlement of the Kashmir dispute with India that is primarily and ascertainably acceptable to the Kashmiri people.

The Kashmiri people cannot defeat India although they have so far heroically denied it the victory it strives for. Pakistan cannot defeat India although its nuclear deterrence capability limits India’s military options. A diplomatic stalemate maximises the suffering of the Kashmiri people. The world is aware of India’s perfidy in Kashmir but is simply not inclined to back a failed or failing Pakistan against the gigantic market and strategic value of what will soon be the world’s most populous country. China, for obvious reasons will continue to back Pakistan against India, while increasingly worried about Pakistan’s inability to learn anything from the amazing experience of its most reliable friend.

The US sees Pakistan as a resentful puppet ruled by dependent elites who will do its bidding even it undermines the confidence of China in Pakistan’s resilience and strategic value.

In Afghanistan, Pakistan backs the Taliban which backs the TTP which perpetrated the massacre of schoolchildren and teachers in the Army Public School on Dec 16, 2014. The army today engages with the TTP, which is essentially a Pakistani branch party of the Afghan Taliban, while refusing to engage with the Pashtun Tahaffuz Movement of Manzoor Pashteen which is a Pakistani movement because of its protests against the bombing of Waziristan.

Pakistan has practically no support among the Afghan political intelligentsia, particularly the educated youth who are the future of the country. India has the field to itself.

These absurdities are the direct result of the state of the state in Pakistan. Unless this state of affairs is addressed, foreign policy, indeed all other aspects of national policy, will not be able to develop coherence and credibility. This is all too clear to political observers in Pakistan. But they are by and large easily resigned to the prospect that this state of affairs will not be addressed — and that they will themselves be complicit in this dereliction of duty, citizenship and patriotism. Unless we await a deus ex machina.

* Deus ex Machina - an unexpected power or event saving a seemingly hopeless situation, especially as a contrived plot device in a play or novel.

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The strange case of the cricket match that helped fund Imran Khan’s political rise

 Simon Clark in The FT 

At the height of his success, the Pakistani tycoon Arif Naqvi invited cricket superstar Imran Khan and hundreds of bankers, lawyers and investors to his walled country estate in the Oxfordshire village of Wootton for weekends of sport and drinking. The host was the founder of the Dubai-based Abraaj Group, then one of the largest private equity firms operating in emerging markets, with billions of dollars under management. 

At the “Wootton T20 Cup”, over which Naqvi presided from 2010 to 2012, the main event was a cricket tournament between teams with invented names: the Peshawar Perverts or the Faisalabad Fothermuckers. They played on an immaculate pitch amid 14 acres of formal gardens and parkland at Wootton Place, Naqvi’s 17th-century residence. Veteran cricket commentator Henry Blofeld attended along with expert umpires and film crews. 

“You can choose to play in order to impress or make a fool of yourself, or alternatively just to be an innocent bystander,” Naqvi wrote in an invitation to the event. The guests were asked to pay between £2,000 and £2,500 each to attend, with the money going to unspecified “philanthropic causes”, Naqvi said. 

It is the type of charity fundraiser repeated up and down the UK every summer. What makes it unusual is that the ultimate benefactor was a political party in Pakistan. The fees were paid to Wootton Cricket Ltd, which, despite the name, was in fact a Cayman Islands-incorporated company owned by Naqvi and the money was being used to bankroll Pakistan Tehreek-e-Insaf, Khan’s political party. Funds poured into Wootton Cricket from companies and individuals, including at least £2mn from a United Arab Emirates government minister who is also a member of the Abu Dhabi royal family. 

Pakistan forbids foreign nationals and companies from funding political parties, but Abraaj emails and internal documents seen by the Financial Times, including a bank statement covering the period between February 28 and May 30 2013 for a Wootton Cricket account in the UAE, show that both companies and foreign nationals as well as citizens of Pakistan sent millions of dollars to Wootton Cricket — before money was transferred from the account to Pakistan for the PTI. 

The funding of the party is at the centre of a years-long investigation by the Election Commission of Pakistan, an inquiry that has taken on even greater importance as Khan — who lost office in April — plots a political comeback. 

