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Economics

A Reasonable Budget

Annual Budgets always arouse expectations, the Budget being presented before the National Assembly after four years (and that also with the confrontation over LFO as a backdrop) added to the anticipation. The good thing about the Budget is that no new taxes have been levied, either in the form of direct taxes or change in administrative/utility prices. This goes towards the business community’s demand of a consistency in government policies. For the first time the government has more or less achieved the target of the tax revenues i.e. Rs.459 billion against the revised Rs.460 billion figure. An important achievement has been that the number of income tax-payers has been rising, now close to 2 million (at one time a few years ago it was only 1.1 million). There is some improvement in bringing down the size of fiscal deficit as a percentage of GDP. The advance tax regime for foreign investors is a good initiative, this should be expanded to include the domestic corporate sector.

Incentives to the housing sector give multiple benefits to Pakistan across the board. Firstly, it provides much needed ownership of housing to our needy citizens, secondly it reinvigorates the economy. Enhanced “housing starts” means that more cement, brick, steel, sand, steel plumbing and electrical material, household gadgets, etc will all be needed. Since almost everything is available or made in Pakistan, jobs will not only be created in construction but the whole lot of support industries will add more and more jobs and turn out additional material resulting in economy of scale and bringing down prices, force-multiplying consumer sales of many household products i.e. there will be spin-offs in all directions, a very direct infusion to the economy. Banks have to be careful in verifying applications and spreading the installment /mark-up in payable lots, we cannot afford to go down the way the “Savings and Loans” (S&L) schemes did in the US, it took a trillion plus US dollars to bail out the banks. Moreover with increases in sales, competition will become intense, thus enhancing the quality of the products. Care also has to be taken of constructing small housing colonies in rural areas to encourage the farmers that their quality of life can be enhanced in their own rural environment rather than moving to the comforts of the urban areas and putting pressure on the urban areas, adding to multiple problems because of unemployment, including law and order.

