Challenging the issues
Nawaz Sharif has been elected PM at a particularly difficult economic period, aggravated and complicated by the Gulf Crisis. The journey to becoming the executive head of the government may have been a political obstacle course, incumbent PM has now to apply his entrepreneurial background and experience in taking Pakistan out of its present economic doldrums.
On Tuesday last, Nawaz Sharif addressed the crisis of confidence prevailing in the business community by calling a selected doyen of industrialists and traders to Islamabad where he laid out his economic action plan and invited discussion. This hardened lot of businessmen had heard such rhetoric about privatisation, denationalisation and tax holidays before, coming from a fellow businessman this time it somehow seemed credible, the Karachi Stock Exchange duly registered confidence. The businessmen left with a general upbeat feeling about the elusive light at the end of the tunnel, their skepticism mollified.
The partition of the country in 1971 (and the destruction of the complementary economy theory) gave a hard shock to the economy, indiscriminate nationalisation thereafter deepened the trauma. A combination of factors saved Pakistan from total economic collapse, not the least being the Middle East boom which helped in creating a parallel black economy. The aberrations of the last two decades of bureaucracy’s commercial/industrial inexperience and incompetence were force-multiplied by rampant corruption, rendering most of our medium and heavy industries bankrupt.
Our salvation lies in bold economic initiatives that will free (or unshackle) the economy while hoping/working for another great (and selective) employment boom in the Middle East, particularly Saudi Arabia, where upto ONE million or so jobs could be available as Yemenis and Palestinians depart. An increase in the number of our troops in Saudi Arabia to pre-1985 levels (maybe even doubling that), will help in defraying part of our burgeoning but necessary Budgetary outlay for Defence Services.
Nawaz Sharif must act immediately on his pronouncements, freeing the economy from bureaucratic shackles in a phased manner by (1) denationalising the taken over industries (2) privatising industries in the public sector, and (3) denationalising the commercial banks. A large segment of public sector blue and white collar workers will be reluctant to give up the virtual sinecures that they enjoy presently and exchange that for the highly competitive field of private business and industry, where employment is obligated against performance and profitability (with overheads slashed to ensure that). Resistance among this lot may foil expected governmental moves, the bureaucracy will not be averse to encouraging this to retain their commercial fiefdom. The Benazir Government had a credibility problem when their rhetoric did not translate into deeds. The apprehensions of the business community at the beginning of the PPP Regime were groundless, however the hopes raised by Ms Benazir’s Thatcherite pronouncements remained far from realisation, in fairness she was hobbled to an extent by extenuating circumstances. As time passed, frustration set in among the business community, the climate was further complicated by widespread chicanery and cronyism. Given the political track record in Pakistan, one may be forgiven for being skeptical but Nawaz Sharif must be given a fair chance to implement the promises made.
Tackling widespread unemployment must be given the highest priority. Job opportunities can be created if the economy is allowed to run without any fetters. To encourage private foreign investment, the Board of Investment (BoI) should go one better. Operating on the concept of the Export Processing Zone (EPZ), Free Industrial Trade Zones (FITZ) should be established for a specified number of industries, situated throughout the country deep in the rural areas, particularly in the interior of Sindh and along Pakistan’s coastline. Depending upon availability, the price of industrial plots of land sold to foreign and local investors must include charges for roads, water, sewerage, telephone, telex, electricity, gas connections, etc. To prevent land speculation bank guarantees should be taken from the investors for establishing their enterprise within an acceptable time frame. The land should be handed over within four weeks of payment, all the requisite facilities ready to be plugged in. Nawaz Sharif has declared the entire country a TAX FREE area for private foreign investment, this tax haven status should be extended to selected domestic investment. Complete freedom enjoins (1) psychologically the abolishing of individual income tax and (2) materially a general tax holiday for selected new industries. To give protection to industries against imports, whether capital goods, usables or consumer items, a formula must be devised balancing monopoly control by competitive price structuring by supply/demand market forces. Incentive difference must be instituted between capital goods and consumer items, not so much as to discourage a consumer-oriented society but to encourage establishment of medium and heavy industries. These measures must give further incentives to high-tech industries.