But back in 2013, Khan — a World Cup-winning cricket captain — was riding a wave of popular support and campaigning to upend Pakistan’s politics on an anti-corruption ticket. He presented himself to the electorate as a democratic reformer — born in Pakistan and with experience of living in the west — who could break the hold of the political family dynasties that had dominated the country for decades. 

Although Khan lost the 2013 general election to longtime rival Nawaz Sharif, his party became the third largest in the National Assembly. Naqvi’s star was also rising. His private equity firm was expanding and winning new investors. He became a regular fixture at World Economic Forum meetings in Davos. 

In July 2017, Pakistan’s Supreme Court removed Sharif from office over corruption allegations. Khan won the election in July 2018. As prime minister he became increasingly critical of the west, praising Afghanistan’s Taliban when US forces withdrew in 2021, and visiting Vladimir Putin in Moscow on the day Russian forces invaded Ukraine in February. 

The Election Commission of Pakistan has been investigating the funding of the PTI for more than seven years. In January, the ECP’s scrutiny committee issued a damning report in which it said the PTI received funding from foreign nationals and companies and accused it of under-reporting funds and concealing dozens of bank accounts. Wootton Cricket was named in the report, but Naqvi wasn’t identified as its owner. 

In April, Khan stood down after losing a parliamentary vote of no confidence, triggered in part by rising inflation. He has accused the US of orchestrating the vote and is now attempting to stage a political return to contest a general election due to take place by October 2023. 

That re-election effort means that although the Naqvi funding took place almost a decade ago, the controversy around it, and the final findings of the election commission, are likely to be at the forefront of Pakistan politics for some time. 

While it has previously been reported that Naqvi funded Khan’s party, the ultimate source of the money has never before been disclosed. Wootton Cricket’s bank statement shows it received $1.3mn on March 14 2013 from Abraaj Investment Management Ltd, the fund management unit of Naqvi’s private equity firm, boosting the account’s previous balance of $5,431. Later the same day, $1.3mn was transferred from the account directly to a PTI bank account in Pakistan. Abraaj expensed the cost to a holding company through which it controlled K-Electric, the power provider to Karachi, Pakistan’s largest city. 

A further $2mn flowed into the Wootton Cricket account in April 2013 from Sheikh Nahyan bin Mubarak al-Nahyan, a member of Abu Dhabi’s royal family, government minister and chair of Pakistan’s Bank Alfalah, according to the bank statement and a copy of the Swift transfer details. 

Naqvi then exchanged emails with a colleague about transferring $1.2mn more to the PTI. Six days after the $2mn arrived in the Wootton Cricket bank account, Naqvi transferred $1.2mn from it to Pakistan in two instalments. Rafique Lakhani, the senior Abraaj executive responsible for managing cash flow, wrote in an email to Naqvi that the transfers were intended for the PTI. Sheikh Nahyan didn’t respond to requests for comment. 

“Like other populists, Khan is made of Teflon,” says Uzair Younus, director of the Pakistan initiative at the Atlantic Council, a Washington-based research group. “But his opponents will try to use the foreign funding controversy to weaken the argument that he is not corrupt,” he adds, and to encourage the election commission to “punish him and his party”. 

A useful ally 

Naqvi, 62, was born into a Karachi business family. After studying at the London School of Economics he spent the 1990s working in Saudi Arabia and Dubai and started Abraaj in 2002, building it into an investment powerhouse. With offices in Dubai, London, New York and across Asia, Africa and Latin America, the company raised billions of dollars from the Bill & Melinda Gates Foundation, the US administration of Barack Obama, the British and French governments and other investors. 

Well-connected, Naqvi liked to impress. John Kerry — a speaker at one Abraaj event — was approached by the company about working with it after he served as US secretary of state. Naqvi met Britain’s Prince Charles and was active in one of his charities, the British Asian Trust. He was a board member of the UN Global Compact, which advises the UN secretary-general, and sat alongside former Nissan chair Carlos Ghosn on the board of the Interpol Foundation, which raises funds for the global police organisation. 

