180 Days in Economic History
Almost two decades ago, the Pakistan Peoples Party (PPP) set in motion a chain of events leading to economic apocalypse. In defence of Zulfiqar Ali Bhutto it must be said that while riding the crest of public opinion (which was aroused against free enterprise held captive of a handful of robber barons), he genuinely believed that a socialistic system would bring about amelioration in the miseries of the masses. In this he was not alone in the world, this was the fashion of the times in most Third World countries. Our tragedy was that in reacting against the greed of the few we ended up in the proliferation of corruption, at a particular economic crossroads we took the wrong turn. The collapse of the Socialist Empire has seen, a reaction against the system set in through the Third World, everybody is now abandoning Carl Marx for Adam Smith.
Escaping from the clutches of an elite club of industrialists, we fell (in the early 1970s) into the hands of unscrupulous bureaucrats and their cronies who ruthlessly exploited the resultant void in business management, Kingdoms were created overnight on the strength of public money. In the meantime the taken-over units went steadily under, stepped down of the assets and the potential. Under the shadow of martial law and in collaboration with an accommodating few among in the Armed Forces, the bureaucrat-businessman prospered, the men in uniform took some of the money but most of the blame. The bureaucracy entrenched itself in the public sector, the first real movement towards its dismantling being initiated during the Junejo Regime in 1985 after the lifting of Martial Law. By this time Pakistan’s economy was in a suffocating straitjacket, most of major commerce and industry had passed into the hands of the public sector. One may have had reactions about many aspects of the Benazir regime, her economic moves were courageous and in the right direction. Given that the PPP manifesto was clearly for public sector control, Ms Benazir was firmly for denationalisation, privatisation and deregulation.
Unfortunately for her, despite adroit handling by her economic managers, economic confusion between the stated Party Policy and her governmental moves persisted. Complicated by a recalcitrant bureaucracy dragging its feet in the loosening of State control, the PPP Regime’s brave effort to recognize economic realities and take pragmatic steps to rectify the situation failed to get off the ground. Ms Benazir was not helped by the avarice and greed of those surrounding her, who took to the system like fish to water after a long drought, living off the fat of the land as if there were no tomorrows. Instead of the masses benefiting, those who made the most of it were in fact a motley crew, some of them were the children of politicians and bureaucrats who belonged to the Ayub Regime of the early 60’s and some simply camp followers and opportunists, another elite club was formed that replaced both the robber barons of two decades ago and the nouveau riche of the corrupt among the bureaucracy committing daylight dacoity on the treasury.
The Benazir Government was firmly committed to encouraging foreign investment in Pakistan. However, it soon became clear that to prise open the ONE-WINDOW operation of the Board of Investment (BoI), a few shadowy palms had to be greased, there was nothing sophisticated about it. While legally such cases can perhaps never be properly evidenced, there is no doubt that hidden hands made billions overnight, while making their futures bright they also turned to recreating their past as they would have preferred it to be. In a perverse way corruption actually encourages instead of deterring investment, other factors act to interdict any such hope, among them (1) an insecure economic environment (2) lack of infrastructure like energy and communications etc to support investment and (3) bureaucratic red tapism enough to deter the devil himself from establishing an industry.
The Nawaz Sharif Government has set about the Herculean task of reinvigorating the economy of Pakistan with some breathtaking moves, frankly speaking beyond the wildest dreams of the most optimistic of those committed to the free enterprise system. This government has done its homework on its predecessors well, making sure that the economic mechanism of the State is under firm political control. The Minister for Finance is not just mere window-dressing for bureaucrats, his utility is not confined to supporting only his own individual interests. Instead of surviving as a front man, the usual role of Finance Minister, Sartaj Aziz knows his job and the authority that goes with it, using that authority to formulate and cobble together a pragmatic, action-oriented policy and then making sure that the bureaucracy supports the implementation thereof to the exclusion of vested interest. While destiny, perseverance and the PPP’s ill-conceived persecution had a part to play in bringing Nawaz Sharif to the PM’s chair, he is extremely fortunate in having the finest Finance Minister that this country has ever had. Unhampered by the need to indulge in any self-propagation, the unassuming self-effacing Sartaj Aziz has carried out the most far-reaching reforms in the economic history of Pakistan. Ayn Rand’s fiction hero in “Atlas Shrugged” rebelled against the socialistic system which was destroying the economic foundations of the USA, given the positive actions uptil now Nawaz Sharif comes across as the Pakistani equivalent of John Galt casting aside the incentiveless, inefficient and corrupt system that has eroded our economic future and threatened to drive it into oblivion. These have been revolutionary reforms, there is more than lip to Nawaz Sharif, he seems to mean business in every sense of the word. Bold steps have been taken to change the entire moribund infrastructure strangulating our economy, that it has been managed to overcome the red tape of a recalcitrant bureaucracy without the democratic government self-destructing is a virtuoso performance for which no plaudits can be enough for his Finance Minister.
