The Economics of Despair
Just a day before the Presidential Address marking the beginning of the 3rd Parliamentary year for the present National Assembly, Mr VA Jafarey, Advisor to the PM on Finance and Economic Affairs, made a “surprise” announcement on prime time national media that the Federal Government had decided to devalue the Rupee by 7% and increase fuel prices by a commensurate amount while imposing some “temporary” regulatory duties (10% on dutiable and 5% on non-dutiable as long as the total tariff did not exceed 65%). Wheat, fertilizers and import of power generation plants under the energy policy (upto a maximum of 3000 MW) were exempted. The official US dollar parity with the Pakistani Rupee has weakened to Pakistan’s detriment from Rs31.85 to Rs 34.25, a difference of Rs 2.40. The Pakistani Rupee has thus depreciated Rs 3.28 or (10.59%) from Rs 30.97 in the four months since the Federal Budget in June 1995, unofficially it will be pegged closer to Rs 35 (an actual devaluation of 13%), the figure it should “officially” cross by end December 1995. One feels that the Government should have gone the whole distance in one go instead of creeping to that figure.
Let us give Ms Benazir’s Government credit for biting the bullet and taking drastic measures to correct the economic imbalance, better late than never. In the present political environment, it requires courage to acknowledge publicly that these were major deficiencies in economic management, particularly with respect to financial discipline. Obviously, the PM decided that enough was enough and in the national interest made a remarkable turnaround, tacitly accepting economic responsibility in the face of numerous ADs in the media extolling the many virtues of the PPP Government’s economic policies. It certainly required a superwoman effort to recognize that despite the immediate political consequences the economy needed drastic rectification if we were to avoid slipping into the bottomless gorge of economic apocalypse. While she will face criticism for not listening to the economic doomsayers much sooner, i.e. at the time of the Federal Budget when Makhdoom Shahabuddin confidently assured us about something he had no knowledge of, that given the loose ends a Mini-Budget had to be in the cards. It was vintage — Ms Benazir to first gamble that she would get away with it, then take bold and pragmatic measures when the chips were down. It was incumbent on the PM to take control of events rather than let the economy (and the country) fade out into oblivion.
The fiscal measures involve strict expenditure control with no extra-budgetary grants available, this would apply across the board to public sector organisations and autonomous bodies. Strict monetary policy will mean the control of additional liquidity that was running rampant due to lack of financial discipline. The SBP Governor had recently highlighted the fact that in the first two months of the financial year, July-August 1995, GoP had borrowed Rs 37 billion, exceeding its own target of borrowing of only Rs 30 billion by nearly Rs 7 billion with 10 months still to go. To ensure that further bank borrowing remains under control, the credit expansion target of 13% is to be strictly adhered to. Rates of concessional lending for exports and purchasers of locally manufactured machines (LMM scheme) have been increased, while small business loans, youth employment schemes, awami tractor schemes, etc may be selectively phased out.
Coming within a few days of the publication of the most independent Annual Report of the State Bank of Pakistan (SBP) in its entire history by the present Governor SBP, albeit at the risk of his own neck in visibly annoying the powerful, entrenched bureaucracy, her swift reaction is aimed at damage control. She has even started the process of eliminating waste and corruption by symbolically lopping off several dispensable heads (Chairman WAPDA, ADBP, CEC till date) but a few sacrificial lambs will not do. The PM must go the whole hog and revamp the whole team of her economic advisors that has landed her regime and the country in this murky economic soup. The track records of these Untouchable “indispensable” people will confirm how they keep changing their advice chameleon-like to suit the wishes of the current rulers suitably tailored to vested interest of their (the bureaucrats’) choice rather than laying out the truth so that the rulers benefit from heeding such advice, both personally and for the good of the country.
In the face of devaluation of the Indian Rupee in mid-September 1995 and given the fact that we are in direct competition with them in the cotton and cotton derivatives sector, it was impossible to keep sacred the value of the Rupee as pegged officially against the US dollar. Unofficially the Rupee was already trading at Rs 33.60 to the US dollar, a depreciation of 5.2%. By officially taking a leap beyond that mark to an official 7% i.e. Rs 34.25 to the US dollar, Government of Pakistan (GoP) closed the gap to the Indian Rupee US dollar parity (unofficially Indian Rupee is 36 to the US dollar) so that the handicap that our exporters face would be reduced, if not altogether eliminated. Given that our textile sector has been virtually sick for the past year or so (and despite a very innovative rejuvenation package almost terminally ill), the measure will make our textile exports internationally more competitive and act as a delayed shot-in-the-arm to the textile industry.