In Washington he was seen as a useful ally. The Obama administration pledged $150mn to an Abraaj fund investing in Middle Eastern companies: a press release said that the partnership would help turn the US president’s promise to improve economic relations with Islamic nations into a reality. Some even saw him as a possible future political leader in Pakistan, which he once described as “a country not known for transparency”, before adding that Abraaj “did everything by the book” during its control of K-Electric. 

“We avoided every single point where you would have had to come into contact with government — even though you were a utility — and have to pay someone something,” he said. 

K-Electric was Abraaj’s single largest investment. But as the private equity firm ran into financial difficulties in 2016, Naqvi struck a deal to sell control of the power company to Chinese state-controlled Shanghai Electric Power for $1.77bn. Political approval for the deal in Pakistan was important and Naqvi lobbied the governments of both Sharif and Khan for backing. In 2016, he authorised a $20mn payment for Pakistan politicians to gain their support, according to US public prosecutors who later charged him with fraud, theft and attempted bribery. 

The payment was allegedly intended for Nawaz Sharif and his brother Shehbaz, who replaced Khan as prime minister in April. The brothers have denied any knowledge of the matter. In January 2017, Naqvi hosted a dinner for Nawaz Sharif at Davos. After Khan became prime minister, Naqvi met him. While in office Khan criticised officials for delaying the sale of K-Electric but the deal has still not been completed. 

Abraaj collapsed in 2018 after investors including the Gates Foundation started investigating whether the company was misusing money in a fund intended to buy and build hospitals across Africa and Asia. Abraaj said it was managing assets of about $14bn at the time. In 2019, US prosecutors indicted Naqvi and five of his former colleagues. Two former Abraaj executives have since pleaded guilty. Naqvi denies the charges. 

Naqvi was arrested at London’s Heathrow airport in April 2019 after returning from Pakistan and faces up to 291 years in jail if found guilty of the US charges. Khan’s telephone number was included on a list of contacts he handed to police — a fact mentioned by lawyers representing the US government during Naqvi’s extradition trial in London. 

His appeal against extradition to the US is expected to conclude later this year. But he has had to pay £15mn for bail and has hefty ongoing legal expenses. Wootton Place was sold to a hedge fund manager in 2020 for £12.25mn. Naqvi and his lawyer did not respond to requests for comment on this story. 

Moving money around 

In 2012 Khan visited Wootton Place. In a written response to questions from the FT, the former cricketer said he had gone to “a fundraising event which was attended by many PTI supporters”. Blofeld, the cricket commentator, recalls that Khan “was persuaded to take the field” at Wootton. “It was extraordinary to see how he still had the knack of bowling those fast inswingers,” he says. 

Naqvi, a self-described cricket purist, provided the bats, balls, osteopaths, masseurs, food, accommodation and clothing. He literally wrote the rules for the matches. Ball tampering — banned in cricket — was permitted in matches at Wootton because “it is important to encourage innovation and experimentation in cricket, as what is considered illegal today may be de rigueur tomorrow,” Naqvi once wrote to guests. 

It was a critical time for Khan to gather funds ahead of the election scheduled for May 2013, and Naqvi worked closely with other Pakistani businessmen to raise money for his campaign. The largest entry in Wootton Cricket’s bank account in the months before the election was the $2mn from Sheikh Nahyan, now the UAE’s minister for tolerance. He is also an investor in Pakistan. 

After Lakhani, the Abraaj executive responsible for cash flow, told Naqvi in an email that the sheikh’s money had arrived, Naqvi replied that he should send “1.2 million to PTI”. In another email to Lakhani after the sheikh’s money entered the Wootton Cricket account Naqvi wrote: “do not tell anyone where funds are coming from, ie who is contributing”. 

“Sure sir,” Lakhani responded. He wrote that he would transfer $1.2mn from Wootton Cricket to the PTI’s account in Pakistan. Then after considering sending the funds to the PTI via Naqvi’s personal account, Lakhani proposed sending the money in two instalments to a personal account for businessman Tariq Shafi in Karachi and an account for an entity called the Insaf Trust in Lahore. Although the ownership of the Insaf Trust is unclear, the emails state that the final destination was the PTI. “Don’t eff this up rafiq,” Naqvi wrote in another email. 

