In an article entitled "The Economic Way Forward", Dr Salman Shah, the erstwhile Advisor to the Prime Minister on Finance and Finance Minister in the military-led government of General Pervez Musharraf, has ventured to give a lot of gratuitous advice on how to revive the economy and to move forward. Perhaps given the writer's questionable credibility, the article has not been commented upon by any mainstream media nationally or internationally.
Nonetheless, coming from a person who is himself largely responsible for the present economic mess, it merits a response. Dr Salman Shah's apparent motive and Shaukat Aziz's for writing the article is to counter widespread criticism for his abysmal performance rather than giving economic advice to his successors on future management of the economy.
Calling social and Islamic economists names in an era when the discredited free market economists are themselves in disarray is poor justification for the libertarian economic views expressed in the article. Rather than providing advice on the future course of action, the article appears to be an attempt to justify past economic policies and performance.
The article is full of facts and figures that provide a skewed view of the economy during the previous regime. Comparison between the nineties and the eight years of the military regime is like comparing apples with oranges.
It is unfair to compare the economy of the nineties (which was the result of post-nuclear detonation economic sanctions - a price paid for gaining strategic advantage - with the eight-year period that enjoyed post 9/11 economic benefits - frittered away by Shaukat Aziz's hare-brained consumer-oriented economy.
In case the post 9/11 liquidity inflows had been used for the development of real sectors of the economy ie agriculture and manufacturing, it would have helped create employment and check inflation. While examining economic indicators, the article presents a distorted picture of growth during the Musharraf era based on incorrect calculations.
GDP size in nominal terms grows proportionately with the rate of inflation even if real economic growth is zero. Therefore, by reporting a low rate of inflation, it was easy for Shaukat Aziz to show a high 'Real' increase in GDP during the years 1999-2007. If the economy grew by US $100 billion in the last eight years on a base of US $65 billion, as claimed by Dr Shah, then it means that it grew at a compound annual growth rate (CAGR) of 12.35%.
This would mean that Pakistan's economy grew faster than even China's. It is surprising that this claim was not made when the writer was still the Finance Minister! Another critical factor that finds no mention in the 'Article' is the readjustment of the base year from 1980-81 to 1999-2000 which alone helped the military led Government to substantially overstate the growth by around 25% during the period of its rule.
The claim relating to credit to the private sector is equally astonishing in that during the period the writer claims private sector credit grew by 12.14% (CAGR), money supply grew by over 15% per annum. This means that the net relative private sector credit remained unchanged or even declined! It has been stated that the electricity and gas consumption increased during the period 2000-2007.
The growth of population alone explains the increase in the requirements of electricity and gas during the period. The important fact that has not been mentioned is that not a single megawatt of electricity was added to the system during these years. An analysis of the claim regarding increase in foreign investment clearly indicates that this amount mainly corresponds to the privatisation proceeds.
We all know that during the period 2000-2008 global credit went into an unsupportable spiral fuelled by an excessive exuberance of financial derivatives and cheap mortgage lending. Pakistan too received its share of easy money. Now that the air has been let out of the balloon, we are reaping our share of the harvest of global recession.
The further claim that development spending and exports increased to US $7.5 billion and US $18 billion respectively in 2007 is contradicted by the fact that the actual development spending during the period 2000-2007 declined as a percentage of GDP.
It is not accurate to state that foreign exchange reserves were only US $1 billion in 1999 when in fact the government record shows that the reserves on June 30,, 1999, before the military take-over, to be US $2.4 billion (equivalent to 3.45 months of imports) despite massive post-nuclear detonation sanctions and that too without any outstanding foreign exchange liabilities which were all cleared by 30th June, 1999.
The reserves in terms of months of import requirements remain unchanged while our foreign debt ballooned from US $32 billion US $50 billion. The growth in reserves almost identical to growth in foreign debt liabilities. The stock market in Pakistan, which is claimed to have been one of the best performing markets, has actually remained the most manipulated and volatile markets in the world.
