State of the Economy
Eighteen months ago, the Pakistan Rupee was pegged around 18 to the US dollar, at that stage one felt that it should have been closer to 20. The gap between our perceptions and that of the State Bank of Pakistan has been consistently Rs 2 or 10%, almost as if 10% was the margin kept as “Reserve for Unforeseen”. Creeping devaluation, average rate of paisas 10 every month, has managed to keep a tight control in a volatile Economic situation. Ashraf Janjua, Economic Advisor to the State Bank of Pakistan, had an excellent Question and Answer session with economic journalists on Monday April 24, 1989, it seems both sides learnt to some extent the craft and perceptions of the other. Mr Janjua earlier had given an excellent dissertation of the approach of the State Bank to fiscal policy, his candid views were very refreshing. Though Mr I A Hanfi, the Governor of the State Bank, missed the function due to an unscheduled but fortunately successful operation of the gall bladder, his gall at the scope and intent of even permitting such an open discussion, seldom previously attempted, was exceedingly welcome, no doubt encouraged by the standards of frankness instituted by his predecessor, Mr V A Jafarey, now the Advisor to the PM on Finance.
It was during V A Jafarey’s initial tenure at the State Bank that the first candid analysis on the national economy to ever appear in print from official circles saw the light of day, authored to an extent no doubt by Mr Janjua. The Annual Report of the State Bank of Pakistan 1986-87 took the then government to task for bad fiscal management. Dr Mahbubul Haq ensured that the subsequent Report of 1987-88 did not slip through bureaucratic controls and a watered down version saw the light of day. In Mr V A Jafarey’s new role in the making and managing of fiscal policy, he is faced with a horrendous situation, should he chose grand rhetoric to cover all shortcomings or can he afford to be consistently forthcoming? He has nothing to gain by covering the mistakes of the previous regime, so one feels we are in for a period of GLASNOST, if it persists in being frank about the mistakes that the present regime must also make in the normal course of governance, we should have seen a real metamorphosis in our advent to democracy. The State Bank has played a great role in maintaining economic sanity during a very troubled fiscal period for Pakistan.
The economy is in utter shambles, that economic apocalypse has not yet arrived is not only due to good luck but because the parallel black economy generates a momentum of its own free from of the shackles of bureaucratic control. We have really been living on borrowed time, it is only a matter of course that we will soon be equated to the economic conditions prevailing in the worst of the debt-ridden countries of Latin America. Part of the problem has been the childish penchant of Dr Mahbubul Haq and others to portray their personal accomplishments for the benefit of the World Bank and IMF by way of high growth rates as much as 5.8% during the last fiscal year. High growth rates during the last decade were achieved at great economic cost to the nation, by criminal neglect of the infrastructure of society and their quality enhancements i.e. roads, railways, transport, electricity, water, gas, etc, it has created an economic handicap, a loaded gun waiting to go off in the solar plexus of our future. Dr Mahbubal Haq used deficit financing as a tool for every occasion, well-knowing that bank borrowing to stay afloat has meant that domestic debt now constitutes Rs 284.5 billion at the end of 1987-88, 41.5% of the GDP. During the past few years it has doubled, growing at the rate of 23.1%, consequently the absolute amount of interest payments has doubled in less than 3 years, a cumulative debt cycle which shows no signs of easing. At the same time recourse by the Government to borrowing from the banking system has frequently “resulted in the rate of monetary expansion exceeding the targeted growth rate”. Credit budgeting has proved to be an effective instrument, relative price stability that has accompanied high growth rates in GDP is because of prudent monetary policy.
The agriculture sector made a significant contribution to the GDP in 1987-88, having doubled in comparison to the previous year. International pressure on our principal commodities of rice and raw cotton has been well withstood, with an upswing the world over the cumulative agriculture performance has been a saving grace for the economy. There is a constant need for us to invest in agriculture as we are primarily an agri-based economy but one finds that as compared to the number of financial institutions in support of industry and commerce, agriculture hardly has multiple choices, no doubt the Agricultural Development Bank of Pakistan (ADBP) and the Federal Bank for Cooperatives (FBC) have done yeoman’s work in this regard. There should be more Development Finance Institutions (DFIs) primarily devoted to agriculture, with the mandate to mobilise funds very much like NDFC has done for WAPDA, e.g. Bearer Bonds etc. Our peasants live in an ever deepening debt cycle, much more vicious than that faced by their urban cousins, we must have credit institutions to take the poor out of the clutches of money lenders flourishing at exorbitant interest rates. In this respect, the PM has repeatedly spoken of the need for more investment banks as definitely being the requirement of the hour, one suggestion is not to award these as political plums but regulate them on a free market basis letting market forces decide their survivability. It is also a sure method to garner in black money into the business of rapid industrialisation of the country. Take the instance of the small-scale industries, nobody seems to realise that the remarkable rate of growth is mainly attributable to these small industrial undertakings having little or no bureaucratic control and thus having no relation to any so-called whiz-kid’s efforts. This is a great economic indicator, the absence of the strait-jacket of bureaucratic control has allowed that portion of the economy to run free — and thus prosper in an atmosphere of independent of artificial restraint. A case for de-nationalisation of everything but what is essential to the State is easily formed on the basis of the small-scale industries’ salutary achievement.
