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A Third World Econo-Realist

Dr Ishrat Husain, Governor, State Bank of Pakistan (SBP), who retired in early December 2005 after completing two consecutive and eventful 3 year terms, has been a fascinating study from various vantage points in both my professional and personal capacity, viz being a Director on the Board of a publicity listed financial institution, as a weekly columnist writing on economic, commercial and geo-political matters, and as a friend, A comparable financial intellectual in Pakistan of similar absolute integrity is Dr Abdul Hafeez Shaikh, the Federal Minister for Privatization and Investment. As Pakistanis of good standing, they are both also human beings of some substance; what is really endearing is their humility. Such men are destined for greatness for their country and themselves, provided they are given the chance to do so and not slotted into corners of no consequence.


Return of the Undertakers

Caretaker PM Moeen Qureshi is on his annual “yatra” to Pakistan. On Friday last he spoke on “Pakistan and its economy in the global context” to a gathering in Karachi organized by “The Reformers”, the brainchild of one of the Caretaker Ministers of 1993, Mr Nisar Memon, former long-term Chief of IBM in Pakistan. This elite audience consisting of businessmen, technocrats, intellectuals, bureaucrats etc was carefully selected to get the maximum mileage from Moeen Qureshi’s thoughts to the Pakistan populace. His message of “doom and gloom” was well articulated, he spoke about the eminent collapse of Pakistan’s economy. Our man who lives in Washington (but will agree to live here either as President or PM) has been saying the same thing for some years now, and the inference is that it was only because of his three months Caretaking in 1993 that Pakistan’s economy has managed to survive this long. Moeen Qureshi pontificated a few “priorities” for the military administration, viz (1) long-term loans from world financial institutions at low interest rates (2) restoring investors confidence (3) law and order situation to be improved (4) administration to be strengthened and (5) a long-term poverty alleviation programme to be structured with help of IMF and World Bank. Well, I have news for Mr Moeen Qureshi, with some adjustment to substance and priority, and with all due respects, isn’t that what the military regime has been trying to do for the past year? And Shaukat Aziz as Finance Minister has done a reasonable job in stabilizing the economy, we may default on our debts but not for any fault of Shaukat. Moreover, the heavens will not fall in case of Pakistan default even though there may be wailing in the corridors of the IMF and the World Bank because of the deviation from their prepared script. As much as I have read history and about economies, one cannot come across a single instance where a nation that can feed itself has collapsed economically. Moreover, any child in Pakistan knows that we spend too much on defence, that same child also knows that even that is not enough (by far) to retain parity with the enormous increases in defence spending that India is presently engaged in. What Moeen Qureshi is asking us to do in sophisticated language is to roll over and play dead. He may be a super-salesman for “signing of the CTBT crowd”, disarming and playing second fiddle to India will take some selling to Pakistanis, especially those who live in Pakistan.


Living Beyond Reality

When “everyone” and her uncles were expecting a sanctions-oriented tough budget, the Federal Finance Minister did his usual Houdini-act again. This took the political wind out of the Opposition’s sails and they were left mostly spluttering “Kalabagh.” With unrestrained glee they have been joined by the likes of Jatois, etc i.e. those most likely to be affected by a firm implementation of land reforms. Despite the fact that as Pakistan’s financial guru Senator Sartaj Aziz was symbolically bound in chains, bundled in a sack and thrown into the deep end, he has emerged, wet and shivering perhaps, with a surprisingly liberal but (in the circumstances) enterprising Federal Budget.


Selection and Maintenance of Aim

The primary mission of any government in the world is to tend to the economy. A vibrant economy is the source of life for the people of any country, divergence from the selected aim has meant disaster for many a nation. In the struggle for power since the country was divided in 1971, the economy has been given a very low priority and the result has been that on a pro-rata basis the quality of life in 1997 is far inferior to that enjoyed by the average citizen 25 years earlier in 1972. For divergence from the primary aim we have only got an inferior leadership to blame, a leadership that gives only lip-service rhetoric to its major responsibility, subordinating it to a myriad number of issues with their own priority given to survivability and how to ensure longevity. The unfortunate part is that if the government would concentrate on fulfilling its promise for the service of the people (and only people) as its primary aim, the issue of longevity would resolve in its favour as a side effect of its greater success. However every government that comes to power gets itself so involved in working for the “next” term that they never finish their first term. Despite our hopes for a sea-change in attitudes, we find that Mian Nawaz Sharif’s regime is no different in their approach to governance than their predecessors, they have fallen into the same routine of riding to power as democrats with the “mandate” of the people, then shedding their democratic cloak for absolute monarchy and then attempting to elongate their civilian dictatorship by any number of means. Less than a year into a massive “mandate” from the people, the Mian Nawaz Sharif regime is reeling, mainly because of a penchant to rail against windmills, with the advice of mule-headed Sancho Panzas.


