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Living Beyond Reality

When “everyone” and her uncles were expecting a sanctions-oriented tough budget, the Federal Finance Minister did his usual Houdini-act again. This took the political wind out of the Opposition’s sails and they were left mostly spluttering “Kalabagh.” With unrestrained glee they have been joined by the likes of Jatois, etc i.e. those most likely to be affected by a firm implementation of land reforms. Despite the fact that as Pakistan’s financial guru Senator Sartaj Aziz was symbolically bound in chains, bundled in a sack and thrown into the deep end, he has emerged, wet and shivering perhaps, with a surprisingly liberal but (in the circumstances) enterprising Federal Budget.

In the face of a looming economic crisis the Finance Minister has relied on a number of assumptions, viz that (1) foreign aid of approximately Rs. 142 billion will keep flowing into the country as per the status quo before May 28 (2) CBR will deliver at least Rs. 60 – 70 billion more than the Rs. 290 billion it should manage to extract from tax-payers this year and (3) Pakistanis abroad will send money through the banking system rather than through “Hundi” outside the system. These assumptions can be labelled as optimistic though not outrightly risky. Both the IMF and World Bank have shrugged off their commitments so either our Arab uncles in Saudi Arabia and Abu Dhabi have to come through or we are living in hope and as such bluffing, which will not only be criminal but tragic for this country when the bottom disintegrates and the economy goes into a free fall without a parachute. On the plus side Federal Commerce Minister MNA Ishaq Dar seems to have got some joy out of his trip to Malaysia and we may get some relief in the import of palm oil on deferred payments. There are enough rumours afloat to reasonably assume that Iran, among others, may agree to sell us oil on deferred payment basis. With respect to CBR collections, there is enough evidence to suggest that these will certainly go up considerably and the government may in fact be able to achieve a target of Rs. 350 – 360 billion provided the government does not succumb to the machinations of “special interest groups” that have previously derailed such efforts in Pakistan. The CBR has been revitalized within the straitjacket imposed upon them by the political government and it is becoming more difficult for tax dodgers to escape official attention. As for Pakistanis abroad, sending in money through official channels, one does not hold out much hope, despite the appeal to patriotism the increase will be marginal. The blue-collar worker strongly believes in the “Hundi” system where he gets his money within hours without any hassles in comparison to banks which are inefficient, indolent and even downright rude to down-scale customers more often than not. Why should he change his tried and trusted route? Some will, for patriotic purposes, and after being mistreated and maltreated, will go back to the “Hundi” route. As regards white collar workers, they are more likely to keep their funds abroad, invested in real estate or tangible securities. If they had any such inclination to send money to local foreign accounts, after the empowerence of freezing of Foreign Currency Accounts, that intention has also got into a deep-freeze and new accounts are highly unlikely. However, even in this some “rotation” is likely i.e. withdrawal at Rs. 46 and re-deposit in fresh Foreign Currency Accounts. Nobody trusts our credibility, only Henry Wilson was able to sell the Eiffel Tower twice. As such to expect much from the National Self-Reliance Fund as well as inward remittances would be unrealistic. Unfortunately this hits us at the point of our greatest weakness, our depleting foreign exchange reserves. With that comes also the crisis of meeting commitments of meeting of debt repayments as well as keeping a balance of payments going. The trade policy announced by MNA Ishaq Dar, goes a long way to meeting a “zero deficit” situation. In the circumstances, this was also surprisingly and refreshingly liberal and pragmatic. As a consummate team player, Ishaq Dar has come a long way.

Given the extremely adverse economic situation many in the intelligentsia cannot understand why there are no blues in the budget. In fact the budget is very liberal by normal South Asia budgetary standards. So the assumption is that our financial planners have either stayed too far out in the afternoon sun or know something we do not. In fact both may be somewhat true but the actual philosophy behind the soft budget is not to further burden the citizen and to somehow stimulate the economy. You cannot burden a man carrying a 40 lb. pack with more weight, this will only crush him forever. To get his limbs going one has to take off some of the weight and periodically give him life-sustaining nourishment. With additional taxes, the buying power would be further eroded and thereby sales and commensurately domestic production would go down. This vicious cycle would create further economic despondency. In effect, the government has to gamble, to take a calculated risk that by keeping taxes down, increasing the consumer’s buying power would help fuel the economy. This is Reagan-vintage supply-sided economics at its bare bones, if it does not succeed then we are in real trouble. If CBR fails to get in revenues, we are dead!

Reducing duties for a wide range of so-called luxury goods is not so much to make them available for well-heeled consumers as to curb smuggling. Successive governments have woefully failed at intercepting smugglers of luxury goods and contraband items. The Bara markets are symbolic of our impotency to stop them. The lowering of custom duties makes the relative cost of smuggling uneconomical in the face of direct imports. We are guilty of helping Dubai become Dubai, at the cost of Pakistan. Keeping duties lower will encourage importers to adopt the official route rather than take unnecessary risks, this way government revenues will be enhanced. Similarly the reduction of duties on higher cc cars is not Saifur Rahman-BMW specific as Ms Bhutto is claiming, smuggling of vehicles has become an unbearable burden on the national exchequer. Lowered duties would mean lesser smuggling as well as import of vehicles and by the official route. As such there is a definite method in the seeming Senator Sartaj-midsummer madness. Now it depends upon the CBR to perform, in a Catch-22 argument the CBR depends upon the government not to interfere with their process when they catch the really big fish.

Whatever methodology one employs the fact remains that Pakistan is in serious economic trouble. Part of this crisis stems from the unavoidable May 28 nuclear detonation which evoked sanctions, part of it is the inept performance of the government in the face of adversity despite the fact that Mian Nawaz Sharif has had a golden 30 days post-May 28. Where hard decision -making is necessary, the government tends to vacillate and to delay, as if the problem will simply disappear. Despite the fact that the government has a lot of goodwill among the intelligentsia and the masses they tend to take counsel from an inner circle short on intelligence but long on flattery, an extremely dangerous combination, one that has got many a previous regime in deep trouble. Decisions have been taken hastily and then forced by public opinion to backtrack, making the issue politically sensitive. What we need is sound crisis management based on correct evaluation of the available information, in each sector we need task-force oriented teams, with definite and achievable targets. We do not need to create fresh monsters, only to overcome the existing ones. We are frittering away our human and material resources in a wasteful exercise in mismanagement without definite aims and objectives. When we should have harnessed the human potential of both friend and foe to cope with the situation, we further polarized the situation by exacerbating issues that were necessary but not of immediate importance relevant to the present situation. Mian Nawaz Sharif will have to reach out of his inner circle if he is to truly build a national mandate or he will find that people will not reach out for him in the future as much as they do today. While he has been politically smart in avoiding the Budget from economically adding to the burdening of the masses, the public perception that he is increasingly removed from reality must be dispelled. That can only be done by a pragmatic display of good governance at its best, that is the essence of finding positive and lasting solutions to our immediate and long-term problems.

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