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Budget Season is On

n a recent Seminar Mr. Ishaq Dar put Mr. Shaukat Aziz and Dr Ishrat Hussain on the mat about the state of the economy by questioning the policies of the government as well as the statistics given out by the regime. A little more than three years ago, as the Finance Minister of Pakistan, he was engaged in implementing the same policies that every government has been following in fits and starts for the last ten years, the thrust of the airing of statistics was similarly positive. Giving US and Japan as example, Dar said if they had been reducing the budget deficit and debt the way the present regime was doing they would never have prospered. The US had the highest budget deficit in the world and was the largest borrower but still had the strongest economy in the world by far.
The dissemination of “positive” financial information depends upon who is in power, with control over the State media to propagate the “gospel truth”. I personally respect Dar for his integrity (if not his politics of misrouted passion), and agree that macro-political stability is more crucial than economic growth. Addressing the prime bankers of the country, Prime Minister Mir Zafarullah Khan Jamali also agreed in principle as any head of government with a sane head would do. The problem is that politicians as public officials rarely practice what they preach when out of power. Dr Ishrat Hussain, Governor State Bank of Pakistan (SBP), maintains that the culture of “thana, kutchery and tehsil” is sapping the vitality and energy of the nation. The SBP Governor should set an example in self-accountability by making public the statistics of the last five hundred appointments where SBP had either a direct or indirect role to play. SBP selections and appointments would then be tested on a “nepotism, sifarish and corruption” scale. The choice on merit, and merit alone, could act as a role model.
The primary responsibility of the State Bank of Pakistan (SBP) like any Central Bank is to control monetary policy and ensure soundness of financial systems, being provided by regulation and supervision. SBP must promote price stability in the context of micro-economic stability and growth, besides addressing as one of the policy-makers the micro imbalances in the economy which are (1) fiscal deficit (2) balance of payment deficit (3) saving and investment imbalance and (4) unsustainably high rate of increase in prices. SBP Reports tend to be full of data that take away the focus from SBP’s aim, the Reports should concentrate on SBP’s view of micro-economic imbalances and how these can be addressed and reduced, to be made sustainable at a manageable level i.e. fiscal deficit, inflation and balance of payment deficit should be workable and viable. There is no sense for the SBP Report to go out of this framework. The suspicion arises, why this window dressing on an otherwise credible report?
Within this framework we have, viz (1) monetary policy (2) exchange rate policy and (3) promotion of the health of the financial system, financial institutions and financial markets as the primary concerns of the SBP. In its Report the SBP talks only of monetary policy and of other areas but has made major omissions, e.g. the Report does not mention anything about the soundness of the financial system, for instance nothing is told about the outcome of supervision of financial system. The SBP should come out with an Annual and Half-yearly report on the state of affairs in the banking sector exclusively, namely the performance of banks, the quality of regulations, the result of supervision and the future course of the banking industry. This area has been completely neglected by SBP and the emphasis has all along been on micro-economic framework, which again has been combined with excessive data on the areas not directly concerned with the SBP. In the area of monetary policy not much homework seems to have been done. The recent sharp decline in discount rate may have benefited the government in terms of ridiculously low interest on T-bills but it has adversely affected three areas i.e. (1) profitability of SBP (2) of commercial banks and most of all (3) rate of return on deposits. In real terms the rate of return on bank deposits is going to be negative. There is thus a question mark on the advisability of the monetary policy.
It is the Finance Minister’s unenviable job to present the next budget in a Parliament in which a vocal minority is outrightly hostile, he will need a thick skin and a loud voice to keep reading the budget while being drowned out by catcalls of “LFO no, MUSHARRAF go”, i.e. if the present government-opposition parleys are stillborn. To his credit Shaukat Aziz insists that he will ensure availability of credit to business on low rates while removing the irritants faced by them on non-tax matters. That will take some doing. Presently there does not appear to be any serious conflict between various policies, balance of payments is not only viable but we have very comfortable level of Foreign Exchange (FE) Reserves, however this is not the result of present policies but largely of external factors after 9/11 and the policy initiated by former Governor SBP, Dr Mohammad Yaqub, of purchasing FE in the open market. The Rupee counterpart of the re-scheduled debt running to nearly Rs.300 billion has also been used for the improvement of government finances, this means that both the FE and Rupee liabilities have been deferred i.e. the present regime is taking the advantage, subsequent or later regimes/generations will bear the burden, “fly today, pay later!”.
A great deal is being made of the improvement of economic indicators; this is true to the extent of increase of FE reserves. The external sector has become strong as well as viable as a result of four major developments, namely (1) improvement in trade balance (2) benefit of re-schedulement of debt as well as direct assistance following the 9/11 incident (3) impressive increase in home remittances from about US$ 1 billion (2000-2001) to over US$2.4 billion (2001-2002), projecting US$ 4 billion (2002-2003) and (4) finally purchases from market. This has resulted in disappearance of the black market, unification of exchange rates and above all the US Dollar is no longer an alternative asset as it was during the period of FE accounts. One must also note that visibly the external sector has been liberalised. However if we look at such crucial indicators as growth rate in population, rate of national savings stagnating at 13%, increase in percentage of population below the poverty line rising from 29% to 35%, as well as the rising indicators of unemployment, these are not happy indicators. We must be concerned not only with the soundness of an economy over mid and long-term but are factors directly concerned with human welfare.
Mr. Arif Nizami has pointed out in a recent Seminar that the country has had to pay a heavy price to the international financial institutions for the reforms enacted. The Nation’s Editor correctly maintains that the country was on the brink of default and it is necessary to put spending money in the consumer’s pocket to jump-start the economy, to have the courage to do it sooner rather than later. The point arises, do our public officials, both politicians and bureaucrats, have the courage to recognize their failures in human resources management and inconsistent extraneous policies even as they build material resources for the State? Or are they simply engaged in making this nation wealthy at the cost of beggaring the nation’s population?

