Will interim setup ‘care’ to take rocky ride to reforms?

After a couple of weeks of intense drama, the present government was able to snatch a “deal” out of the jaws of the IMF. Under the circumstances where the cards seemed to be stacked against Pakistan, the Prime Minister’s bonhomie personal diplomacy was able to tip the scales in Pakistan’s favour.

Specifically, the Extended Fund Facility (EFF)—the existing programme—was discontinued. In its stead, the Pakistani authorities and the IMF were able to agree on a Stand-by Arrangement (SBA) to the tune of $3.0 billion for a period of 9 months.

The significance of the government’s signature on the dotted line with the IMF cannot be overemphasised. Pakistan’s friends notwithstanding, data certainly predicted a very challenging economic situation later this year. 

With the funds coming in from the IMF and then from friendly countries, Pakistan’s economy has now finally come out of what had all the trappings of a perfect storm.

Even a small-scale geopolitical disturbance could create an alarming situation.

This brand-new SBA will provide much-needed economic stabilisation and the necessary breathing space for putting the Pakistani economy on a sustainable trajectory.

Despite the SBA, most analysts feel that Pakistan’s economy still faces exceptionally high risks in the next three years. Pakistan’s economy is especially vulnerable due to the huge amount of external financing required. Even a small-scale geopolitical disturbance could create an alarming situation.

For this reason, not only is a steadfast adherence to sound policies required, the economy would not be able to get sea legs until comprehensive reforms are undertaken in multiple sectors. The IMF pointed out some areas of reform in its report but undertaking reforms is easier said than done.

One chief reason why it is so difficult to undertake economic reforms is that there is no consensus on how the process of reforms will begin to unfold in Pakistan. 

For instance, should the state assist in developing industrial champions as it did in some East Asian countries like South Korea and Taiwan? Or, should we let champions emerge from a process of what Joseph Schumpeter called “creative destruction” that is only possible where markets are free?

Over the years, Pakistan’s state apparatchiks have not been able to run the various state-owned enterprises (SOEs) profitably. This situation has now become totally untenable as a huge chunk of money is needed every year to just keep these bloated SOEs afloat.

It is thus no surprise that a number of nations facing economic stress are currently trying to privatise their airlines.

The sad reality of Pakistan International Airlines (PIA) is a good case in point. PIA was the first airline from a non-communist nation to fly into China in 1964. PIA also played a role in setting up Emirates Airlines in 1985. Emirates' inaugural flight took off from Dubai for Karachi and thus Emirates came to have the call sign EK meaning “Emirates through Karachi.”

Unfortunately, PIA is now a shadow of its former glorious self. Due to inefficient management and political interference over the years, PIA is almost always in the red with the airlines declaring a loss of almost PKR 100 billion in 2022. PIA is not even operationally viable as it ended the year with a loss from operations equal to Rs15 billion, a hole that was plugged from the federal budget.

Additionally, though strides have been taken toward downsizing, PIA still has one of the highest numbers of employees per aircraft at around 260. The same ratio stands at 93 for Turkish Airlines, which brought in a net amount of about $14 billion.

Given such alarming numbers, the road to reforms must start by fast-tracking the privatisation of PIA and other loss-making SOEs. A 1999 study on the privatisation of 10 airlines showed that while sales grow rapidly, net income, total assets, capital expenditures and dividends also increase. It is thus no surprise that a number of nations facing economic stress — from Portugal to Sri Lanka — are currently trying to privatise their airlines.

Caretaker government should use its time in office to kick-start the reforms agenda, gather the experts and develop multiple privatisation plans. 

Implementing reforms like privatisation is going to be deeply political as well. One reason is that privatisation of SOEs like PIA is going to be a zero-sum game and many people are going to lose their livelihoods. In an economy mired in stagflation and joblessness, this could result in significant social unrest, especially as some SOEs’ unions are connected to mainstream political parties. For this reason, it is essential that privatisation plans are reviewed by different political parties with maximum input from unions so as to make this process as painless as possible.

Moving in the direction of SOEs’ privatisation is very important given how precarious Pakistan’s economic situation could become if the next nine months are lost to political bickering. 

The caretaker government should use its time in office to kick-start the reforms agenda, gather the experts and develop multiple privatisation plans. Ultimately, only a democratically-elected government has the real mandate to implement reforms, but the journey on this rocky road can start today.

Dr Aqdas Afzal is an assistant professor at the Habib University. He completed his doctorate in economics on a Fulbright scholarship. Dr Afzal tweets @AqdasAfzal and can be reached via [email protected]

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