On May 6 2013, Wootton Cricket transferred a total of $1.2mn to Shafi and the Insaf Trust. Lakhani wrote in an email to Naqvi that the transfers were for the PTI. Khan confirmed that Shafi donated to the PTI. “It is for Tariq Shafi to answer as to from where he received this money,” Khan said in response to the FT. Shafi didn’t respond to requests for comment. 

‘Prohibited funding took place’ 

The ECP investigation into the funding of Khan’s party was triggered when Akbar S Babar, who helped establish the PTI, filed a complaint in December 2014. Although thousands of Pakistanis worldwide sent money for the PTI, Babar insists that “prohibited funding took place”. 

In his written response, Khan said that neither he nor his party was aware of Abraaj providing $1.3mn through Wootton Cricket. He also said he was “not aware” of the PTI receiving any funds that originated from Sheikh Nahyan. “Arif Naqvi has given a statement which was filed before the Election Commission also, not denied by anyone, that the money came from donations during a cricket match and the money as collected by him was sent through his company Wootton Cricket,” Khan wrote. 

Khan said he was waiting for the verdict of the election commission’s investigation. “It will not be appropriate to prejudge PTI.” 

In its January report, the election commission said Wootton Cricket had transferred $2.12mn to the PTI but didn’t reveal the original source of the money. Naqvi has acknowledged his ownership of Wootton Cricket and denied any wrongdoing. In a statement, he told the election commission that: “I have not collected any fund from any person of non-Pakistani origin, company [public or private] or any other  

The bank statement for Wootton Cricket tells a different story. It shows that Naqvi transferred three instalments directly to the PTI in 2013 adding up to a total of $2.12mn. The largest was the $1.3mn from Abraaj which company documents show was transferred to Wootton Cricket but charged to its holding company for K-Electric. 

The impact of the scandal could yet hit Khan’s re-election ambitions. In July he renewed his call for an early poll after the PTI won a critical victory in by-elections in Punjab, Pakistan’s most populous province. On Twitter, he called the Election Commission of Pakistan “totally biased”. 

At the same time prime minister Shehbaz Sharif has urged the commission to publish its verdict in the PTI case, saying that the delays caused by political infighting had given Khan “a free pass despite his repeated & shameless attacks on state institutions”. 

Yet the Atlantic Council’s Younus says that Khan’s loyal supporters won’t be moved whatever the outcome. They “do not and will not care. In fact, Khan may claim that the story is further evidence that foreign powers are leveraging global media to conspire against him.” 

For Babar, who helped found the PTI, the controversy is proof that Khan has fallen short of the ideals they set out to champion in politics. “He had the opportunity of a lifetime and he blew it,” Babar says. “Our cause was reform, change — introduce the values in our politics that we espoused publicly.” Instead, he says, “[Khan’s] morality compass in a political sense went haywire”.

There is a global debt crisis coming – and it won’t stop at Sri Lanka

Foreign capital flees poorer countries at the first sign of instability. The pandemic and Ukraine war ensure there is plenty of that around writes Jayati Ghosh in The Guardian





This January, even before Sanjana Mudalige’s salary as a sales worker in a shopping mall in Colombo, Sri Lanka, was slashed in half, she had pawned her gold jewellery to try to make ends meet. Ultimately, she quit her job, because the travel costs alone exceeded the pay. Since then, she has shifted from using gas for cooking to chopping firewood, and eats just a quarter of what she did before. Her story, reported in the Washington Post, is one of many in Sri Lanka, where people are watching their children go hungry and their elderly relations suffer for lack of medicines.

The human costs of the crisis only really captured international attention when the massive popular upsurge earlier this month, known as Aragalaya (Sinhalese for “struggle”), led to the peaceful overthrow of President Gotabaya Rajapaksa. His family had ruled Sri Lanka with an iron fist, albeit with electoral legitimacy, for more than 15 years, and is now being blamed by both national and international media for the desperate economic mess the country is in.

But blaming the Rajapaksas alone is too simple. Certainly, the aggressive majoritarianism that they unleashed, along with the alleged corruption and major economic policy disasters of recent years (such as drastic tax cuts and bans on fertiliser imports), were crucial elements of the economic debacle. But this is only part of the story. The deeper and underlying causes of the crisis in Sri Lanka are barely mentioned by most mainstream commentators, perhaps because they reveal uncomfortable truths about the way the global economy works.