Economic Upturn?

If the boom on the Stock Market and the IMF delegation that was in Pakistan this week are to be believed we are back on the road to economic resurgence, a dramatic reflection of the present government’s economic restructuring drive. Conservative financial analysts do not pay much attention to the price of shares in Pakistan as a good enough economic indicator and the IMF stopped believing the Benazir regime’s fudged statistics since they made it into a state of art, in the presence of stock manipulators and gamblers who have a history of resorting to subterfuges for profit-taking, they prefer to look at the numbers that make up the fiscal deficit, such as the revenues available to meet the current expenditures and the sense of purpose behind structural reforms. However even the most hard-bitten observer will concede that there is momentum which must have origin in conceptually sustainable policies, this has been confirmed by the IMF team which has lauded “the concrete policies of the present backed by political determination”. As we go into the final stretch leading to the celebration of the 50th year since Independence, there is a remarkable parallel in July 1947 to July 1997, on a pro-rata basis that is. Our economic forefathers were then faced with imminent bankruptcy for the fledgling nation, being deprived of their allocated share of funds by British “fairplay”, they had too little in the kitty and too much to pay for. The vast difference in 1997 is that in 1947 in contrast to almost nothing in the areas designated for Pakistan, India had a wide range of medium to heavy industries with a sophisticated infrastructure in support. Pakistan virtually caught up in the 60s till the Bhutto hiccups “one” and “two”, father and daughter’s horrendous economic shortcomings paling before the voracious Zardari appetite for unadulterated greed almost put paid to us economically. In the early 60s, we were a model for more than a decade.


Read His Lips, No New Taxes!

The best from the finest must come at a critical point at the worst of times. The very believable economic survey that preceded the Federal Budget was scary, the sustained economic crisis it portrays in 1976-1977 equals if not surpasses the political crisis that broke the country in two in 1971, coincidentally almost 25 years apart and coming during the Golden Jubilee Year when we should be celebrating development and progress since independence. 1971 was the year our leadership across the broad spectrum failed us at a critical moment of truth, for all purposes till Friday June 13, the year 1997 was economically going down the same tube despite some glimmer of hope with the advent of the Mian Nawaz Sharif regime. With the chips really down, this government has risen to the challenge. By enunciating a pragmatic supply-sided no-new-tax budget, Mian Nawaz Sharif’s regime has confounded critics and believers in status quo. The acid test of leadership is to choose your managers with care, the right person for the right job, as well as the courage and ability to take calculated risks. In putting confidence in Senator Sartaj Aziz and going with the overturning of traditional logic in budget-making, Mian Nawaz Sharif has come up trumps.

The gameplan inherent in the Budget proposals is simple, decrease taxes per capita and thus encourage increasing of volume on the whole. The idea was to give relief on both ends of the spectrum, to the common man as well to business and industry. By reducing the burden on industry, manufacturing costs would become lower, within reach of the additional funds available for spending by consumers. As the Leader of the Opposition grudgingly conceded, it is an incentive-oriented, relatively tax-free budget, but as she peevishly did not concede, it is a brave, innovative and challenging set of budgetary proposals to meet a very bleak economic picture. The business community that was anticipating belt-tightening, is virtually speechless, as one newspaper put it, agog. The Opposition, armed to the teeth with statements about the anticipated increase in taxes, has been set adrift spluttering with frustration. To put it bluntly, they have no case to propound.


