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Five Minutes to Midnight

The Punjab CM, Mr Shahbaz Sharif, and the Federal Finance Minister, Senator Sartaj Aziz, air-dashed to Abu Dhabi and Saudi Arabia this week in a desperate effort to get funds so as to keep the country from defaulting. The Nawaz Sharif regime inherited US $ 300 million only in foreign exchange reserves in early 1997 but had raised them to US$ 1.3 billion in about 18 months, the imposition of emergency on May 28 and the deep freeze of all foreign currency accounts changed all that. In the face of sanctions a temporary measure could have been overlooked by the investing public but when it became apparent that the Government was dead serious in wanting to Rupee-fy the deposited US dollars at the official rate, the public confidence rapidly eroded. Since then a rather erratic course has been followed with disastrous consequences.


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.


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.


The Economics of Despair

Just a day before the Presidential Address marking the beginning of the 3rd Parliamentary year for the present National Assembly, Mr VA Jafarey, Advisor to the PM on Finance and Economic Affairs, made a “surprise” announcement on prime time national media that the Federal Government had decided to devalue the Rupee by 7% and increase fuel prices by a commensurate amount while imposing some “temporary” regulatory duties (10% on dutiable and 5% on non-dutiable as long as the total tariff did not exceed 65%). Wheat, fertilizers and import of power generation plants under the energy policy (upto a maximum of 3000 MW) were exempted. The official US dollar parity with the Pakistani Rupee has weakened to Pakistan’s detriment from Rs31.85 to Rs 34.25, a difference of Rs 2.40. The Pakistani Rupee has thus depreciated Rs 3.28 or (10.59%) from Rs 30.97 in the four months since the Federal Budget in June 1995, unofficially it will be pegged closer to Rs 35 (an actual devaluation of 13%), the figure it should “officially” cross by end December 1995. One feels that the Government should have gone the whole distance in one go instead of creeping to that figure.


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.


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.