This is not a crisis created by a few recent external and internal factors, it has been decades in the making. Ever since its “open economic policy” was adopted in the late 1970s, Sri Lanka has been Asia’s poster boy for neoliberal reform, much like Chile in Latin America. The strategy was the now-familiar one of making exports the basis for economic growth, supported by foreign capital inflows. This led to a significant increase in foreign currency debt, something the IMF and the Davos crowd actively encouraged. 

In the period after the 2008 global financial crisis, as low interest rates in advanced economies led to the availability of cheap credit, the Sri Lankan government relied on international sovereign bonds to finance its own spending. Between 2012 and 2020, the debt to GDP ratio doubled to around 80%, with a growing share of this in bonds. The payments due on these debts kept rising in relation to what Sri Lanka could earn from exports and the money sent back home by Sri Lankans working abroad. The disruptions caused by the pandemic and the war in Ukraine made matters much worse, by causing export earnings to fall and sharply increasing the price of essential imports including food and fuel. Foreign exchange reserves plummeted – but the government had to keep paying interest even when it could not import essential fuel.

Looked at in this light, it is clear that Sri Lanka is not alone; if anything, it’s just a harbinger of a coming storm of debt distress in what economists call the “emerging markets”. The past period of incredibly low interest rates in the advanced economies meant that more funds flowed to “emerging” and “frontier” markets from the richer world. While this found cheerleaders in the international financial institutions (IFIs), it was always a problematic process. This is because, unlike in places such as the EU and US, capital leaves low- and middle-income countries (LMICs) at the first sign of any problem.

And these countries were much more battered economically by the pandemic. Advanced economies were able to provide massive countercyclical measures – think of the UK’s furlough programme – because financial markets effectively allowed and even encouraged them to do so. By contrast, LMICs were prevented from increasing fiscal spending by much – because of those same financial markets, which threatened the possibility of credit downgrades and capital flight as government deficits grew larger. Plus they faced significant declines in export and tourism revenues and tighter balance of payments constraints. As a result, their economic recovery has been much more muted and economic conditions remain mostly dire.

The half-hearted attempts at debt relief, such as the moratorium on debt servicing in the first part of the pandemic, only postponed the problem. There has been no meaningful debt restructuring at all. The IMF bewails the situation and does almost nothing, and both it and World Bank add to the problem through their own rigid insistence on repayments and the appalling system of surcharges imposed by the IMF. The G7 and “international community” have been missing in action, which is deeply irresponsible given the scale of the problem and their role in creating it.

The sad truth is that “investor sentiment” moves against poorer economies regardless of the real economic conditions in specific countries. Private credit rating agencies amplify the problem. This means that contagion is all too likely, and it will affect not just economies that are already experiencing difficulties, but a much wider range of LMICs that will face real difficulties in servicing their debts. Lebanon, Suriname and Zambia are already in formal default; Belarus is on the brink; and Egypt, Ghana and Tunisia are in severe debt distress.

Many countries with lower per-capita income and significant absolute poverty are facing stagflation. Billions of people are increasingly unable to afford a basic nutritious diet, and cannot meet basic health expenses. Material insecurity and social tensions are inevitable.

The situation can still be resolved, but it requires urgent action, especially on the part of the IFIs and G7. Speedy and systematic debt resolution actions to bring in private creditors and other creditors, such as China, are needed, as is IFIs doing their own bit to provide debt relief and ending punitive measures such as surcharges. In addition, policies to limit speculation in commodity markets and profiteering by big food and fuel companies must be put in place. Finally, the recycling of special drawing rights (SDRs) – essentially “IMF coupons” – by countries that will not use them to countries that desperately need them is vital, as is another release of SDRs equating to about $650bn to provide immediate relief.

Without these minimal measures, the post-Covid, post-Ukraine global economy is likely to be engulfed in a dystopia of debt defaults, increasing poverty and sociopolitical instability.

