State-Crony Capitalism

Recently Iran agreed to export 80,000 barrels crude per day to Pakistan. Pakistan requested a loan of $500 Million from Iran for the pipeline to be built.  Iran refused for $500 million but agreed for half the amount – $250 million. This loan of $250 million doesn’t have the interest rate decided or the loan repayment length. The fun does end here. Russia is “pressuring” Pakistan to award a $1.2 Billion Oil Pipeline ‘no-bid’ contract to Gazprom, a Russian firm that has used its economic clout for political gains in Europe.

Let’s try to understand what’s happening here.

• Iran is going to loan $250 Million for IP pipeline to Pakistan

• Russia wants $1.2 Billion to build the pipeline for Pakistan

• Pakistan will import $292 million of crude from Iran every month.

So what is Pakistan giving in return? The answer is – I don’t know. And here’s why I say this

• Pakistan owes a total of $130 billion, local and foreign

• Pakistan has a trade deficit  of about $1.5+ Billion per month i.e. its importing 66+% more than its exporting

• Repayment of $2.3 billion (1.5 billion SDR)  to the IMF is due this year. You will witness a 15% drop in the PKR value by or before summer.

So how do we solve the huge debt, the huge trade imbalance and rupee depreciation? Simple! Take on more debt, use that debt to build infrastructure to boost imports and then reduce the price of imports by subsidies financed by money printing! The general public is completely complacent in these decisions. The public protested the rise in oil prices. The public demanded and welcomed the recent subsidies. And I can only assume the response from the public to this Iran Pakistan Oil pipeline is going to be ‘encouraging’.

Never mind the consequence of influence of these both countries, Iran and Russia, will play in the internal affairs of Pakistan when the debt bill comes due. There is a saying “When you borrow money from the Russians, you are lending your soul”. For Pakistan, there will be no room left for soul-searching. That too would have been collateralized.

Last year I read a book by Michael Lewis – “Boomerang – Travels in the New Third World”. The author tried to understand the mindset of citizens of different countries. What surprised me was the stark resemblance between Greece and Pakistan (without the law & order situation). I will quote a paragraph from his book.

“What happened in Greece — when the Greek people were left alone in a dark room with a pile of money — what they really wanted to do was bloat the state. Because they had this very perverted relationship to their own government — it was a kind of pinata filled with goodies that everybody got a crack at.”

Fact of the matter is the only reason why there are riots in Greece before Pakistan is because Greece doesn’t control its own local currency. Greece cannot print money and inflate away its debt, unlike Pakistan. If Pakistan hadn’t been bailed out by the IMF in 2008, you would have seen the greek scenes on the streets of Karachi and Lahore.

Pakistan is considered to be the world’s 6^th largest population, representing about 3% of the world’s population. Its share of GDP in the World Economy – 0.25%. To put it in simple terms, Pakistan is consuming about 10 times more than it is producing. So who’s providing the rest? The International Economy. Pakistan has truly given a new meaning to the word – “A Welfare State”