Bad news never comes alone. Almost simultaneously (and certainly a coincidence), a World Bank Study on Pakistan’s agriculture sector concludes that revenue-generation to the volumes necessary for good fiscal governance is impossible when agriculture is not being taxed in the same manner as the rest of the citizenry. The Study strongly encourages a move towards direct taxes on agriculture income and land or both, replacing the current system of inefficient and inequitable resource transfer and commodity-specific taxation, with the possible exception of taxes on commodities in which Pakistan has market power. The 70-page study authored by Rashid Farooq, Principal Economist, Agriculture Operation, World Bank argues that structural and policy reforms are urgently needed to stop creeping stagnation in the agriculture sector. The Study stresses opening the sector to market forces but allowing government intervention for ensuing pre-conditions of growth, poverty alleviation and environmental protection. To reach Pakistan’s potential for growth between 30 to 50%, four priority areas are, viz (1) removal of distortions like government involvement in output prices, rather prices should be market-oriented and all sort of support prices must go, transition to be phased over 4-5 years (2) irrigation being lifeblood of agriculture, we must face problems of waterlogging and salinity, etc reforms including institutional reform and market pricing of water (3) reform of extension services, effective use of technology and best farming techniques and (4) correcting distortion in land markets e.g. inefficient distribution of land and inadequate system of land tenure stunts continue growth. Despite evidence that small farms are more productive than larger ones, 25% of Pakistan’s farmland is concentrated in farms of fifty acres or more. In India where land reforms have been effective, wheat yield may be as high as 70-75 maunds per acre whereas in Pakistan we are quite comfortable with 50 maunds per acre. People in India have small landholding and lack government subsidy, intervention, etc, they must make every acre pay. Our landlords with much large holdings (some even upto 50000 acres) because of ineffective land reform are mostly absentee dilettantes with no such compulsion.
Ms Bhutto must address disaster-in-the-making in the industrial regime. The reduction of tariffs across the board has seriously affected our manufacturing sector, one need only visit the PACE Department Store in Lahore to perceive the plight of our industrialists, particularly those who had invested in manufacturing consumer products. It may be cheaper to buy imported chocolates, milk, paper tissues, mineral water, etc in contrast to our own domestic ones. How can industry survive when we are becoming a vast consumer market for foreign manufacturers? One feels that punishment to the manufacturing sector for not supporting the present regime is being taken too far. We face a severe employment crisis in the future if action is not taken immediately to put up tariff barriers to protect our local consumer industry.
All things said and done, the fact remains that the economy is in full despair and rampant inflation is very much on the cards. As much as the Government may say otherwise, the fact remains that the devaluation and measures thereof is a Mini-Budget that has initiated a cycle of inflation. Those most affected will be the salaried class and those already living below the poverty line, viz (1) those who pay taxes but are forced to live within budgets of their own and (2) those who hardly can eke out a living and certainly cannot afford to pay taxes. Inflation is going to take the cost of living to unbearable heights, much more than we can bear the burden of in the same stoic manner. Of particular worry is the fate of our pensioners, it is imperative that Ms Bhutto takes legislative measures to index their pensions to inflation as in one go their buying power has been reduced by almost 10%, with inflation it is likely to be reduced by 25%, a quarter of their earnings would be lost even before they see the colour of their money. As everyone knows, inflation feeds on itself, a blood cycle of frustration that is anathema to the middle-class and the poor who make up a vast majority of our populace. Who can we finally hold accountable for our economic shortcomings, this is the sorry history of every successive regime, elected or otherwise! Can we really expect change unless there is a genuine attempt at financial reform and accountability thereof, in particular a campaign against corruption in the upper levels of the hierarchy? Unfortunately, ours is a policy of blind subservience without anyone having the courage to face upto reality and to tell the truth to the rulers — at least in time!
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