Monitoring Supply Sided Economics

Complementary to Ronald Reagan’s supply-sided economics of lowering taxes across the board and controlling expenditures, thereby consecutively generating productivity, Thatcherism’s main props are disinvestment and denationalisation of the socialistic public sector. Both philosophies coalesce in the full-fledged exploitation of private sector entrepreneurial expertise by disengaging the State from everyday life of the average citizen. The Sartaj Aziz initiatives inculcates both the capitalistic principles, cutting down of public sector involvement on the one hand and drastic lowering of taxes and duties on the other. His prescription is that reduction of government expenditures and the taking over of the inefficient public sector by the competitive private sector is thus matched by tax reduction incentives to entrepreneurs to lower prices, thus making it more attractive for consumers to spend more. This in turn creates a possible economic cycle of more products and services which not only makes of the resultant shortfall in revenues but also creates more jobs. The sum total of disengagement when multiplied by reduced taxes leads to force-multiplier productivity. This is the logic Finance Minister Sartaj Aziz used to excellent effect with IMF MD Michel Camdessus during his recent visit to the US. In any society where an effective monitoring mechanism exists, this strategy has a good chance of success. In a country where the basic tools of monitoring assessment and collection of revenues are flawed, this route is more than a calculated risk, a gamble that the country may well lose without the safety net of adequate and precisely structured monitoring arrangements. For the record, while seeking the Republican nomination for 1980 US Presidential race, George Bush had attacked then candidate-aspirant Ronald Reagan for espousing “voodoo-economics” as supply-siding was then labelled by him. When George Bush later became Reagan’s VP running mate in his bid for the US Presidency, the Democrats made him virtually eat his words many times over. As US President in his own right in 1988, George Bush faithfully followed the hitherto successful economic prescription of his predecessor till he faltered at the increasing budget deficit and went back on his campaign promise, to quote, “Read my lips, no new taxes!”. Despite the most advanced tax collection machinery in the world, the US economists could not accurately predict that revenues would be far short of projections and expenditures far more than planned, the resultant gap necessitated fresh taxation and destroyed President Bush’s credibility with the US electorate and his bid for a second term. Even the vaunted US Internal Revenue Service (IRS) cannot keep up with human ingenuity for devising circumventions, it has now reverted to putting the onus on the individuals as regards burden of proof with respect to the means to maintain their visible lifestyles.


Calculated Risk

After crucial discussions last week between the Finance Minister Senator Sartaj Aziz and the Head of the Fund Mission Muhammad Al-Eryan, the IMF official went back to Washington and made a presentation to the IMF Executive Board that in essence stated that Pakistan’s radical proposals for the revival of the economy was a “risk worth taking”. The major element of the calculated risk is based on the proposed size of reduction in taxes. As such the IMF team has recommended that talks be started with Pakistan to switch-over from the costly Stand-By Arrangement (SBA) to the low-interest Enhanced Structural Adjustment Facility (ESAF). In effect while expressing concern over the proposed massive tax reforms IMF seems to have bought the argument of the Pakistan side that SBA would add to the debt and in effect we would be running in place without any forward movement whereas once the “ball and chain” of high taxes was removed from our legs, our progress would be slow but sure. The logic of the Finance Minister’s arguments, buttressed by the position papers of 11 Task Forces composed of businessmen and senior government officials set up by the PM, impressed IMF that this time Pakistan meant business. We must recognize that the future lies in facing the obvious and determinedly tackling it, not in “fudging” statistics to fool others. In the end not only did we manage to fool ourselves but we had a date with economic disaster that only Presidential action, and subsequently the Herculean efforts of Shahid Javed Burki, managed to avoid.

The reduction in taxes means that there will be a commensurate shortfall of revenues. Senator Sartaj Aziz has taken Pakistan down this road of a calculated risk in the logic of “Supply Side Economics”, made famous in the 80s by President Reagan. In effect this strategy is based on the premise that lowering of taxes will in turn stimulate production and the resultant increased production will mean additional taxes, which being lower, will encourage all concerned to pay. This is an excellent logic because higher taxes meant increasing the cost of the product, putting it beyond of the reach of the consumer to purchase and thus making production stagnant as stocks remained unsold. This lack of demand resulted in most of our industries coming to a dead stop, there was immediate need to revive them by taking pragmatic measures which would increase demand and lead to increased production. The business community must now respond by paying its due taxes.


Where Do We Go From Here?

The recent Federal Budget has increased the threshold of pain that the common man has to endure because of the misconceived policies that a “democratic” regime is implementing in horrendous fashion through an errant bureaucracy. Despite what Mr. VA Jafarey claims, and Mr. VA Jafarey has been making quite a number of claims to the contrary recently, the economy is in serious trouble. If it were not for our much vilified parallel economy, the same that everyone (and his/her IMF uncle) wants to document and cannot, we would be up the creek with only a begging bowl for a paddle. The Pakistani Rupee is sliding ominously against the US dollar and the country’s stock markets are barely kept afloat by frequent doses of massive public sector intervention. An economic disaster-in-the-making is not a startling revelation, not only does it cost the man in the street more to go on living, everyday drives him deeper into debt. The middle class cannot afford to die even, their hard-saved life insurance may not be worth the paper it is written on, given that the Ministry of Finance (MoF) has requisitioned almost all of State Life’s funds to create the instant liquidity Government of Pakistan (GoP) seems to acquire whenever an IMF deadline approaches. Creative accounting be damned, we have resorted to outright fudging to maintain the financial lie that all is “milk and honey” with respect to our economy.


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.