Strict inflation targets for central banks have caused economic harm

 Edward Chancellor in The FT

A great experiment in monetary policy is drawing to a close. Last week, the European Central Bank announced its largest rate hike in two decades, taking its benchmark rate back to just zero per cent. Never before, over the course of some 5,000 years of lending, have interest rates sunk so low. Those who rue the consequences of easy money are quick to blame central bankers. But the problem originates with the strict inflation mandates they are required to follow. 

In 1990, the Reserve Bank of New Zealand became the first central bank to adopt a formal target. In 1997 a newly independent Bank of England was also given a target, as was the ECB when it opened for business a year later. After the global financial crisis, both the Federal Reserve and Bank of Japan jumped on board. What BOJ governor Haruhiko Kuroda called the “global standard” — an inflation target in the range of 2 per cent — performed several functions: providing central banks with a clearly defined benchmark, anchoring inflation expectations and relieving politicians of responsibility for monetary policy. 

The trouble is that whenever an institution is guided by a specific target, critical judgment tends to be suspended. As the late political scientist Donald Campbell wrote, “the more any quantitative social indicator is used for social decision-making”, the higher the risk it will distort and corrupt the processes involved. This problem is well known in monetary policymaking circles. In the 1970s Charles Goodhart of the London School of Economics noted that whenever the BoE targeted a specific measure of the money supply, this measure’s earlier relationship to inflation broke down. Goodhart’s Law states that any measure used for control is unreliable. 

Inflation-targeting runs true to form. Thanks in large measure to globalisation and technological advances, inflationary pressures abated in the 1990s, allowing central bankers to lower interest rates. After the dotcom bust at the turn of the century, fears of deflation induced the Federal Reserve to set its Fed funds rate at a postwar low of 1 per cent. A global credit boom followed. The ensuing bust unleashed even stronger deflationary pressures. The Fed proceeded to cut its policy rate to zero. In Europe and Japan, rates turned negative for the first time in history. 

Throughout the following decade, central bankers justified their actions by reference to their inflation targets. Yet these targets produced a number of corruptions and distortions. Ultra-low interest rates pushed the US stock market to near record valuations and provided the impetus for the “everything bubble” in a wide variety of assets ranging from cryptocurrencies to vintage cars. Forced to “chase yield”, investors assumed more risk. The fall in long-term rates hurt savings and triggered a massive increase in pension deficits. Easy money kept zombie businesses afloat and swamped Silicon Valley with blind capital. Companies and governments availed themselves of cheap credit to take on more debt. 

Most economists assume that interest rates simply reflect what’s going on in what they call the “real economy”. But, as Claudio Borio at the Bank for International Settlements argues, the cost of borrowing both reflects and, in turn, influences economic activity. In Borio’s view, the era of ultra-low interest rates pushed the global economy far from equilibrium. As he puts it, low rates begot even lower rates. 

During the pandemic central bankers were still striving to meet their inflation targets when they lowered interest rates and printed trillions of dollars, much of which was used by their governments to meet the extraordinary costs of lockdowns. Now, inflation is back and central banks are scrambling to regain control without crashing the economy or inducing yet another financial crisis. The fact that policy rates trail far below inflation, on both sides of the Atlantic, suggests that monetary policymakers are no longer blindly following their inflation targets to the exclusion of all other considerations. 

This is welcome. But elected politicians cannot continue to shirk responsibility. They need to reconsider central banks’ mandates, taking into account the impact of monetary policy not just on near-term inflation, but on asset valuations (especially real estate), leverage, financial stability and investment. The experiment with zero and negative rates has done considerable harm. It must never be repeated. As Mervyn King, the former BoE governor, says: “We have not targeted those things which we ought to have targeted and we have targeted those things which we ought not to have targeted, and there is no health in the economy.”

Pakistan - Caught in the Debt Trap

Sultan Ali Allana in The Dawn

THE 22nd IMF programme, circular debt, G2G loans and an imminent 23rd programme lurking around the corner. It reminds one of Jaws the movie, where danger creeps unseen and dread is prevalent amongst all. ‘Borrow more to borrow even more’ versus ‘earn more to borrow less’. Two very different courses, yet interchangeably deployed, admittedly intermittently, in varying blends, over the past 40 to 50 years, have shackled the nation to the debt trap.

