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So we do not like Keynes anymore. Honestly speaking, Keynes probably was right when he argued that in times of depression the Government needs to stimulate demand, even if it needs to borrow to increase government spending. That is exactly what the West did, and continues to do, in the aftermath of the Great Recession of 2008; quite the opposite to what IMF has been preaching to each and every developing nation facing a financial crisis, austerity.

Apparently, what is good for the goose (developed nations) is not good for the gander (developing nations). But why is that?

Albeit, even ignoring the why, with the State Bank of Pakistan refusing to lend more money to the Government, and in fact making life more miserable for the Government by raising interest rates, and the Finance Ministry forced to bring down the fiscal deficit at the cost of the development budget, the government definitely is not in a position to spend to increase aggregate demand.

So we are probably anti Keynesian more by force than by choice.

But with the FBR bent upon taking an additional Rs 1.5 trillion from our pockets, and inflation driven by higher utility and fuel costs further depleting our disposable income consequently impairing our quality of living, where will the demand come from?

The middle class won't be in the middle for long.

There can be an argument that Keynes did us in since the previous governments borrowed recklessly for infrastructure projects, and while that temporarily did create demand, the end result is that we now have to pay for those follies of yester years.

As a consequence of building all these Metros and Motorways, coupled with other largesse, our total debt and liabilities stand at Rs 40,218 billion as at 30th June 2019; how will we ever pay it? Even assuming that the Chairman FBR is able to do the unthinkable and collect Rs 5,500 billion in taxes this year, and even assuming that the government is able to reverse the NFC award and retains 75% of tax revenues, we will probably still need to borrow to pay the interest costs on existing debt, which are estimated to exceed Rs 4,000 billion this year.

Total national debt may have increased by Rs 10,000 billion in one year, but how much of the increase was due to exchange losses and how much was borrowed to pay the cost of existing debt?

But why blame Keynes?

He never said to borrow billions upon billions to spend on building big beautiful infrastructure projects which ultimately failed; as they were not financially viable on a standalone basis. If you borrow to build subsidy driven projects, you will borrow to pay for the subsidy as well.

The strategy to replicate infrastructures existing in developed economies is by and large unsustainable; except if you are an oil rich nation, and do not care whether the Metro is ultimately profitable or not! Underlying market demand was the catalyst for Germany's autobahn, American railroads and London's tubes. Just because China has a bullet train is no reason for us to have a bullet train; you don't become developed by buying infrastructure in an attempt to look developed.

Only infrastructure which is purpose driven is valuable, and even in that case the cost to benefit ratio should be the decider. Spending billions on infrastructure to subsidise the cost of public sector employees reaching their workplace is probably a sunk cost; and many more millions will be sunk in maintenance alone. Building schools without good teachers, and hospital without doctors, even through aid money, is a waste of resources; the quality of free education and free healthcare can never improve, irrespective of the shiny buildings. What good is all the electricity if we cannot afford to pay for it?

A good strategy might be to constitutionally ban Ribbon-cutting ceremonies.

If politicians, or any other kind of leadership, are barred from taking credit for infrastructure projects, than perhaps we will eventually have projects which have an economic payback and which are completed within budget and in time.

To venture a guess, we have never completed a mega project within budget, at least in the last few decades. If project returns are not in the equation at all, cost over runs will never matter to the decision makers; except that they matter.

I am not saying to stop building roads altogether, but if I was a Karachiite, I would rather spend my budget on a cleaner city and quality education and health before I built a Bus Rapid Transit which ran on a subsidy. BRT is a showpiece but it hardly improves the quality of life.

Keynes is, and was, probably right; the Government should spend in times of recession, however the objective should be productive infrastructure which creates and/or supports creation of permanent employment, sans any subsidy.

Especially for a developing nation, which by default has meagre resources, it is wiser to invest in the right kind of infrastructure, rather than flashy megaprojects. You can fool the voters once, maybe even twice, but if his home looks and smells like shit, and his children cannot get quality educations and parents are denied good healthcare, a storm will come.

We need to borrow and invest in infrastructure, but the right infrastructure.

(The writer is a chartered accountant based in Islamabad)

Email: [email protected]

Twitter: @LeAccountant


Copyright Business Recorder, 2019


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