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Sindh’s Centrifugal Forces

Within six weeks of re-entry into the body politic of the nation, democracy is performing in line with the general claim made by its detractors that most politicians of the third world put self-interest over good governance as their primary objective. With the PML (Q) nominee for PM Mir Zafarullah Khan Jamali barely passing muster with a heterogeneous mix of votes (including that of 10 “patriots” from PPP-P), the battle shifted to the Provinces. With the PML (Q) and MMA having quite a majority respectively, the governance of Punjab and NWFP was never in doubt. The situation in Balochistan and Sindh Provinces is another story! MMA may have got the immediate edge in Balochistan by winning over the nationalist parties but the vital ground of Sindh (and with it the prize catch of the cash-rich port city of Karachi) has become a veritable quagmire. No party having a clear majority, it was either the PPP-P or the MQM that could lead a possible coalition of smaller parties or they could join together in a Provincial coalition opposed to the Centre. The smaller parties with the “swing vote” had different ideas, they thought it was their prerogative to name the Chief Minister. On that premise all possible permutations and combinations floundered and the Governor postponed the Sindh Assembly “Oath-Taking” Session indefinitely till matters got sorted out as to who had the clear mandate to govern. The possible options are mind-boggling enough to call into question the core character of the political parties in the fray, do they in fact have an ideology or are their ambitions confined only to coming to power by any means, fair and foul?

Maulana Fazlur Rahman has been living in the heady bliss that he was Ms Benazir’s first (and only) choice to be PM. That was conveyed not only directly after the elections but was repeated ad nauseam by Nawabzada Nasrullah Khan. Imagine the good Maulana’s seething anger when he discovered what everyone and his uncle already knew, she was only using him as a willing pawn to blackmail the military regime. Hell hath no greater fury than a Maulana scorned by a woman (and a politician at that), the PPP-P may well live to repent the games Mohtrama has been playing with the JUI (F) Chief’s emotions, more importantly, with his aspirations. Her scathing denunciation of MMA, a far cry removed from her stance availing at the end of October when the PPP-P and MMA were close to forging a coalition, was very ill-received by the MMA leaders. Keeping intact her normal posture of “doublespeak” for different audiences, Ms Benazir now feigns that she was always against the “fundamentalists”. The hard fact remains she was always ready to bed them politically as long as she got what she wanted, mainly that NAB charges against her husband and herself dropped. Since the military regime called her bluff (and it is believed Uncle Sam also showed annoyance over her evolving coalition plans), she has scrambled from one political option to another in trying to hold the Federal Regime hostage to her designs. Once Mir Zafarullah Khan Jamali was past the first post, PPP-P fell back on trying to hold their Sindh bastion.

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Mixed Signals

The President of Pakistan, General Parvez Musharraf, met US President Bush in New York last Sunday evening. Earlier, he had addressed the UN General Assembly. Given that after sending democracy into temporary limbo he became an international pariah a scant two years (and a month ago), for the Pakistani President the visit has been a triumph of sorts, for the personal risks he has taken in the last 60 days it brought only mixed rewards. In meetings en route in Teheran, Istanbul, Paris and London, Parvez Musharraf scored heavily in getting effusive support for Pakistan as a frontline state in the “war on terrorism”. But it was the last stop that counted. Under dire pressure from the frenzy building in the streets, the Pakistani intelligentsia had high hopes that the US would take concrete and tangible measures to reverse the Pakistani public perception that the US is friendly with Pakistan only when it has use for it, and then leaves Pakistan to fend for itself in paying the economic and political price for the privilege of that rather limited (by need) friendship.

As a symbol of tangible support, Pakistan needed debt relief that would be more like debt forgiveness, something that would more than offset the political and economic fallout being acutely felt in Pakistan because of the US attack on Afghanistan. Pakistan suffered economically (and continues to suffer) because we were then left in the lurch after the Afghan War in the 80s, sad experience shows that the present aid package announced for Pakistan is meagre compared to the economic hardships that the present Afghan War is now forcing on Pakistan. US$ 1 billion is hardly peanuts, but in the context of what we really need it may as well as be chicken feed. One must be grateful for small blessings however, for even the US$ 1 billion aid package that we did get will ameliorate to a small extent the burden of the war which is being increasingly felt in the streets and homes of Pakistan. In material terms it may be in lost man hours and in export manufacturing orders, in emotional terms the cost cannot even begin to be counted.

