Silent Rage
The government of Nawaz Sharif was sacked on the evening of Sunday April 18, 1993. On the following day, as a reaction to the controversial Presidential action, the Karachi Stock Exchange (KSE) witnessed the largest fall in its share index in one day. Though it did not equal the October 1929 Black Tuesday crash on Wall Street, the fact of the precipitous “Black Monday” dive shook domestic and foreign investor confidence in the state of the economy.
The policies of the previous government were seen to be liberal and supportive of a conducive economic environment. By enacting far-reaching reforms to unshackle the economy from bureaucratic embrace, Nawaz Sharif had inspired sustained economic investment, particularly at the lower end of the economic spectrum. Indeed, this had blown the share market much out of proportion to its real value, corrections in a free market atmosphere had brought share prices to much more realistic levels before Monday’s headlong fall. The fall in share prices may be a reflection of investor confidence being shaken but given a GNP of US $ 50 billion approximately, a capitalisation of US $ 7 billion is relatively small. The unreal high point of 1700 points plus being reached in January 1992, the market index had come down to the 1200 threshold, a psychological benchmark that the former Finance Minister had set as an indicator of impending trouble. If the crisis continues share index may still fall through the 1000 point floor and as such while the Caretaker Government may be determined to change the form of the liberalising reforms enacted by the previous Regime, it has no elbowroom to change the substance as that would reflect adversely on the consistency of our own policies. As it is about Rs 7 billion in share prices has been wiped out and such a financial catastrophe may be difficult for generally new market players to absorb.
The Caretaker Government moved quickly to try and stem the tide. Farooq Leghari, Caretaker Financial Minister, swallowed PPP pride and publicly acknowledged that the government was committed to carrying out the policies of the previous government and that no changes in the economic structure was planned and/or anticipated. The new Regime tried to shore up the share levels by buying large orders through the NIT, ICP, etc, the intervention being as much as Rs 700 million per day. Using finance institutions where money has been invested by the general public may be debatable, the government intervention was on the basis of “quiet advice”. The initiation caused share prices to stabilize at the lower end. Money of the general public is now at risk if the market has not bottomed out and there is a further fall. Luckily for both the investors and the government, the Stock Exchanges observed an unofficial strike at Nawaz Sharif’s ouster on Thursday, suspending further erosion in shares value.
Even without President Ishaq’s action, Pakistan’s economy has been under strain on three major counts, beginning with the fact that structural reforms that have liberalised the economy and to an extent managed to prise it out of the bureaucratic grip are still very much in a transient stage. With the end of the Afghan conflict and the collapse of the Soviet empire, the cold war came to an end. As Pakistan’s immediate strategic importance faded, the aid from donor countries and aid giving agencies had started to dry up to an extent, at least the inflow is much less than the quantum we were used to throughout the 80s decade. All this was compounded by the most devastating floods ever to hit Pakistan in this century, this gave a severe setback to the economic consolidation process. Growth was projected before the floods at 6.2%, it was later scaled down to 4.8%. The former finance minister, Prof Sartaj Aziz, easily the most pragmatic and honest functionary to hold this position in this country’s history, had held out for 4.0%, it will ultimately be probably pegged between 3.0% to 3.5%. Compared to the previously estimated growth, this rate is highly unlikely to attract anybody, whether it be domestic or international investors.
Due to worldwide recession, particularly in the textile sector, Pakistan’s exports which are very heavily dependant upon cotton and cotton products, have registered a continuing decline in the past few months when measured with the corresponding period last year. In March 1993 exports were down 16.8% as compared to March 1992, this had the effect of reducing the export growth rate from 10.4% to 6%. Fortunately for Pakistan, because of a net decline of imports as compared to last year, an increase of 3.6% instead of the 24% measured last year, the balance of payments situation has not worsened showing a net deficit of US $ 2 billion, marginally less than last year. The four years of excessive liquidity and monetary expansion have not shown in the form of extremely high prices, in effect inflation has been kept pegged at 10%. One daresays that this is partly due to the fact that large scale industrial production is not being reported accurately as well as the fact that growth rate in small scale industries, cottage industries, services sector, etc has been much higher than anticipated but not well documented.
