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Money Drain, Brain Drain

Now that the Governor of the State Bank of Pakistan (SBP) has come clean and conceded to what was widely known, that there are no US dollars left in the kitty, the freeze on May 28 begins to make much more sense. Having invited our expatriates abroad to send their foreign exchange earnings to Pakistan, our government used up that money to live in a life of luxury that we could ill-afford. When Shahid Javed Burki took over as Caretaker Advisor on Finance in November 1996, Ms Benazir and company had cleaned out more than US$ 7 billion during their tenure. To stay afloat the Mian Nawaz Sharif regime has probably seen through the balance, as much as US$ 2 billion of the US$ 9 billion in Foreign Currency Accounts.


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.


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.


The “Willing” Crowd

As is usual for this time of the year, a number of Pakistani expatriates settled abroad are visiting Pakistan, among them former Caretaker PM Moeen Qureshi (MQ), potential Prime Minister Shahid Javed Burki, former Finance Minister Dr. Mahbubul Haq, etc, (the last named is believed to be returning home to settle in Pakistan permanently). Whether by coincidence or design, they seem to visit Pakistan every time there is some sort of a political or economic crisis in the country. In keeping with past practice, they are doing their usual well-organised rounds of speaking on various platforms, meeting the civil and military hierarchy as well as a cross-section of the people who matter in the Opposition and the Establishment. Dutifully, the print media is effusive about the “pearls of wisdom” that emanate from these economic intellectuals about the measures to be taken to “save” the economy and turn it around so as to provide for a glorious future for the people of Pakistan. Gifted with the gab, having years of experience to back their known brilliance and academic achievements, their solutions still are very much in line, except occasionally perhaps for Dr. Mahbubul Haq, with the known prescriptions of the IMF and the World Bank, the institutions they served faithfully over the years. Dr. Haq has a penchant for human resource development as an agenda of one point, except for him the other two have scant experience in the running of Third World Governments on a day-to-day basis till called to serve, as in the case of MQ as Caretaker PM.

As much as one respects Mr. Moeen Qureshi (MQ) for his outstanding performance as a Pakistani in reaching almost the top slot in a world finance institution despite the BCCI tag on Pakistanis as far as financial credibility is concerned, his ready acceptance of the IMF conditions in August 1993 despite the fact that the Mian Nawaz Sharif Government had initialled a draft in April 1993 having much easier terms, is the raison d’etre for our economic morass today. As the successor elected Government, Ms Benazir was obliged to accept the stiff IMF conditions which certainly gave immediate resuscitation to an economy ailing because of civil strife, but which strait-jacketed her flexibility to manoeuvre in the coming months and years, resulting in economic doldrums as we broke through every danger indicator on the economic path, particularly deficit financing in the past year. If MQ had spent more time in Pakistan, he would have been perhaps more inclined to stiffen up Pakistani resistance to the IMF conditions that were not pragmatic or conducive to the prevailing economic environment. With the opening up of the economy, there was a necessity for increased documentation, but slowly and gradually so as not to “disturb the natives and make them restless”. The second issue one takes with MQ is about shedding crocodile tears for the Muhajir community. Today’s law and order problem in Karachi is not of MQ’s creation but the basically unstable political structure presently in Pakistan is because the MQM did not take part in the National Assembly elections in 1993 when MQ was Caretaker PM and it was his duty to ensure every citizen got due representation at the national level and was not psychologically cast out of the national mainstream. What did MQ do then to redress the MQM’s grievances that in effect changed the entire political balance in Pakistani politics? And which 26 months later remains an insoluble sore point in the list of MQM’s demands? As far as corruption is concerned, at least 1 or 2 of his own ministers made use of their office for personal benefit during the 90 days or so of his Care-taking, why does he not denounce them publicly as he seems to be asking others to do? Or does charity begin at home?