Some Days in May
The indications are that the Caretaker Government has weathered the immediate financial storm that arose out of the Presidential dismissal of the Nawaz Sharif regime and the dissolution of the National Assembly. After a staggering first week when banks had to import US dollars to meet the rush of depositor withdrawals, the run has been stemmed. Except for those panic-stricken in the wake of the make-up of the Caretaker Government, the rest took notice of the repeated pronouncements of the Caretaker Finance Minister that they would continue the liberal policies of the Nawaz Sharif government. While decrying the Singer, this amounted to support for the Nawaz Sharif Song of the three D’s, Deregulation, Disinvestment and Denationalisation. This was a pragmatic acceptance of the obvious, that the policies annunciated by Nawaz Sharif would lead to the economic betterment of the nation and his far-reaching liberal reforms were starting to permeate into society on a broad front.
The fact that the economy has remained stable after surviving such a shock and has not continued to erode is because of the resilience of Pakistan’s economy, primarily because of the parallel economy that still persists in elongevity and secondarily due to the building up of investor confidence in institutions rather than individuals. As such, Nawaz Sharif, in a perverse way, has helped to stabilise the present Caretaker government, they are reaping the benefits of his courage and far-sightedness in unshackling the hold of the bureaucracy on the economy. What has been done in the way of reforms cannot be immediately undone. Market forces, rather than government instructions, have created an in-built resilience. Recognition of the obvious by the Caretaker Government meant that they shied away from being labelled as Undertakers of the economy, what could have happened if the situation had been handled less adroitly is open to speculation.
On the external sector, recent political change has not made any real adverse impact for the short term. As stated previously, liquid foreign exchange reserves did decline to US $ 700 million from a level of US $ 917 million before the Presidential action but with US $ 25-30 million available with commercial banks, the fall has been arrested. The size of the external sector i.e. the inflows and payments together add upto US $ 22 billion, therefore the minuscule change in the level of reserves is not that significant, it is more of an indicator showing a loss of investor confidence to a degree. It needs to be appreciated that there are about US $ 2 billion in foreign exchange deposited in banks in Pakistan by about 100,000 investors, the average investor having US$ 15000-16000 on deposit. For an adverse change, the run should have been more marked, the number of runaway depositors would certainly have been more than the 10% estimated at present. As it is close to 60% of the foreign exchange accounts have already been pledged as collateral for bank borrowing and these could hardly join the flight. All these features do not give any semblance of black money being a significant part of the foreign exchange accounts.
The developments in external trade and other components of the foreign exchange sector indicate the absence of any unusually large or unmanageably severe pressures on totality on the balance of payments of the country. Notwithstanding the fact that both the fresh allocation and utilisation of aid in the pipeline is significantly smaller than previous years the balance of payment deficit may be slightly smaller than last year. This is despite the fact that the situation arising out of the severe floods in the country necessitated larger than anticipated imports. This points to the fact that the external sector during the current financial year will be viable beyond any doubt.
Much before the fall of the Nawaz Sharif Government, some indiscreet elements had been expressing apprehensions about the competitiveness of the Pakistani Rupee in the international market, in particular some vested interest have mounted an insidious campaign of adjustment in exchange rate, maintaining the figure of 10% being the so-called needed adjustment. Frankly, such statement and demands are less than responsible, they are made from selfish vested interest. Market forces are the real purveyors of the innate and inherent strength of the economy and the external sector. As an indicator the Pak Rupee this month has lately appreciated in the free market, moving from a purchase price of Rs 29.47 to one US dollar to the present level of Rs 28.65 to the US dollar. There is simply no evidence of enhanced effort at dollarisation of the economy or any other development in any way which is indicative of a lack of confidence in the viability of the Pak Rupee and the external sector.