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The President Who Never Was

On the afternoon of June 20th, a confident but unsmiling Gen Pervez Musharraf embraced and saluted Rafiq Tarar as he showed him out of the door of the Presidential Mansion in Islamabad. Tarar had ceased to be President a short time earlier vide Chief Executive’s Order No. 3 called Succession Order 2001. To his credit, Rafiq Tarar showed some spunk and did not “resign for personal reasons” as he was most probably encouraged by the Khakis to do. Thereupon legal niceties dictated that Pervez Musharraf assume the office of the Presidency, in his own words at the subsequent oath-taking ceremony “reluctantly but in the supreme national interest”. With that transition, an aberration that had occupied the august President’s office for more than three years rode off into the sunset, in the words of Tarar’s son-in-law, Maj (Retd) Mubassharullah, “there is no need to scandalize when everything has been settled amicably in Islamabad”. In going into oblivion, Tarar joined almost all the former Presidents of Pakistan in failing to travel the whole course. Iskander Mirza was ousted by Ayub Khan, who in his turn was sent packing by Yahya Khan, the events of 1971 did Yahya in. Bhutto remained an executive President and a “Civilian Martial Law Administrator” for only a few months before he became PM, at his own volition, under an Interim Constitution. He was PM under the 1973 Constitution, amended beyond recognition, till ousted by his COAS Ziaul Haq in 1977, who himself died in a yet unexplained air crash eleven years later. Senate President Ghulam Ishaq Khan who succeeded Zia in 1978, outsmarted himself in 1993 and along with the PM was shown the door by the then COAS Gen Waheed, who honourably chose not to elevate himself to the Presidency despite the “call of destiny”. Farooq Leghari resigned honourably because he could not accept the dictation of “democratic” PM Mian Nawaz Sharif. Now Tarar has ridden off into the sunset and like any good Subaltern will probably never be heard of (or from) again, i.e. if he has the guts to risk losing his pension and the comfort that taxpayers will keep in coughing up to keep him comfortable in Presidential retirement for the rest of his life. To paraphrase Shakespeare’s Marc Antony during the funeral oration for Julius Caesar, “the good that men do is oft interred with their bones, the evil lives after them. So let it be with Tarar!”

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Shaukat Proposes. Who Disposes?

Some people have their destinies written in the wind, ephemeral in character this disappears like chaff in the face of any crisis. And in any case the wind cannot read. This may or may not be so for Shaukat Aziz, Finance Minister-in-waiting for almost every government in the last decade. With full-time cover of a military regime Shaukat finally got his chance to define how he would govern the economic health of the nation and look after the well-being of every individual citizen, if not till Kingdom Come, maybe for the next three years, or at least for the next year. As “Mission Impossible(s)” go, Tom Cruise had it much easier, and then he had distractions of the other kind, the kind that is anathema to the Ulema who hold Pakistan hostage intermittently. Abandoning the “best dressed list” for the standard bureaucratic white shalwar-kameez, black waist coat outfit was out of character but symbolic. Whatever magnificent plans Shaukat may have had for Pakistan when in faraway land, like the Romans do when on Pakistani soil you do exactly as the bureaucrats want you to do. And when you have the fudgers-in-chief of the last 4 regimes surrounding you, one hardly has any choice.

The abolition of the wealth tax was absolutely brilliant, however this was “a Pindi-dictated” initiative not a Shaukat Aziz one. Wealth tax has been the subject of misuse of discretionary powers by the CBR personnel and the abolition of it must have left CBR shell-shocked (maybe of the self-propelled kind). He came up roses in consolidating of Provincial taxes from 30 to 9. If you own a business you would know how different Departments can drive you crazy taking full advantage of levying some unknown tax, harassing and intimidating you with penalties, incarceration, etc till you cough up. However CBR had the last laugh, importers will now be held to blackmail for “under-invoicing” at the discretion of the Principal Appraiser (PA), the threat of confiscation by Customs Collectors (who will never dare disagree with the PA’s observations) will be very real.

