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Creeping Economic Anarchy

In order of priority the three major sectors of our economy are, viz (1) agriculture (2) industry and (3) services. Our planners set very ambitious targets for Financial Year 2000-01, most of which cannot (and will not) be met. Because of acute shortage of water (and other reasons including WAPDA’s shift to metered electricity in place of a flat fee), farmers were forced to reduce acreage under cultivation. The output of sugarcane and rice declined by as much as 19.1% and 11.4% respectively. Cotton registered a slight increase of area under cultivation, the overall production remained the same. Punjab harvested more wheat, it was offset by decreases in Sindh due to lack of irrigated water, even if grain production manages to reach 700,000 tons if the rains do come, it will be well short of the projected 772,000 tons. Given that cotton, rice, sugarcane, grain and wheat account for 94% of the agriculture sector, there will be an overall decline in all the levels forecasted. According to the Islamabad-based dream merchants’ optimistic predictions the people will not starve, shortages will be made up from buffer stocks but even they concede that the overall economic outlook for the year 2001-02 is exceedingly bleak. Given that acute water shortage is imminent, we are well on our way to a creeping economic anarchy.


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.


Born-again Muslims

The government of Mian Nawaz Sharif recently moved a Bill in the National Assembly (NA) for the 15th Amendment to the Constitution (popularly known as CA15). Certainly the government could not have chosen a worse time to launch another initiative. On a number of major fronts, the Mian Nawaz Sharif regime has been facing disaster, starting with one certainly not of its making. It is incumbent on any government to maintain control over the tension level, each major initiative has raised apprehensions as well as the stakes, polarising society along the way at a particularly critical time in our history. Has anyone in the regime’s camp heard of such a thing as a “trial balloon?”

A number of major contributing factors encompassing decades of bad governance and malpractice went into the economic crisis that we were immersed in at the beginning of May 1998, culminating in the hands-on looting of the public exchequer during the Asif Zardari-Ms Benazir regime circa 1993-1996. Despite widespread institutionalised reforms and the putting in place of supervisory controls by Mian Nawaz Sharif’s economic team, the economy continued to deteriorate but displayed some early indicators of possible recovery. Then came May 8th and 11th and our world changed overnight. Suddenly we were under immeasurable domestic pressure to counter the Indian blasts and under severe external pressure not to go ahead with a response. As we stood between the devil and the deep sea, the Indians launched a most vicious propaganda campaign, designed to rub our noses in the dirt, to wreck the nation’s morale, “to win a war without bloodying swords,” to quote Sun Tzu. The proliferation of vitriol decided our May 28 nuclear response at Chagai, we were left with no options but to either “eat humble pie” or to “eat grass.”


Overcoming the FX Crisis, Pragmatically

Brutally expressed, there is no further credibility left in our written sovereign commitments. That erosion of confidence has seen a massive outflow of US dollars as witnessed by the depreciation of the Pakistani Rupee, the difference being unofficially upto Rs 9 at one time. From May 28 onwards there has been a series of ill-considered initiatives, starting with the deep-freeze of all foreign exchange accounts, that has undercut Pakistan’s future as a guarantor of any financial agreement or transaction. The net result is that inward foreign exchange remittances have mostly dried up, at least along the legal route and in the present environment, and for the foreseeable future, because no one is going to trust Pakistan’s word. The crucial element in the gameplan to the sanctions was remittances by expatriates, these will not be forthcoming anymore, unfortunately that confidence flow has dried out.

Why did things come to such a pass? Unfortunately out of the US $ 11 billion that came into the foreign currency accounts since 1992, almost 70% was used up by the Benazir-Zardari government. What the Caretaker Regime inherited in late 1996 was almost a bankrupt kitty, in turn they passed on only a few weeks of foreign exchange reserves to the Nawaz Sharif regime in 1997, about US $ 300 million only and that took some doing by Shahid Javed Burki who was looking after the Finance portfolio in the Caretaker regime. Fresh remittances and austerity measures had built up the Reserves to US$ 1.5 billion over the past 18 months. It is now a fact that withdrawals of almost US $ 150-200 million from May 23 onwards convinced the government that the nuclear blast would cause panic withdrawals because of the anticipated economic sanctions. The result was the imposition of emergency and the deep freeze of all foreign currency accounts. As a temporary measure it could have been overlooked by the investing public but when it became apparent that the government wanted to Rupee-fy the deposited US dollars on GoP terms, the public confidence rapidly eroded. Since then the erratic course followed has been a multiple disaster for the country. Since credibility is a must factor for those seeking to establish financial havens, we are a non-starter in this category. As this article goes into print, the zigzag policy persists and as Maxim suggested in last week’s (Saturday July 4) cartoon in THE NATION, someone would have to be mental to send money into Pakistan.