The other serious problem facing the Caretaker Government is with respect to flight of foreign exchange. While reserves were at a high of US $ 1 billion plus in June last year, it had dropped to US $ 917 million by March this year mainly because of the devastating floods and its adverse effect on the economy. Almost US $ 100-150 million took wings in the 1-2 days after the sacking of Nawaz Sharif. The new Finance Minister had to stop the hemorrhaging by repeatedly confirming a continuation of the policies of the previous Government. Even foreign bankers had to beg the media not to publicise the news so that the withdrawals would not become a rout. The exodus slowed considerably as the market adopted a wait-and-see policy. Swallowing their pride the Caretaker Government gave wide media coverage to reinforcing their commitment to the previous Government’s economic policy initiatives but the lack of consistency and durability of government policies will continue to haunt investor confidence. While the political initiatives of Nawaz Sharif were nothing out of the ordinary, his economic policies were relatively extraordinary in the context of Pakistan and ultimately economics has a major bearing on the political course of events. The former PM was beginning to reap political advantage, a solid front of the mercantile community has now come behind him, despite the fact that some have deep-rooted reservations about his overall policies. This is important in a country where business has shown no real political leaning till very recently. While the economy is still in a state of transition, the liberal reforms have been well received and the masses had started to feel the first flush of tangible benefits. This has forced the Caretaker Government onto the defensive in the first few days of their incumbency, it will be difficult to explain to the intelligentsia and the masses why they are following the same policies they were decrying less than a week back.
Since the economy was very much in a transient stage, the rehabilitation of the private sector was not complete. Instead of putting their own equity there was greater reliance on bank borrowings. The departure of Nawaz Sharif will mean that repayments to banks will be affected, further accentuated by the recession in the textile sector. There are many important problems facing the economy, primary being the unmanageable and unsustainable budgetary deficit. This is a challenge for any popular government as it involves implementing stringent fiscal discipline. The medium and long term viability of the economy depends on reducing fiscal deficits by control of expenditures as well as increase of revenues by mobilising new resources, widening the tax base and improving revenue collections. Above all the tax burden must be evenly shared by the population i.e. the agriculture class comprising more than 80% of the population have to chip in. This is not possible in a legislative system where most MNAs/MPAs are agriculturists. Short term political solutions are attempted by all successive governments but they only aggravate the situation and satisfy nobody but the immediate beneficiaries. In this respect we must plug the plethora of exemptions that allow wide misuse of facilities such as export rebate, duty drawback etc. One idea would be to merge all the incentives into an enhanced exchange rate. The vulnerability of our fiscal incentives has allowed fraud and deceit to be perpetuated at a severe cost to our economy.
Two and half years of resurrecting the economy have been put at risk by the Presidential action. Whatever government comes it has to pursue the same economic policies as the previous government, as such they do not contribute to the economy positively but negatively as the lack of a fresh policy will not be conducive to maintaining investor confidence in consistency out of conviction but out of sufferance. Throughout Nawaz Sharif’s tenure informed economic analysts have kept on giving dire warnings about fiscal deficits, overspending, haphazard priorities, etc but overall the impression was of positive change and that had a snowball effect on the economy. It is true that privatisation lacked transparency but the former Chairman of the Privatisation Commission, Lt Gen (Retd) Saeed Qadir, has stated publicly that he is answerable for his deeds. People should take him up on his words and initiate due process under the law.
There is a silent rage simmering among the intelligentsia and the masses that is not so much supportive of Nawaz Sharif as much as directed against the actions of the President at putting the present and future livelihood of millions at risk for the sake of selfish, vested interest. There is a public perception that must be addressed and investor confidence restored. The Caretaker Government has to display a consistency between their actions and deeds, they cannot continue to belabour Nawaz Sharif while being supportive of his policies. Individuals do not matter, institutions do. Such dual track policies send wrong signals to a perceptive business community on whose shoulders rests the economic emancipation of the masses.
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