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Cost Cutting

A long with the many ideas being floated for enhancing revenue generation, it is important to find innovative ways for cutting non-development costs and curtailing expenditures. There is a fair amount of recurring wastage and only strict control at every tier of administration can keep this to a very minimum. Add to this the losses due to inefficiency and corruption and we can get quite substantial savings by installing checks and balances at various nodal points to ensure effective monitoring of financial outlays in the system.

There is a dire need to reduce the number of departments in the civilian bureaucracy as well as personnel. There may be a hue and cry about unemployment but it will be far more economical to have people stay at home and collect their salaries than load the government with additional financial burden because of individuals making private telephone calls, excessive use of electricity, misuse of government transport and personnel, etc. Most of these departments have overlapping responsibilities and are breeding grounds for corruption. They burden the already overloaded taxpayers with additional “demands”, both official and unofficial, so much so that tax-payers are in danger of being declared an “endangered species”. To effect meaningful reduction, it will be necessary to do a systematic processing of needs that are vital for the running of the nation matched against the means to accomplish these needs.

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Welfare Society

The fundamental principles of Islam requires that the State looks after the welfare of its citizens, all of whom are equal before the law, there being supposedly no elite. Those fortunate are forbidden from ostentatious display of wealth. They are admonished to bend over backwards to remain identified with those less fortunate and to share their good fortune. All that is theory, in practice there is no system of welfare in Pakistan, mostly it is lip-service in the public sector, in the private sector there is evidence of it but it is sporadic. As much as democracy as practiced in Pakistan was a sham, so are welfare schemes. State-sponsored welfare schemes were present in the communist system but these fell prey to inefficiency and corruption. Our meagre forays in this field have faced the same misfortune.

Welfare Schemes have to cater for (1) those who have no means of earning a living and (2) the senior citizens of the State. The minimum common agenda (MCA) should be to provide them with the bare necessities of shelter, medical cover and enough money for food, payment of utility bills, etc. For those employed by the State there is a system of sorts. The Defence Services are closest to an optimum caring for those retired, the civil bureaucracy has a system in place but it is not adequate enough. For the private sector, schemes were instituted during late Zulfikar Ali Bhutto’s regime but they have been overtaken by rampant corruption and gross inefficiency, the Employees Social Security Institution (ESSI), managed separately by the Federal and respective Provincial Governments, and the Employees Old Age Benefit Institution (EOBI) managed by the Federal Government.

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Balancing the Costs

When the Indians went public with their series of nuclear blasts in May 1998, we were already in serious economic straits. This is an enduring legacy of many past governments but more recently a gift of the Bhutto-Zardari combine that ruled over us from 1993 to 1996, the Mian Nawaz Sharif regime has since been fighting a losing battle. The Indian nuclear blasts presented us with an opportunity to come out of the nuclear closet but it was quite clear that the western powers would make us pay an economic price for the luxury of exploding the bomb. Even then, we could have perhaps survived on the strength of repatriation of salaries from Pakistanis abroad but the foreign exchange freeze of May 28 simply blew us apart. In one surgical strike on ourselves we stopped the in-flow of foreign exchange and destroyed our financial credibility for the future almost irretrievably. Take for example, the innovative US Dollar Bond Scheme recently unveiled by the PM, very lucrative but few takers. Not that the in-flow from Pakistani expatriate earnings has been eliminated altogether, it continues on the basis of “Hundi” but that credit is not counted officially in the exchequer’s data, remaining a part of the parallel economy. That the country has not come apart economically is very much because we are kept afloat by the unofficial sector.

