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State of the Economy

A year into the PPP’s ascent to Federal power, it is time to take stock of the economic health of the nation. While the effect of long-term measures cannot be visibly discernible during this short period, the economic indicators are more apparent and a coherent picture emerges of the performance of Ms Benazir’s Government.

The PM has avidly preached and practiced a tight fiscal policy. While the temptation to lessen controls must have been severe on a populist regime, it must be said to her credit that she has gone along with the dogma of her experienced economic advisors, V.A. Jaffery and AGN Kazi, in maintaining monetary discipline in contrast to popular demands of the political profession to appease the masses. Monetary expansion during 1988-89 has been about 5 per cent less than half of the increase in the preceding year when we were being led down the garden path of economic apocalypse by that great economic yuppie and ex-whiz kid, Dr Mahbubul Haq. By the end of 1989, we were in the early throes of galloping inflation, which has been held down with some sacrifice on administrative expenditures down the line. This has resulted in the Budget deficit declining from 8.5 per cent of the GDP to slightly more than 7 per cent of GDP. On any economic scorecard, the reduction of the Budget deficit is quite an achievement.

On the other hand, because of the cap on credit ceilings of commercial banks on IMF “advice”, the Government has had to resort to non-bank borrowing to make up the Budget deficit. Since non-bank borrowing is always more expensive than credits from banks, we are increasingly in the vortex of a high priced debt (to the tune of almost Rs 30 billion), to be redeemed in the future. In the same manner we have diverted foreign aid to make up budgetary shortfalls with the result that our balance of payments deficit has climbed to about US$ 2 billion in the preceding year, the highest reliance on foreign debt for some time.
Any layman can well understand that this will have economic repercussions in the future and we should have exercised the same fiscal prudence displayed in our monetary policy.

The nationalised commercial banks and DFIs are in complete disarray for a variable number of reasons, the prime being nepotism-oriented infusion of fairly inexperienced favourites to senior banking positions, thus affecting morale and efficiency within the financial institutions. It is never correct to play around with the stability of financial institutions by induction of inexperienced executives, whenever you erode the confidence of senior executives it is bound to be reflected in stable banking performance. In quite a few cases, novices have been moved into critical financial niches, this has had a dampening commensurate effect down the line. The PPP must take steps to renew confidence and staff morale in the banking profession by merited promotions and appointments. As it is, the nationalised banks’ performance has continued to be lacklustre and prone to widespread corruption.

In this respect, the existence of the Pakistan Banking Council (PBC) in the presence of the State Bank of Pakistan has been an anomaly. The PBC must be scrapped immediately, in the presence of PPP’s determination to hold down expenses, it must be one of the world’s most exclusive and costly retirement homes for unwanted senior banking executives, barring the appointment of the Presidents of the PBC, that is. While members of PBC must certainly be innocent of wrong-doing or other nefarious pastimes and have suffered only because of their honesty and refusal to bow down before the demand of corrupt individuals, some of these characters should be charge-sheeted for the billions of rupees that they have paid out in irrecoverable loans to their favourites (and by proxy to themselves). It is high time that the banking executives were made accountable. At the second and third level there are many honest and capable professionals who can be promoted on merit to senior positions, to which no doubt they will bring credit (no pun intended). No amount of good intention will succeed until such remedial measures are taken that bring in accountability while recognising merit and potential. The commercial banks have had a miserable performance in mobilising domestic resources, the national savings coming down by 1 per cent from 13 to 12 per cent. The poor management in the DFIs has prompted the World Bank to refuse credit to two public sector DFIs in Pakistan, one of them is believed to be PICIC.

For whatever reason, the brightest spot since 1971 has been the rate of private sector investment in the last year, which has overtaken public sector investment for the first time in the last two decades. While the previous regime’s economic planners claim that it has been their policies that are taking effect now, a long-term residual performance, perceptions among knowledgeable economic circles is very different. One of the major reasons for giving credit to the PPP is the wholesale abandoning of their nationalisation programme, a platform that had spelled economic doldrums for the country in the 70s and retarded national growth during the whole of the last two decades. Ms Benazir Bhutto a la Thatcher has on the contrary come out whole hog for privatisation in place of nationalisation.

The Pakistan experience only shows that while in certain areas the public sector is necessary to ensure equitable availability of supplies and services for the masses by keeping these out of the clutches of some of our very greedy robber barons, the bureaucratic elite (at least the dishonest among them) have become wealthier than most of them. Needless to say, the interested commercial circles are waiting anxiously for the first phase of privatisation, modest in shedding of public shares though it may be. The targeted institutions like PIA, Sui Northern and Muslim Commercial Bank are well selected but there has been inordinate delay in the whole process. Happy Minwalla, the PM’s Ambassador-at-Large and coordinator of disinvestment needs to get on with it. While public funds will certainly be freed, small shareholder investment by the middle class will create a new dynamism.

Pakistan’s middle class is keen to invest their savings for better return than the fixed amount offered by the banks. In the investment sector, the greater quantum of investment in the 20 per cent increase has been in small-scale industries rather than in medium or heavy manufacturing. For the first time also the services sector seemed to have taken the place of honour from the manufacturing sector. While not exactly a catastrophe for the economy, it is not a happy event, as steady growth in the manufacturing base is badly needed for rejuvenating the economy. Another bright spot has been a steady increase in home remittances signifying confidence in the economy by our expatriate workers. The Stock Exchange has also been performing well above par signifying commensurate investor confidence. One of the effects of the squeezing of monetary expansion has been reduced inflation, in the face of spiralling costs in the first part of the year, the curbing of price rise to an average of about 70 per cent is some achievement. One of the other effects of curbing inflation has been to reduce development expenditure in the public sector; this will have a retarding effect in the ensuing years. An impressive growth rate of 5.2 per cent is well-maintained, though in the face of 3.4 per cent population growth the gap of only 1.8 per cent is hardly spectacular.

True to its electoral promises, the sanctioning of investment has been creditable although actual implementation is far from satisfactory. Unbridled investment sanctions without availability of credit has created new problems, most sanctions have been held up to fruition because commercial banks and DFIs do not have any liquidity to advance any credit. Most sanctions have also been made to favourites of some kind. Instead of letting a “hundred flowers bloom” by allowing proliferation of investment banks in the private sector, the sanctioning of permission has been very slow with the result that the private sector funds have not been mobilised as they should have been. Foreign investment has been much more shy than we have been led to believe.

Our Foreign Trade index has shown a marked 8 per cent decline as the volume and cost of imports have steadily risen without commensurate rise, indeed a stagnation in exports. Because of devastating floods and pre-election uncertainties, the growth in exports last year was stunted. This year, despite the decline of the exchange rate against the US dollar, the devaluation has hardly brought any expected gains in exports, this has been an exceedingly sorry performance.

On balance, this has been slightly better than a mixed performance, the PPP comes out better in comparison on a pro-rata basis to the last year when considering all possible intangibles. Under great political pressure, the PM did not succumb to tempting politically motivated populist measures and has thus succeeded in controlling inflation and reducing deficit. Given time she is more than likely to attract foreign investment with her charisma and international credibility. The question arises, will she show the same pragmatism in choosing her professional aides with courage and far-sightedness rather than relying on known leeches draining her of political capital among the masses?


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