IMF Conditionalities versus Economic Realities

The major reforms that the Bhutto government is depending upon to bail out the economy and the country from its present state of crisis are IMF dictated strictures such as (1) controlling of expenditures (2) increasing revenue collection (3) imposing financial discipline in public sector financial institutions (4) imposition of farm taxes (5) extending General Sales Tax (GST) to cover every product and (6) reduction of defence expenditures. It is only due to the existence of our very vibrant parallel economy that we remain alive and well despite being supervised by the most atrocious team of economic managers that this country has ever known. Since almost all social and political aberrations have origin in the economy, the social divide and political crisis we are immersed in can be said to be caused by the partial failure of the economy, directly attributable to mismanagement.

Whereas most of the reforms sought by the IMF are neither uncalled for nor surprising, at least one does not reflect geo-political ground realities. Almost all governments are guilty of excessive expenditures, mostly because of lack of control or deliberate misuse of funds earmarked for (1) entertainment (2) travel (3) telephone calls (4) transport and fuel (5) medical and (6) personnel. Arguing how to control all this would be futile, let us simply “privatise” the concept of bureaucratic perquisites (“perks”). To provide transportation and fuel, the Government should select a standard economy car (Suzuki Alto, Khyber or Margalla or equipment depending upon the Grade) for the public servant and lease it out at 50% of the lease cost, the government bearing the balance, giving the public servant a fixed amount for a driver and fuel, on a sliding scale depending upon the city classification (whether expensive, average or low cost). Let the bureaucrat contribute to medical insurance from a government approved panel, the government paying for the insurance premium. As regards using government employees as household servants, this should be forbidden except in the case of few public residences such as the President’s, PM’s, Governor’s, Supreme and High Court Judge’s and Minister’s. For telephone calls, give the bureaucrat a fixed amount for local calls and have him justify each long distance call before reimbursement i.e. if it could not be done by E. Mail or courier, if it was that urgent. Elected representatives who become public servants (i.e. Ministers, Advisors etc should have a little variation as aforementioned e.g. their vehicle can come from a small staff pool — and no more than one vehicle, an economy model at that).


Pre-Budget Expectations – The Proverbial Magic Hat

Balancing the nation’s books is more akin to Houdini trying to get out of a closed sack underwater with both hands and feet tied and chained. Pakistan’s Houdini, Mr Sartaj Aziz will spell out the economic destiny of the populace for the coming year in the National Assembly (NA) on Friday June 13 (lucky or unlucky, take your pick). Not only are we deeply in both external and internal debt, we are in dire danger of defaulting on our instalments of both Principal and Interest thereof. With revenues decreasing instead of registering an increase, with the weather hostile to obtaining a semblance of food autarky, with a corrupt revenue-collection machinery dragging its feet, with traditional aid-givers adopting a wait-and-see attitude, etc, it is a brave, selfless man indeed who would happily function as Pakistan’s Finance Minister, a thankless job in the company of thankless colleagues and a demanding people. People (Dr Mahbubul Haq in the front row) are now waiting to see whether the man chosen to be the sacrificial lamb by the Nawaz Sharif regime will fall flat on his face or pull the proverbial rabbit out of the magic hat.

Fed up with fudged statistics by the Bhutto regime, neither the World Bank (WB) or the IMF were happily disposed towards Pakistan or ready to accept Pakistani numbers with any credibility. For the record WB’s President Mr Wolfenson has recently denied Ms Benazir’s accusation that the WB was an accomplice (along with Farooq Leghari and a host of others blamed by Ms Benazir for good measure not excluding the voters who voted against her) in the sacking of her corrupt regime. IMF’s Mr Camdessus reluctantly did concede that he had been taken in by her considerable “charm” and what Mr Sartaj Aziz stated during his visit to the US was “music to their years” (a direct quote) in the sense of long-term structural reforms of the economy. The deliberate mechanism needed to correct the imbalances in the financial sector involves downsizing the administrative structure, drastically reducing the size of the public sector, bringing in private sector entrepreneurial and cost-cutting measures into effective employment in the administration, etc. As a preamble to his budget proposals, the Finance Minister does not simply signify rhetoric, he means it. Because both the WB and the IMF seem to believe this, there is every likelihood that we will have access to almost US$ 1 billion in comparatively conditionality-free External Structural Adjustment Facility (ESAF) at 0.5% interest rather than the expensive conditionality-ridden Stand-By-Arrangement (SBA) at 6% plus what we got in 1993 due to Moeen Qureshi’s generosity to the people of Pakistan. Sartaj Aziz was close to an ESAF agreement in April 1993 when Ghulam Ishaq Khan sent Mian Nawaz Sharif packing the first time around. Instead of working ourselves into a frenzy about IMF conditionalities, we should accept that some of it is plain common-sense stuff, it is only in the matter of prices of foodstuffs and other essentials that we must stiffen our backs.