Objectivity is often lost in the Third World by not being fair. Ms Benazir certainly left the economy in better shape in August 1990 than when she inherited it in December 1988 but the elected IJI Government got it in a far worse shape in November 1990 than when the PPP Government left it, mainly because of the interim Gulf crisis. The basic difference is that Ms Benazir’s economic handlers seemed not to want to tinker with the system, floundering at the altar of political expediency and sheer timidity, as such their achievements were limited. Instead of practical surgery, Ms Benazir kept using doses of remedial medicine. Nawaz Sharif’s Sartaj Aziz has the PM’s full political blessings to go full speed ahead with revolutionary economic changes, betting the survival of his government on the economic amelioration of the masses instead of relying on the whims and penchants of the gnomes in bureaucracy who have shown how adept they are in the overthrowing of governments not conforming to their taste. Nawaz Sharif’s real-life Atlas role, is one way to ensure being one step ahead of his many detractors in political and bureaucratic circles.
The first stage in the series of far-reaching reforms was the decision to go ahead with the privatisation of banks starting with the test case of the Muslim Commercial Bank (MCB). With permission for more banks in the private sector also in the offering, critics advised caution in the MCB privatisation move. The principle of disinvestment was not really contested, of concern was (1) the possible disruption of economic activity by concerted union action (2) the manner in which the Bank was being privatised (3) the price being asked for and (4) the effect on banking services on the common man who is usually the last person a private financial institution would really want to walk in through the door.
The Nawaz Sharif Government has instituted far-reaching changes in the Foreign Currency Regulations in a bid to make the domestic climate more conducive to foreign investment. This is the most fundamental of reforms which was needed to re-vitalize the economy and one must again commend the courage of the present regime in allowing free movement of foreign exchange in and out of the country in conjunction with allowing Pakistanis and foreigners to own and freely operate foreign currency accounts within and outside the country. Like Hong Kong and Dubai, Pakistan has thus become a free exchange area. This major step removes the psychological mindset and physical roadblock discouraging foreign investment, particularly the private entrepreneurial shells of private businessmen. Most of our top businessmen have been maintaining foreign accounts illegally, by making it legal a mere technicality has been waived. There are risks manifest in the loosening of such controls, some suspect our currency may end up rapidly depreciating, like in Latin/South America with possible flight of capital. On the other hand our economy is buttressed by strong, positive factors like food self-autarky, a wide range of skilled blue and white collar manpower and an innovative, enterprising populace with an avid and keen approach to commerce and industry.
Allowing foreign companies permission to borrow unlimited amount from local and foreign finance institutions and also purchase shares at will of listed companies on the Stock Exchanges, private limited companies partnerships etc is again an innovative move to revive our sick industries, particularly in the textile sector. Rid of foreign exchange controls, foreign private investors could conceivably purchase controlling interest in various idle industrial and commercial units at comparatively cheap cost, pump in badly needed capital and expertise to revive their functioning, thereby bringing these units back into the economic mainstream. There is always a danger of speculators taking the money away later to more lucrative ventures in other countries but they cannot physically take away the revived industry. Without the commercial sophistication, technical expertise and cash-flow that foreign entrepreneurs can bring into Pakistan, we cannot hope to compete effectively in the open foreign markets.
Effective March 1, 1991 Letters of Credit (LCs) can be opened up in most cases without obtaining import licences from the Chief Controller of Imports and Exports (CCI&E). This is both a symbolic and physical delinking from the artificial public sector controls suffocating the economy. Rather than unnatural vested-oriented bureaucratic checks, market realities will now govern the imports of a wide range of commodities and items. These may be of individual commercial risk to importers since everyone and his uncle may rush to import a particular item in great temporary demand causing excess supply against the requisite demand and thus commensurate drop in prices. Artificially created favourite-trader monopolies have been destroyed by this option, with credit institutions making a merit-based decision founded on their evaluation of (1) market requirement and (2) profitability. Bureaucratic corruption has bedevilled Pakistan since the creation of the country, growing by leaps and bounds in the last decade, this is at least a significant step to eradicate it. Individual corporate disaster may be more commonplace but in contrast to the great boon to the common man who will have a choice of a variety of freely imported items at competitive prices, this should be acceptable. There may certainly be some danger in the running wild of the economy, our institutions are resilient enough to withstand those extraneous pressures that would imperil our hopes for economic emancipation, particularly because a parallel black economy has been operating in any case.