The stock market scandal of 2005 was not allowed to be properly investigated and the securities market regulator was institutionally weakened to allow perennial predatory practices in the stock market. Strenuous efforts to bring about meaningful capital market reforms were thus thwarted by Shaukat Aziz's government at the time. The sharp fall in the KSE-100 index from over 15,000 to 5,000 in fewer than 6 months is a manifestation of the inherent market manipulation engineered by the last government.
The article states that the new political government has not been able to maintain the 'Pakistan Brand' and has, in fact, eroded it considerably because the erstwhile Finance Minister, Ishaq Dar, had dared to point out publicly the rapid deterioration in the economic indicators and the loss of confidence in the economy because of the mismanagement by economic managers of the Musharraf led regime.
Ishaq Dar had been mandated by the Federal Cabinet, for the sake of transparency, to present to the people of Pakistan a balance sheet on the economic indicators as they stood on the day an elected political government took charge. It is also important to point out that this balance sheet was actually prepared by the team of experts who had worked with the former Prime Minister/Finance Minister Shaukat Aziz and Dr Shah under President General Pervez Musharraf.
It was the moral responsibility of Dr Salman Shah as well as the caretaker government to inform the people of Pakistan the hard facts on the economic situation of the country at the time when the newly elected political Government was to take charge in March, 2007. The people of Pakistan had the right to know that Shaukat Aziz's government misrepresented facts in the budget 2007-2008.
The domestic debt interest payments were budgeted at Rs 318 billion although the liability on this account was around Rs 440 billion implying an under provision of Rs 122 billion in order to indicate the budget deficit for the year 2007-08 at 4% of the GDP.
No budget provision was made for R&D subsidy to textile exporters for which an expenditure of around RS 40 billion was incurred. An expenditure of Rs 38 billion had been incurred on miscellaneous development programmes till February, 2008 for which no provision had been made in the budget. Likewise there were under provisions of Rs 75 billion for electricity subsidy and around 140 billion for oil price differential payments in the budget for 2007-2008.
Notwithstanding, another blunder was committed by first allowing export of wheat at around US $200 per ton and then importing the commodity at over US $400 per ton that resulted in a loss of around Rs 40 billion to the exchequer. The revised budget deficit was projected to be around Rs 950 billion after taking into account the under provisions, no-provisions and excess expenditures as opposed to the original deficit estimate of Rs 400 billion.
Based on the main features of the budget for 2007-08 as broadly explained above, the obvious inescapable conclusion is that the objectives of the budget makers were more political than economic in view of the then forthcoming elections. It was imperative for the newly elected political government to take cognisance of such a disastrous fiscal situation.
It was in this background that the then Finance Minister Ishaq Dar immediately on assumption of office started 'fire fighting measures' by taking appropriate actions to raise revenues and to take hard and difficult decisions to curtail expenditures in order to help bring down the projected deficit of 9.5% of the GDP to 7.4% of the GDP for the year 2007-2008.
Attributing the loss of confidence by foreign investors on the lawyers' movement tantamount to an admission of guilt since the Musharraf government was solely responsible for instigating this movement by its unconstitutional act of dismissal of the entire senior judiciary, including the Chief Justice of Pakistan on 3rd November, 2007.
Needless to say, the lawyers' movement was, with the help of domestic public, able to provide the country a democracy dividend. The chaotic politics and lack of focus on economic issues is the result of turmoil left behind by the complete constitutional, legal and institutional breakdown caused by the insidious commando attacks intended to perpetuate a one-man rule.
One cannot fault Dr Salman Shah for advising the President, Mr Asif Ali Zardari, to build the Kalabagh Dam and to increase allocations for health and education. However, one wishes that he had given this advice to Shaukat Aziz or Pervez Musharraf when he himself had the opportunity to do so as Finance Minister of Pakistan!
(The writer is a former Federal Secretary to the Government of Pakistan)