Pre-budget Economic Review – Benazir’s Choice – II

(This is the SECOND in a series of THREE articles on the subject)

Statistical indicators clearly show the deep malaise in the economy with inflation, deficit spending, corruption, etc eating away like a bunch of rats at the vitals of our economy. With revenue collection falling way short of projected targets and non-development expenditure on the rise despite Government of Pakistan’s (GoP) best efforts, GoP’s budget makers have to accomplish a Houdini act to get out of this financial Gordian knot. About the only positive indicator for GoP at this time is the blizzard of MoUs that signal the PPP regime’s all-out resolve to get foreign investment into the country at any cost, even by “mortgaging the country’s economic assets” according to a recent statement of the Faisalabad Chamber of Commerce and Industry (FCCI). The MoUs notwithstanding, all other indicators point to a gradual slide to impending economic doom.


Pre-budget Economic Review – Economic (or Bubonic) Plague? – I

This is the FIRST in a series of THREE articles on Pakistan’s economy)

The Government of Pakistan (GoP) has boxed itself into a corner by its rhetoric about a supposed economic miracle which is far removed from the actual health of the economy and the portents of its future. A relatively moderate (but reasonable) performance by the present regime in the face of concentrated domestic and external economic adversity has come out in bad light because of unnecessary bombast. About expectations and targets set forth far beyond bureaucracy’s ability to accomplish, particularly because adequate documentation of the economy is lacking. Four areas must be studied to obtain a comprehensive overall economic review, viz. (1) Growth, GDP and Production (2) Public Finance (3) Relations with IMF and lastly but most important (4) Inflation and Prices.


Mid-year Economic Review

The Government’s rhetoric expounding the economic miracle that they are supposed to have wrought in the space of a year and some is so different from the actual facts on the ground that when compared with the relatively moderate performance by the present regime, it comes out in bad light. Given that the economic morass we had descended to in 1993 due to the political freeze, for which the present regime has to accept a major share of responsibility because it was the gridlock of administration that they, as the then Opposition, used as a modus operandi to bring down the Nawaz Sharif government, we are not in as bad a shape as we could be, again relatively speaking. The general performance of the economy is considerably short of the over-ambitious expectations and targets, that is the major reason for the increasing loss of confidence in the policies of the Government of Pakistan (GoP). Four areas can be highlighted to give a comprehensive overall economic review, viz. (1) Growth, GDP and Production (2) Public Finance (3) Relations with IMF and lastly but most important (4) Inflation and Prices.


Banking on Trouble

One of the most important Ordinances enacted by the Moeen Qureshi Caretaker Administration was the State Bank of Pakistan (SBP) Ordinance of October 1993. This gave virtual autonomy to the SBP thereby separating the governance of fiscal and monetary policies. This Ordinance was due to expire on Feb 5, 1994 if it was not passed by the NA or the Senate but it was repealed on Jan 1, 1994 and replaced with another which has considerably curtailed the independent status of the SBP. To understand the intricacies of the how and what for, one must come to layman’s terms with certain economic facts that govern fiscal and monetary policies and the mutual relationship thereof.

Market oriented economies have three principal objectives, viz. (1) economic growth (2) financial stability and (3) viability of external sector of the economy. While economic growth is self-explanatory, financial stability requires price stabilization, maintenance of people’s confidence in the currency of the country and the viability of financial institutions while persevering with consistency in financial policies. To maintain the viability of external sector of the economy there should not be a unsustainable large balance of payments deficit and that automatic inflows over the mid-term period should take care of balance of payments problems. To achieve these three micro-economic objectives there are two sets of approaches, viz. (1), market oriented and (2) centrally planned, centrally directed approach i.e. State ownership, complete regulation and direction, etc.