The biggest problem that we face today is the foreign debt burden, accentuated in the last days of the previous regime by massive short-term borrowing with the result that our debt servicing has jumped from US$ 750 million to US$ 1.5 billion in the year alone, hardly an indicator of good economic management. In the circumstances, an agreement was signed by Dr Mahbubal Haq with IMF in October-November 1988, the tough conditionalities were left to hang like a Sword of Damocles over the present Federal Government. This was patently unfair, a sort of parting kick to the masses, now looking for succour from a populist PM. We are then faced with a situation which may yet be resolved in the streets of Pakistan, Venezuela and Jordan having survived but barely recently. Luckily for us IMF has not come away looking good in either case. US$ 3 billion plus has been promised by the Aid-to-Pakistan Club but while this is a significant vote of confidence in the international credibility of PM Ms Benazir, it is nothing to be euphoric over the long-term, our children and grandchildren will have to pay for it through their noses when they grow up. Why should we put their future in hock?
To come back to the problem at hand, how to resolve the budget deficit without resorting to additional taxation, the Government is faced with an unenviable burden. While clearly luxury goods need to be exorbitantly taxed, great effort has to be made to curb smuggling. The government effort to make the cost of luxury goods prohibitive while allowing their imports in order to generate revenues will go to waste without a positive Federal effort to close our land, sea and air borders to infiltration at will by smugglers. We must invoke the most modern methods employed in the high-tech field, in this regard the Federal Ministry for Interior can play a very positive role if they forsake hide-bound solutions and adopt progressive ones. However, removal of subsidies and additional taxation which will affect the common man will have an adverse reaction in the streets, leading to the LONG MARCH post-Budget that Ms Benazir’s political opponents are already talking about. The only other resort is to go in for a CALCULATED RISK, a massive ONE-TIME devaluation of the currency upto a given date in contrast to the creeping method being used now, this will make additional revenues available to the government. The advantages of creeping devaluation is that there is a firm regulatory approach to monetary and credit control thereby keeping inflation under tight control while making additional revenues available to the government on a gradual basis, the State Bank of Pakistan has done a magnificent job in the circumstances. On the other hand practice has shown that the Government is always having to resort to deficit financing because creeping along we never really caught up with the shortfall. For the short-term there will be enhanced competitiveness for our finished exports, since rice and cotton have already got stable markets for export surpluses. The rise in import prices will certainly result in inflation, fuelling a monster rise in prices across the board that will demand higher wages and an endless cycle of spiralling inflation. On the other hand, because of the additional revenues the government may actually cut taxes and remove customs duties/excise taxes in certain key areas as a measure of generating a modified version of supply-sided economics.
We have said that the rate of the Pakistani Rupee against the US dollar is approximately 10% less than it actually should have been. The fact is that in the past month the rate of devaluation has accelerated much past the average 10 paisas upto paisas 50 a month, so at the end of May 1989 it should come closer to Rs 21 and stabilise shortly thereafter. According to our formula (10% more) we would peg the US dollar at far Rs 23 approximately. At the end of the seven months uptil December 1989, a creeping devaluation of around 15 paisas per month will take the official rate to about Rs 22 whereas we feel it should be around Rs 24 to the US dollar. The rules of the game have been changed once in 1972 when abandoning the Bretton Woods Agreement, then again in 1982 when we went for creeping devaluation against a basket of currencies. Now maybe it is time to change the rules of the game again, let us go in for pegging the US dollar in ONE GO at Rupees 24 and then keep it steady uptil end December 1989. In this manner the Government will (1) get additional revenues without resorting to massive taxation, in fact may even reduce taxes in some areas (2) give a clear mandate to our exporters without resorting to inflation and (3) put a cap on our imports prices increase to a reasonable amount. By fixing the price upto Dec 31 coupled with a massive effort to control inflation, price stability becomes a possible consideration, effective if speculative tendencies are avoided by (1) being ruthlessly curbed and (2) reduced taxation.
Liberalization of the economy is a must, de-regulation must be the touchstone of economic growth. We have effective money managers in Ms AGN Kazi, V A Jafarey and I A Hanfi, none of them have the crutches of personal ambitions interfering with their financial responsibilities. Though Mr M I Khalil is now in the Ministry of Establishment and Dr Muinuddin Baqai has been forgotten in the Statistics Division, we believe that de-control can be force-multiplied in its effect with such honest and efficient fiscal managers around at the helm of affairs. The PM has been wise in her choices of aides generally though below the level of Maj Gen (Retd) Nasirullah Khan Babar, Saleem Abbas Jilani and Maj Gen (Retd) Imtiaz Ali, the quality of some of her other aides takes a very sharp nose-dive, we know their professional and personal qualities only too well, the smile hides a knife, jealousy and inferiority complex overcoming other attributes. Some of them were — and are still — psychiatric cases.
Pakistan has been living beyond its means, the living being done by the rich at the expense of the poor, mainly because our laws and bureaucratic practices were so weighted. The time has now come to even the imbalance, take corrective measures however painful, the affluent few having to make sacrifices for the not-so-affluent, one less air conditioner may mean milk for many babies of the poor.
The PM is left with few choices, she must redeem her pledges but in a Catch-22 situation she also has to make the economy self-sustaining.
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