Plans cannot be complete without making a few other important concurrent reforms in the energy and taxation sectors, given that the communications field is being given due emphasis.
The energy sector is greatly insufficient to even energise the existing sick industries. This insufficiency is compounded by inefficiency. While WAPDA, KESC and other government utilities may have worked to the best of their ability, this ability has never been put to the test against the competitiveness of the private sector, they do not have the capability to carry the future load themselves in the public sector.
Their distribution facilities are corrupt and woefully inefficient, these need to be privatised so that the revenues they should actually generate comes back to the public coffers. The private sector is keen to invest in viable projects, certain individuals in this particular bureaucracy are suspect in their competence, intention and honesty. It makes no sense to keep people like Daud Beg or GM Ilias ensconced in their sinecures to look after the Private Power Cell (PPC) year after year when it is now an established fact that the potential private investors are not willing to come to Pakistan because they have been frustrated either by the attitude and demands of those bureaucrats, whether the demands are professional and private or comprising of blatant misrepresentations. Unless these characters are physically removed from the controls of the private sector power projects evaluation, potential investors in energy sector will remain shy in Pakistan, Nawaz Sharif and Sartaj Aziz can make every allowance, every initiative for investment will fail because of the shortage of energy. From time to time there are glowing official handouts about many private sector power projects being sanctioned, unfortunately the reality is woefully different, most are simply illusions wrapped in paper trails. Let Energy development be treated as any other industry and a reasonable tariff be offered to encourage private entrepreneurs to invest, particularly for using indigenous sources that will fuel electricity into our industrial grid.
There is need for instituting great changes in the taxation system. Individual taxes make up Rs 3.5 billion out of the total Rs 15 billion revenues collected from income taxes. This Rs 3.5 billion (rendered by 500,000 salaried and 500,000 self-employed) is chicken-feed (less than 3%) of the total government revenues of Rs 120 billion. If the government were to enact positive reforms in the taxation sector by abolishing individual income tax at the Federal level in favour of Community taxes imposed by Local Bodies this would make a psychological and physical change to the envisaged tax-haven status, an open invitation to private foreign enterprise. Decisions for taxation reforms must not be delayed, besides the commercial feasibility of such an option it is morally incorrect to make one million people pay to maintain a nation of over 100 million just because they may be more hardworking, better educated and/or more enterprising. There is argument for and against imposing tax on agriculture income. Ours is an agri-based economy which has efficiently provided food self-autarky. Letting the Income Tax into this sector would ensure that Pakistan would become a food-deficient area in the future.
Perhaps the most beneficial agreement in an essentially agrarian economy has been the Water Apportioning Accord. For over 45 years we have been subject to living with ad-hoc arrangements that divided the available water but would not allow the Provinces to plan how to use any surplus if that was available. Horrifying as it may seem, every Province was thus been left with many acres of cultivable land that were lying unused because in the uncertain situation no one could take any decision to cultivate that land. According to Abdul Rahim Mahsud, High Priest of the Ministry of Water and Power, Rs 2 billion is lost annually for every ONE Million Acre Feet (MAF) of water, Rs.20 billion annually. Over the 5 years and 5 governments that he has honestly served from 9 to 5 or whatever, Rs.100 billion was thus irrecoverably lost, no loss of sleep (or his safe seat) for Mahsud, governments may come and go but he (like the river) goes on forever. The Nawaz Sharif Government’s prime success is in getting all the Provinces to amicably agree to the Accord, the solution may not be a completely agreeable one for everyone, but at least it is a starting point from where lively discussions are more likely rather than disagreements because the grey area has become limited. There are some debatable issues, viz (1) about the actual quantum of water (2) the likelihood of upper Riparian Provinces drawing their full share even if there is a known shortage in any given year and (3) the quick establishment of an Indus Water Management Authority.
The higher figure of 117.35 MAF used for apportionment has raised fears in the minds of experts about accurate implementation of the Accord. NWFP has got far in excess of its present share on the present ad-hoc basis (and more than either the Akbar or Haleem Commissions had recommended). At the same time Balochistan has gained substantially on a pro-rata basis. While Sindh may have had a marginal increase, the major cutback has been in the Punjab allocation. Instead of giving credit to Punjab for their apparent sacrifice and silent acceptance of it, critics in Sindh and NWFP have raised an unnecessary hue and cry. One finds their only legitimate concern is in the implementation of the award, to allay such fears it is important that the Indus River Water Management Authority be constituted forthwith. In sum total the Federal Government and the four Provinces deserve credit for the Accord. Flaws exist in every agreement, but the nation has a document which has been created by Provincial consensus, which can be improved further in the future without resort to contentious acrimony and endless debate while precious water keeps flowing down the river. There is an ambiguity about whether the Accord clears the way for Kalabagh. No one can doubt the benefits of the proposed Kalabagh Dam to Pakistan, however, the emotions in NWFP and Sindh run extremely deep and threaten to be divisive to the integrity of Pakistan. Some decisions cannot be made for economic reasons alone, Kalabagh Dam must become a closed chapter keeping the unity of the country paramount. However painful economically it may be, some decisions have to be based on realpolitik.