Having shot ourselves in the foot with respect to one of the major props of our foreign exchange reserves, economic sanctions imposed on us by the US and other developed nations affected us in varying degree. Thanks to Indian belligerency after their own nuclear explosions, this proforma application by the US and others did not have much enthusiasm. However, if it had not been for China to start with, and then Saudi Arabia, UAE and Kuwait providing critical “bridge-financing” funds, we would have been bankrupt and in default, in fact we are already almost at the end of the grace period. At the same time IMF, bent on extracting its own pound of flesh, set conditions guaranteed to make the common man come out in the streets in violent protest. Such harsh terms would be unacceptable to any self-respecting government in Pakistan, caught in an economic vice, between the devil and the deep sea, we had few choices but to opt either for seeming confrontation or roll over and play dead. One may or may not agree with either Mian Nawaz Sharif or Ms Benazir, as different from each other as chalk from cheese, on any number of counts but they have one feature in common admirable in any leader, both not only have plenty of courage but on vital issues can stand their ground even to the perils of the seats — and their lives. It is only when they take up confrontation on extraneous issues less than a matter of life and death that one questions their judgement. On the core issue of routine IMF conditionalities like raising electricity tariffs, etc Mian Nawaz Sharif took the route of populism, lowering the tariffs by as much as 30%, positioning himself as a champion of the masses. This reduction was also meant to serve as a factor to stimulate the economy by lowering the price of production across the board. That premise fell apart at the altar of the greed of our industrial bosses who have not responded in kind, opting for profit-taking rather than passing on the benefit to the consumer.

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Voodoo Policies or Noora Kushti? – Searching Questions. Ambiguous Answers

With the postponement of the visit of the IMF Mission to Pakistan, for all intents and purposes the economic battle lines seem to have been drawn with Pakistan heading pell mell into default. Already being labelled as an international basket case, it seems we have no choice but to unilaterally declare a debt moratorium. Within the grace period of a series of small defaults, we seem to be resorting to populist rhetoric to provide answers to the many questions that have arisen to bedevil this country. Because of the looming recession worldwide, temporarily arrested by lowering of interest rates by the US, Pakistan does not figure prominently on international economic radar screens, others being more vital to western interests. A recent article in TIME magazine clearly documented changing western perceptions vis-a-vis the continued integrity of a country once acknowledged as the cornerstone of US policy in the region, to its present outcast status as opposed to the interests of India. On a whole range of issues, political, social and economic, Pakistan is under severe pressure. Unfortunately instead of addressing the issues, Mian Nawaz Sharif seems to be adopting a confrontationist course, this is a deliberate policy that could well be a smokescreen. Is all this for real or are we the witnesses to an elaborate “sting” operation? There is growing suspicion (and uneasiness) that an agreement of sorts may have been reached with IMF on the basis of a secret commitment on CTBT, that all this bluster is meant to mobilise domestic public opinion. Whatever, this head-on policy has worsened investor’s last remaining confidence in Pakistan’s economy, they have been pulling out of blue-chip stocks even, leaving Pakistan teetering on the brink of economic catastrophe. Could this also be a ploy for raking in short-term profits? Maybe we are reading too much into conspiracy theories.

Eighteen months into his rule, the PM has thankfully discovered Karachi, the linch-pin of economic activity in Pakistan. The worsening law and order situation has actively contributed to economic apocalypse and general depression among the intelligentsia and the elite of the city. When the PM very rightly supported a suggestion by prominent concerned citizens for Metropolitan Police in Karachi, the bureaucracy promptly tried to shoot it down point-by-point. In a Catch-22 situation, how can they afford to give up power that ensures systematic chaos and confusion, that in turn allows them to rule the roost in the name of law and order without any check and balance? Not surprising, while the whole exercise is still a zero sum game, it has given a PR photo-opportunity to the PM to “show his concern for the people of Karachi”. The Rs.24 billion economic package will certainly be of indirect benefit to Karachiites in the sense of easing the transportation/communication problems for the benefit of those up-country but what Karachi needs is direct government investment in creating more jobs, both in the public and private sectors in the fields of education, health, transportation, electricity, water, sewerage, gas, roads and other community-oriented socio-economic infrastructure. What Karachi badly needs is local self-government. For such an elaborate scheme to be successful one needs not only political will and the money to back that will but also an honesty of purpose and dedicated approach. Unfortunately we are sadly bereft of these attributes. So unless we can come up with a miracle, the immediate and long-term prognosis is bad for the country. With contempt we noted when Kissinger labelled Bangladesh an international basket case, in the space of one day (May 28) we have gone into two different directions, we became a nuclear power, sort of, and simultaneously commenced our journey down the road to economic ruin.

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