Omnipresent in this murky blend, not unlike other debt-laden markets, are what the West terms as ‘economic hitmen’, who pursue self-interests, ostensibly for the greater good. These interests are then propagated scientifically, justified, and then, with the clever manipulation of economic data, communicated to every handheld device.

While economists and financial experts take turns at solving what has now become a complex equation, perhaps it’s time to go back to the basics, which may be termed as Solution 101 — ‘earn more and borrow less’ — a solution which is admittedly easier to state than actualise. It is a course which may well require our urgent attention and, most importantly, political convergence that entails all major political parties, irrespective of their manifestos, unanimously agreeing to sign off on a ‘charter of economy’ that marks milestones at five-year intervals — starting with ‘earn more and borrow less’ to ‘earn more and not borrow at all’ to, ultimately, ‘earn more and build reserves’.

Simply put, this charter may be a 15-year plan for this nation’s way forward and a performance measure to determine the economic achievements of each successive government. Politics and the economy must at all costs be separated in the interest of the nation.

Pakistan’s debt story is interwoven with the country’s 75-year journey. We entered the first IMF programme in 1958 and, since then, it has been one programme after another, while institutional and G2G debts have continued to grow simultaneously. As of Dec 31, 2021, combined foreign currency loans are more than $90.5 billion. The story of Pakistan’s debt is incomplete without taking into account domestic debt, which by the end of December 2021 had crossed Rs26.7 trillion (roughly $151.5bn based on the Dec 31, 2021, closing rate), resulting in total debt in excess of $242bn or around 77 per cent of GDP. There is also the circular debt, which grew from Rs161bn in 2008 to over Rs2.46tr by March 2022. It continues to grow, putting, oil, gas and power supply at risk.

A consolidated picture of Pakistani debt on a per person basis depicts the debt journey. Each Pakistani, irrespective of age and gender, carries upon their shoulders a debt burden of nearly Rs190,000, while devaluation and interest adds to this figure by the day. Pakistan must borrow to pay back its borrowings and borrow to pay back the interest on its borrowings. Bluntly put, we are no longer borrowing for growth, but to service and repay borrowings.

The government may be able to service local currency debt by raising taxes, at the cost of stunting growth; however, foreign currency earnings will have to be significantly enhanced through exports, remittances, privatisation and foreign investments, and imports will have to be managed to make the equation work. Without a balancing act, the debt cycle will grow to untenable levels.

Tough decisions and belt-tightening are essential. The country’s policy framework, which has relied on imports, belies the requirements of a paradigm shift in thinking. The emphasis needs to shift to the development of a robust agro economy, making Pakistan not just self-sufficient in food, thus ensuring future food security, but also a country that can be a global supplier of food. If oil can be extracted (at a cost) and countries can rise to heights unthinkable in the 1960s, surely, agro extraction (at a cost, undoubtedly) can become a source for sustaining growth, which in due course can accelerate industrial growth for a balanced economic model.

The cycle of boom-and-bust can only be broken if there is a meaningful shift in the policy framework. Granting subsidies without assessing the long-term consequences, or imposing heavy taxation regimes, which impair growth, must be examined and thought through. To quote Winston Churchill: “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up with the handles.” While building a strong SME and labour-intensive industrial base, with the aim of capitalising on the shifting industrial trend in China, is equally important, a focused approach, which entails start-to-finish government support — some call this the ‘ease of doing business’ — must be given top priority.

Competitive markets drive global agendas where Pakistan will have to situate itself and measure its competitiveness. What has not worked before will certainly not work going forward. It is imperative that we plan for future generations to provision for a fulfilling and debt-free life of progress, prosperity and security. We have heard the endless discussions of experts and also novices who have little understanding but who use economic jargon to impress with ‘solutions’. But why has nothing, or very little, worked? Framing policies, ensuring competency and challenging dogma require political consensus and hard work.

Freedom comes at a price and it’s a price we must pay someday. Climate change is upon us, where food security and water management will remain on top of the global agenda for decades to come. Gainful employment for our ever-growing and young population will be challenging. With over 366 million mouths to feed by 2050, surely this must be our primary concern. Debt and more debt are certainly not a solution. It is the problem!

The Shiv Sena - It's History & Future