A notable development has been the National Finance Commission (NFC) Award. This was preceded by the Council of Common Interest (CCI) which had decided the parameters on which the division of funds between the Provinces would be based, the cardinal principle being that the basis of opportionment of revenues from the Central Pool would be the 1981 Population Census and that the Provinces would have full right on the profits accruing from the resources based in their territories. Instead of having to live on handouts from the Federal Government, the Provinces have become financially autonomous, primarily based on their own resources. The centralized control of State funds had led to unlimited corruption and limited development. The basis of revenue gannering should be a direct relationship between taxation, gathering of profits and spending thereof. The Central Pool has been divided 80:20 between the Provinces and the Federal Government, with Punjab getting 53.88%, Sindh 23.28%, NWFP 13.54% and Balochistan 5.30% according to their respective populations in 1981. The divisible pool has been enlarged and estimated at Rs.59.25 billion, thus 80% due to the Provinces is estimated at Rs.47.40 billion, divided in the ratio —Punjab Rs.27.435 billion, Sindh Rs.11.035 billion, NWFP Rs.6.418 billion and Balochistan Rs.2.512 billion.
To the original basis of collection of revenues from income tax, sales tax and the export duty on cotton has been added excise duty on tobacco, tobacco manufacturers and sugar, cumulatively totalling an additional Rs.10 billion. The CCI had already decided that profits on Hydel generation, royalty on crude oil and surcharge on gas would all accrue to the Provinces adding Rs.14.3 billion to the total available to the beneficiary Provinces. The effect of NFC has been to strengthen the resource base of the Provinces thus allowing them to be financially autonomous of the Federal Government. One of the effects would be to allow Provincial Governments to allocate more funds for rural development, concentrating in developing re-furnishing the infrastructure for education, medical facilities and transportation while increasing employment opportunities significantly. This will stop the present flow of migration from the rural areas to the bigger cities, thus curtailing the rapidly deteriorating law and order problems in the major urban areas, Karachi being the greatest regret for the unemployed. The villages also lack energy, rural roads, heavy machinery/equipment and other essential services that is the right of every citizen. With the uncertainty for obtaining resources from the Federal Government and the paucity thereof gone, the Provincial Governments will be able to balance their Budgets or make arrangements themselves to increase their resources. While one cannot discount the material value of the NFC award, the more important value has been psychological insofar as the Provinces, which coming into more frequent contact with the average citizen, can themselves solve their problems or give the reasons for not doing so at the basic level instead of holding out an annual begging bowl and hoping for the best.
Nawaz Sharif had two options in dealing with the economy viz, (1) consolidate and effect cautious reforms spread over a period of time or (2) effect a series of revolutionary changes to revamp the whole infrastructure. If he had adopted the first course, he may have been as successful as Ms Benazir in making some gains but given our many economic handicaps that would have meant simply keeping pace with our problems, the equivalent of standing still. To ensure that more was done than just remaining content at not losing ground, Nawaz Sharif had to adopt the second course. Anyway one looks at it, these 180 days have created economic history in Pakistan. Nawaz Sharif has succeeded in wiping of his “wimp” image and establishing the authority of political rather than bureaucratic rule over the economy, the fundamental promise of any democracy.
Whenever revolutionary reforms are enacted, there is always fear of backlash and reaction to the changes. The road is one of calculated risk with a bunch of bureaucrats waiting in the wings to set a series of ambushes, that Nawaz Sharif chose a former bureaucrat to be his Finance Minister shows that he did not discount the power that bureaucracy wields and that Sartaj Aziz was uniquely qualified to find his way through the economic minefield laid out by them. The effects of the changes have registered on the country’s economic barometer in the Karachi Stock Exchange where the volume of the shares traded and rise in share value have both been spectacular, a show of positive business support. As the Budget approaches, the Government is quietly raising prices of utilities probably because price rises do not look too good in a Budget speech. The price rises must reflect real-term conditions, we have been getting a free ride for far too long, while inflation is galloping along merrily. The confidence of the investor has been struck, it has not yet been fully restored, that will come with everyday that the Government lasts (and keeps ahead of the changes).
In sum total, whatever may be the other aberrations and apprehensions, the confusion of the Shariat Bill among them, the performance of the Nawaz Sharif Government has been nothing less than spectacular in the economic field.
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