New public sector projects or the rehabilitation of old projects constituting the socio-economic infrastructure of the nation like roads and highways, bridges and flyovers, telecommunication projects, railway sector, medical and others in the Services sector, etc. Other than the Balancing and Modernization of our deteriorating public infrastructure, investment in this sector means many jobs created (at least temporarily). Resources may be mobilised locally for the most part rather than in foreign exchange with a judicious selection of public sector projects spread over the length and breadth of the country.
The Indus Highway is already under implementation, another which comes to mind is a possible modern Coastal Highway with a parallel rail track. All this costs money but by the elimination of the Federal tax burden on the individual (by abolishing individual income tax) and mobilisation of domestic resources, much-needed projects may be implemented to bolster the economy. Costs of construction material, cement and steel particularly, should be kept down by increasing production, encouraging people to invest money in new units of housing. Construction creates its own solid economic cycle, properly husbanded it can lead to an economic boom in contrast to the present world economic situation.
Without mobilisation of domestic resources, in layman’s language without availability of cash, there can be no question of economic emancipation. The investment companies fraud (twice in the last decade) showed that the masses invested (and wanted to invest) their hard-earned money in companies offering highly lucrative returns. An artificial economic boom was created, to an extent rooted in the parallel black economy that is now a fundamental part of our economic life as a nation. Mainly because of (as still mysterious) bureaucratic inaction, fraudulent investment companies proliferated. Given proper regulations for investment (banks) companies, the State Bank of Pakistan could have exercised judicious control and positive punitive action could have deterred these fraudulent companies from resorting to widespread fraud and chicanery. There is an anomaly about corrective action even now though during ex-PM Junejo’s time a start was made to bring in duly regulated investment banks as well as punishing the recalcitrants.
The fraudulent investment companies have shown that domestic mobilisation of resources is possible. The establishment and functioning of investment banks will (1) mobilise domestic resources for (2) setting up industries and the development of the services sector, while providing the “Financial Services” that are necessary for dynamic increase in the economic potential of the nation. The Nationalised Commercial Banks (NCBs) have an aversion to risk and have stayed away from Term Lending and Project Financing, thereby restricting the investment horizon, this to an extent has been taken up by the Development Finance Institutions (DFIs) like BEL, PICIC, IDBP, NDFC, etc including “Services” like Under-writing, Equity Investment and Consultancy Services. Foreign Banks have not played any significant role despite windfall profits due to various considerations but Leasing companies and Modarabas have been a major source of providing long-term finance, in effect they have been the leading edge of the potential for financial dynamism. Investment Banks can carry out “Commercial Activities” like (1) issuing short/long terms Certificates of Deposit and Investment (CoI) (2) trading in commercial paper and listed Securities whether Equity or Non-equity instruments (3) Under-writing (4) Floating and Managing Open-ended and Closed-ended Mutual Funds (5) issue Negotiable and Debt Instruments to clients providing Guarantees for loans and other obligations while the “Financial Services” can include (1) acting as a broker or (2) as a manager of Pension Fund or Provident Fund (3) assist clients in fund raising through Public Issues, etc (4) assist in raising equity through Venture Capital, just to mention a few of an exhaustive list. The advantages of investment banks over retail banks is that (1) they are allowed to invest in high yielding tax-exempt Government Securities (2) higher profits are anticipated by them without increasing their capital base and (3) higher post-tax return on equity if government perseveres with the expected low tax bracket.
At this time the sanctioned investment companies are not really functioning due to various lacunae in the governing regulations. Unless the controls are relaxed they will not function as they should, the capital base required will be missing from our efforts to generate the economy.
Judicious (but immediate) de-regulation of the financial sector is the need of the hour to ensure mobilisation of the resources required for economic salvation.
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