Following the decision to raise interest rates last week, Federal Reserve Chairman Jerome Powell made it clear that economic pain is coming. A recession is probable.
Several other central banks around the world also raised their interest rates last week. The European Central Bank is expected to continue to tighten monetary policy. But as a consequence of global rate hikes, a global recession is likely. The economic pain will be felt most acutely by emerging market economies that have high debt-to-GDP levels and a history of poor macroeconomic policies.
Pakistan is at the front of the queue. Making matters worse for Islamabad, Pakistan is also feeling the effects of floods and global food inflation. Why is Pakistan in such a bad situation?
For one, Pakistan fails on domestic investment and has low export levels and a low internal savings rate. All of this is compounded by profligate central government borrowing and low productivity. In turn, the global lending community should condition new financial assistance on reforms that would lead to more domestic investment. More investment would drive higher productivity. Most importantly, the lending community should tell the government of Pakistan in plain language that the government must stop raiding the coffers of the state. Pakistan’s debt-to-GDP ratio is creeping toward 100%.
Again, no new financing without reform. After all, since 1960, Pakistan has received 22 separate lending facilities from the International Monetary Fund. Islamabad has few good excuses for its failure. Consider the stark distinction between the economic fortunes of Pakistan and those of Bangladesh, which was part of Pakistan before the 1971 civil war by which Bangladesh achieved independence. In 1981, when I was a young foreign service officer in Bangladesh, the per capita income of that country was around $100. Today, the per capita income approaches $2,000. In 1981, the per capita income of Pakistan was about $600. Today it is $1,600.
Thanks to appropriate macroeconomic policies, high domestic savings, strong domestic investment, rising productivity, and a low debt-to-GDP ratio, Bangladesh is an economic miracle. Bangladesh’s achievements are especially profound given the constraints of geography, topography, and population density. I lived in Bangladesh for over two years. During the monsoon season, half the country is under water. I am not kidding.
Apologists for Pakistan argue that the country is strategically important to the United States so it should receive a pass on economic reforms. That position is misguided given the U.S. exit from Afghanistan, India’s rising economic and political power, and a looming decline in the power of China. It is time for the wealthy nations to tell Pakistan to get its house in order. Perhaps Islamabad can ask its Chinese patron for a bailout?
Moreover, the U.S. and the wealthy countries of Europe are not in a position to destroy more scarce capital by continuing to bail out Pakistan. The U.S. debt-to-GDP ratio is 98%. Servicing costs for federal government debt are rising rapidly. As for the countries of the European Union, they face another sovereign debt crisis as they try to borrow their way out of their disastrous energy policies.
Put simply, it’s time for Pakistan to grow up and be a self-responsible nation.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