Our major problem is the domestic sector where there has been inordinate bank borrowing. While the self-employment and yellow cab schemes required about Pak Rs 8 billion till date, the previous government has had to borrow Pak Rs 60 billion to meet the requirement of its ambitious development programme. In the government announced schemes, the best estimates of repayment is about 30%, this is an unacceptable percentage. As far as the government borrowing is concerned, unless there is additionality in revenue generation and revenue gathering, the fiscal deficit looms as a rather large and unmanageable problem. Whichever government is in power, fiscal deficit will always remain an ominous question mark over the economy. This problem must be addressed squarely before it becomes a catastrophe. There is always a tendency to turn development aid into recurring government expenditures, this has to be avoided like the plague. As it is about US $ 9 billion is waiting in the aid pipeline to be disbursed, this has to be managed with great care.
The stock market finally stabilized at about 1082 points on the share index, marginally going up on Wednesday and Thursday as market forces rather than mass perception took over. There are some anomalies in the market which need to be corrected particularly the role being played by some insiders. To give one example, the shares of almost all the Modarabas are selling 35-40% below par prices, although some are declaring annual dividends of between 17-20% and have a break-up value of at least 30% above par. That is an unreal situation and shows that the stock market is not fully mature and can be easily manipulated by a few with vested interest. ANZ Grindlays Modaraba which was at a high of above Rs 80 per share last year is hardly above Rs 20 now, an amazing comedown but still 100% above the par value. As an indicator of investor confidence the Stock Market fails the litmus test because it is acted upon by factors that do not render it wholly independent.
Things are settling down after the first flush of the business revolt on the fall of Nawaz Sharif, businessmen being pragmatic as usual after having displayed the limits of their great feeling on the subject. The business community is almost solidly with Nawaz Sharif and will remain so because in contrast there is no confidence in the policies of others, present or in the future. Business has to go on as usual for the sake of the nation, no one can afford an economic paralysis, as a businessman himself Nawaz Sharif would be the last one to suggest this. In the meantime it is clear that Nawaz Sharif has managed to strike the same raw nerve among the intelligentsia and the masses that Zulfiqar Ali Bhutto did in the period 1968 to 1970 when he, as a Sindhi landowner, managed to establish a grand coalition of intellectuals, landowners, middle class and the poor, taking away the great silent majority from the other, more known parties, particularly the PML factions into the Pakistan Peoples Party (PPP). While landowners will certainly not side with Nawaz Sharif, they are replaced in the new coalition by the business community, a more potent urban-based force, given free and fair elections. By giving land to the Haris in Sindh, Nawaz Sharif has aroused the fear and ire of the landowner class and as much as businessmen and industrialists were against Bhutto in 1970 (and afterwards) the landed gentry will now oppose Nawaz Sharif as can be seen from the composition of the Caretaker Government Cabinet, PM downwards. They may not be so unitedly in opposition as to the socialist slogans of Bhutto. In Pakistan, at this time, this may be the catalyst for victory at the polls, the perception among the great silent majority that Nawaz Sharif may be the champion of the disfranchised against the monolithic rule of the agriculturists. Deep down, there has been a simmering resentment against this class that rules the country with or without Parliament but does not pay the taxes it should, that despite land reforms this class manages to hang onto excessive land holdings that allows it to perpetuate its rule without giving much to the nation in return, almost as if they are feeding on the carcass of the nation. The present scenario may pit Ghulam Ishaq Khan against Nawaz Sharif on the surface but from the frivolous agenda of egos and personalities the conflict has been transformed into an ideological war, the battle for the soul of Pakistan. There is still some breath left in the body politic, the freshness emanating from the perceptions of a free economy. There is a resurgence in the wind that bodes well for the future of Pakistan. Nawaz Sharif, despite himself, has become an unlikely champion of democracy and hope. The question is, will Ms Benazir Bhutto bring her many talents and tremendous political assets back on the side of principles or remain ambiguously on the side of fleeting opportunity? Already she has lost tremendous credibility by joining the Caretaker Government, if Nawaz Sharif succeeds without her she may become a charming footnote to history. Even if the former PM should fail, history will still be unkind to her because of the stakes for democracy. She has the acumen, the perception and the courage, does Ms Benazir have a commitment to democracy that she is so eloquent about?
All eyes are fixed on the Supreme Court and the 8th of next month, it may be a long, hot seven days in May for Pakistan.
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