It pays to be bold a (not reckless)
Edmund Burke writing “Thoughts and Details on Scarcity”, noted about the masses, “And having looked to Government for bread, on the very first day of scarcity they will turn and bite the hand that fed them”, unquote. PM Mian Nawaz Sharif may have cause to ponder on Burke’s observation, particularly when he looks at his so-called natural constituency, the business community. The PM and the Federal Finance Minister should refer to Field Marshal William Slim’s “Unofficial History”, in particular the chapter entitled “It pays to be bold”. The steps taken in the new economic regime with respect to foreign exchange and trade are in the right direction but they do not go far enough, they are still too little. The government may have bought some time and so it is still not too late to bring in radical changes that will restore confidence in Pakistan’s economy.
The package devised was meant to be incentive-oriented, reflecting some fundamental changes in the mind-set of policy-makers which by itself is remarkable. Normally it is heresy to talk about dual exchange rates in front of our economic bureaucrats but that is exactly what they have finally grudgingly accepted in the country’s interest. Allowing conversion of the foreign exchange held as collateral into Rupees is also welcome, US Dollars bonds will find some acceptability. In panic, depositors had converted their Rupees into US Dollars causing a shortfall of US Dollars. A fair amount was transferred in “Hundi” to Dubai, so much so that banks in Dubai are now asking for some proof of legality i.e. business records, etc. Money is still flowing out but it will now slow down to low and medium flood.
As regards allowing importers 50% at official rate and 50% at the “floater” rate, this is not a good idea, it will lead to inflation even though some essential commodities are to be imported at the official rate. It would have been far better to allow exporters the difference between the official rate and the “floater” rate in bonus vouchers that could only be used to pay government taxes and duties and which would be allowed to be traded or used to finance imports of a certain non-essential category e.g. spare parts for vehicles, luxury goods such as air-conditioners, refrigerators, washing machines, cosmetics, etc.
By allowing US Dollar bonds as collateral, instead of insisting on Rupeefying the foreign exchange, the Government of Pakistan (GoP) has partially restored the confidence of depositors. While depositors may not feel so cheated anymore they still have grounds for grievance. To avoid shortfall in the currency supply the difference between the official rate could be in the form of redeemable Pakistani Rupee bonds in yearly denominations at a mark-up slightly more than the usual bank rate i.e. the floating bank rate (or the floater) is a reasonable idea. As regards the receipt of export proceeds, remittances, etc it is fair to give 50% at official rate and 50% at the “floater” rate. However, if anybody thinks that the wage earner abroad will send in their money home at less than the “Hundi” rate they are mistaken. The “wage earner” must get at the prevailing “Hundi” rate and he must get it with the same speed and efficiency, that is the only way to get them to remit through official channels, anything else is wishful thinking.
The government has to realise one thing, the major issue at the moment is the credibility of our sovereign guarantees that has been eroded needlessly. Going by Clausewitz’s “Selection and Maintenance of Aim”, therefore the first priority is to somehow restore the confidence in our spoken and written word. Any economic package must eliminate the feeling that the foreign exchange depositors have been cheated. By allowing Rupeefication of the US Dollar at dual rate, the government has conceded the principle anyhow by allowing a floating bank rate. There has to be a radical departure from the norm to encourage our expatriates to remit money through the banking system. That can only be done at free market rates i.e. the kerb rate. Why not have a tri-rate system, an official rate, the “floater” and the “Hundi” rate? Also demonetisation is on the cards, either the government does it or the economy will deteriorate to such a state that some successor regime will have to step in to do so. Why is the government protecting black marketers, hoarders, smugglers, militant groups, etc?
The IMF did not come through its promised tranche in time and therefore the scheme elapsed. A delegation is expected to negotiate fresh terms with Islamabad now that the US has dropped its objections. Obviously the quantum of ESAF/EFF required has now increased, at the same time IMF would like to tack on more conditions. In the meantime the default clock is ticking away, first there will be a 30-day period followed by a 60-day period. Pakistan could well decide to go ahead with the default since the promised funds were kept away as pressure tactics. This is almost a game of playing chicken, seeing who blinks first, the Government of Pakistan through Mian Nawaz Sharif or the US, through its surrogate IMF. Would the west countenance another land of anarchy in this already volatile region? Geo-politically Pakistan is not Somalia or Rwanda, the oil rich States are in the vicinity and so are Iran and Iraq, would the US want to create a solid block of anti-US sentiment that will destabilize the Near East? Moreover it is a nation with a nuclear and missile capability. For the think-tanks in the US looking at various options and responses, try that on for size. They may not like it but they have to come to terms with reality. We have been a faithful US ally for long with nothing much to show for it, in the face of Indian threats the nuclear explosion was necessary out of regional security considerations. The US should remember the Chinese proverb, “do not use a hammer to remove a fly from a friend’s forehead”.
Whenever any government is in trouble, there is no dearth of leaders who line up to proclaim how and why they would have fared better. Political analysts by the dozen trot out theories which are usually long on speculation and short on fact. A whole host of names suddenly appear from nowhere as possible alternatives, from the PM down to Ministers and Advisors. Pakistan, which even at the best of times is prone to rumour and conspiracy theories, is presently overwhelmed by a combination of both in various permutations. Jang’s Irshad Ahmed Haqqani (who proudly states that he does not read my columns) has come with a “talent list” of people who could form a possible “Caretaker” government. Another prominent columnist has talked of a “forward bloc” within the PML. Speculation is rife that we are in the throes of a government meltdown and sacrificing possible scapegoats at the altar of public opinion will not suffice to stem the collapse. Well, neither may be quite true, paraphrasing Mark Twain, “the rumours of the government’s demise are greatly exaggerated”. Webster’s Dictionary describes scapegoat variously as “1) a goat upon whose head are symbolically placed the sins of the people (2) one that bears blame for others and (3) one that is the object of irrational hostility”. The most commonly supposed scapegoats for this regime are Senator Sartaj Aziz, the Federal Finance Minister, and Dr. Muhammad Yaqub, the axe may well come down on them but it will not be deserved. They have soldiered on under very adverse circumstances, voicing their objections to various schemes in closed door sessions but loyally carrying out instructions as ordered. Senator Sartaj Aziz, whom I admire very much, was requested by me to resign in the face of this crossfire but he declined saying that would be the easy route, that in keeping with his conscience and the larger interest of the country he felt he could minimise damage by staying in place. Similarly Dr. Yaqub, another man one admires, had in fact resigned many months ago but because that could have led to some weakness in negotiations with the IMF, in the country’s greater interest he has kept loyally to his post. If these two are indeed made scapegoats, would this be just reward for loyalty under fire ?
The government has to stop creeping around the issues and get on with it. Talking about Rs.10 billion from POL price increase, what about the bank defaulters who owe more than Rs.170 billion? 11 July has come and gone, in the face of inaction the regime’s credibility is rapidly going down. Why should the people of Pakistan pay for the criminality of a host of businessmen and industrialists? That is the acid test of Mian Nawaz Sharif’s leadership! He should not fear their retaliation, if he does the correct thing the people of Pakistan will breathe a sigh of relief that their confidence in him was not misplaced. Field Marshal Slim wrote another chapter in “Unofficial History” which one recommends strongly to the PM, “Do not take counsel of your fears!”.
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