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Mixed Signals on the Economy

For sheer optimism, turn to Federal Finance Minister Ishaq Dar. And why not? When he took over as the nation’s account manager, the foreign exchange kitty was bare and IMF was on a fang baring relationship with Pakistan, mainly because of the nuclear blast but also because of the Independent Power Producers (IPPs) issue and the fact that Islamabad was failing on collecting revenues as well as controlling expenditures. More important there was foot dragging on the institutional reforms IMF desired. Reading correctly the vibes emanating from the White House (courtesy of old IMF and Washington hand State Bank Governor Mohammad Yaqub), troubleshooter Ishaq Dar counselled the PM to hang tough and sack the negotiating team consisting of Advisor Finance (Hafiz Pasha?) and Secretary Finance Moeen Afzal. He then took over the Ministry of Finance in addition to his own duties and lo and behold, the White House’s arm-twisting of the IMF resulted in the long-delayed package for Pakistan being agreed to and the first tranche released. Once the logjam broke, money flooded in and the result saw a strengthening of the Pakistani Rupee on the open market. Nothing succeeds like success and Ishaq Dar has been on a roll since negotiating the minefields with aplomb and confidence, sometimes getting carried away in his use of gender to describe achievement. To his credit he not only explained but also apologised quickly to put the incident behind him, even though his detractors are trying best to keep it alive in order to embarrass him.

Moreover Dar has been pragmatic in dealing with Special Action groups, compromising where necessary without allowing the interests of the Government of Pakistan (GoP) to be eroded. His forthright manner in dealing with issues has invoked grudging admiration. If he had inherited the Finance Ministry a day before the nuclear blast, he would have been the heir to a moderate success story, the day after the blast, Pakistan’s economy had been devastated, GoP’s credibility shot by the freezing of the foreign exchange accounts. Net result was that the safety margin we have because of repatriated funds was gone, even today that safety net does not exist because once the confidence in money management goes it requires a superhuman effort and quite a passage of time before it can be restored. That is the yoke that Ishaq Dar must carry in his quest to restore Pakistan’s economy.

Despite Ishaq Dar’s positive moves, the economy is still far from being out of danger of collapsing if it is buffeted hard by another crisis. The cotton crop has turned out far worse than expected, contributing to the general depression. The wheat crop is expected to be good, thus releasing us of additional pressure. The bad news is that the manufacturing sector has performed very poorly over the past year and imports of raw material have dropped dramatically. Obviously this will have long-term effect down the road. On the other hand, demand for imported consumer items remains high, giving a mixed assessment of the buying power of the masses, particularly in view of the fact that unemployment has risen quite sharply. This uneven situation is alarming because it increases the gap between the have and the have-nots, creating a vacuum tailor-made for anarchy and violence. As it is according to statistics, poverty level has risen from 23% of the population in 1990 to 40% in 1999, this is a drastic reduction in the lifestyle of the masses. Another alarming statistic is that we owe the Asian Development Bank (ADB) about 25% of the total they have lent out to developing countries in Asia, exceeded only by Bangladesh, but out debt service ratio is 35%, the highest, followed closely by Indonesia. This is not a happy performance and reflects badly when credit agencies allocating ratings look at us.

One bright spot has been the performance of the nationalised commercial banks. There has been a remarkable turnaround, led by Habib Bank whose Citibank-trained President Shaukat Tarin has led a dedicated management team in taking Habib Bank out of the woods and ready to be placed on the privatisation auction block. Similarly, UBL’s Zubyr Soomro has managed to make UBL look respectable again. Since the country has been in the throes of a financial crisis since they took over 2 years ago, their performance in the face of adversity has been very significant and praiseworthy. Except for a handful of private banks, the banking sector has kept its head out of the water bringing in innovative schemes to attract depositors, each bank outdoing the other in laying out incentives. The closure of hundreds of branches and shedding of thousands of employees on either Golden Handshake Scheme (GHS) or retirement/termination has made the bank leaner and stronger. There has been a general improvement across the board in operational effectiveness and efficiency.

In the matter of curtailing of expenditures and additionality in revenues, GoP has been very unsuccessful, GoP had brought in a very successful private banker, Moinuddin Khan, as head of Central Board of Revenue (CBR) and within the straitjacket of bureaucratic parameters he had done a magnificent job but his initiatives, mainly in GST, etc, were still-born because of the PM’s constituency among businessmen, wholesalers and retailers who resisted any move at taxation of any sort.

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