Dire economic straits
Dire economic straits
Bad news from Pakistan has become the norm rather than an exception.
Just a fortnight ago, a meeting attended by the prime minister, the chief ministers and the service chiefs was informed by the finance minister himself that the country was going bankrupt.
Dr Hafeez Sheikh warned his stunned audience that the national debt had increased to a perilous level. The country is on the edge of insolvency to the extent that the government will not have the money to pay off salaries in two months, he said.
Soon after, the finance minister left for Washington with a 17-member delegation for talks with the IMF for the release of the remaining two tranches amounting to $2.6 billion under the Stand-by Arrangement (SBA). According to media reports, IMF officials chided the economic czar and members of his team for inconsistency in official assessments of the impact of the floods on the economic landscape of the country.
The IMF has put the SBA loan on hold till the November-December review talks. Meanwhile, a blame-game has started among the members of the delegation regarding the failure of the visit.
An insider, who was also quoted in a section of the media, said that even before the delegation arrived in Washington, the principal economic adviser to the finance ministry, Saqib Sherani, had intimated the IMF, the World Bank and the Asian Development Bank through an email that Pakistan was going to experience its worst-ever economic scenario, with zero GDP growth and 25 per cent inflation on a short-term basis.
The same report claims that the finance minister and his team turned up at the IMF head-office asserting there would be a 2.5 per cent GDP growth, 13 per cent inflation and 4.5 per cent deficit, after the impact of the floods on the economy had been taken into consideration.
The prime minister further damaged the credibility of the delegation by stating that the budget deficit would be 6-7 per cent. It is no surprise that the IMF chided the delegation for the conflicting claims about the flood damage.
The delegation stayed in the US for more than ten days, comfortably ensconced in one of the most expensive hotels of the US capital. All it could achieve was for Pakistan to be allowed to avail the $450-million facility reserved for national emergencies. An official quoted in the media has correctly pointed out that Pakistan could have secured the emergency support through a simple letter instead of the expensive junket to Washington.
It is obvious that, notwithstanding the unprecedented damage caused by the floods, the malaise afflicting the countrys economy runs much deeper. As the finance minister informed his august audience last month, the economic situation was precarious even before the sudden onset of the floods. None of the targets agreed with the IMF had been achieved, he informed them.
Even the provinces are making conflicting, and inflated, claims about the damage inflicted by the floods. The political will and consensus among the provinces regarding the imposition of the value-added tax (VAT) by next month, as per the agreement with the IMF, is also lacking. Neither is a plan in the offing for the reduction of the ever-increasing circular debt.
It seems that the IMF is no longer willing to offer a free lunch to Pakistan despite the blandishments of our economic managers. To be fair, the dire economic straits that we are in are not entirely the making of the present government. However, the manner in which the economy is being handled has compounded its problems, with the floods proving to be the last straw that broke the proverbial camels back.
The meltdown of the economy will have far-reaching implications for the country, with democracy likely being the first casualty. In spite of this, the federal government and the provinces are simply not willing to improve governance, tighten their belt or to lead by example. They seem to be oblivious to the impending crisis.
At the federal level, a pervasive sense of inertia persists. In a parliamentary system a mid-term reshuffle is the norm, sometimes even for cosmetic political reasons. The coalition government has completed half of its five-year term by fits and starts. But none of the key members of the team have been changed or been shown the door for incompetence or corruption. The only exception is the finance ministry which has seen four ministers come and go.
As a result, a new style of governance (or lack of it) has emerged. On the one hand, our India policy, Kashmir, counter-terrorism and, lately, flood-relief have been partly or fully outsourced to the military. On the other, our economic policy has become the domain of former IMF/World bank mandarins, who have been unable to develop roots in the political milieu. Dr Hafeez Sheikh and his advisors are perceived by their political masters as outsiders, their counsels falling on deaf ears.
Dr Sheikhs predecessor, Shaukat Tarin, left in disgust when he sensed that politicians are not willing to change their profligate mindset. He successfully pursued a macro-economic stabilisation programme with the assistance of the IMF and was able to bring a modicum of stability in the economy, with a decrease in inflation and a lowering of interest rates.
Pakistans economic malaise, however, runs much deeper than the real or perceived incompetence of our rulers and economic mangers. For long we as a nation have lived much beyond our means. The way our economy is structured, the figures simply do not add up. According to former State Bank Governor Dr Ishrat Hussain, who now heads the IBA in Karachi,
Pakistans government secures only 15 per cent of the national income, leaving 85 percent in the hands of the private sector.
This amount is to be spent on defence, debt-servicing, internal security, development on education health and general administration. Out of every rupee of income received by a Pakistani on average, the tax paid is only 9 paisas. A meagre tax-to-GDP ratio of 9 per cent and our dismal rate of savings are too low for sustained economic growth.
With the ever-rising budget deficits, inflation is bound to increase. According to Dr Ishrat Hussain, double-digit inflation rates in Pakistan have historically been rare. Hence, the tolerance threshold for inflation beyond 7 and 8 per cent is low. Inflation, expected to rise to 25 per cent as a result of floods, will have far-reaching socio-economic consequences.
With the economy teetering and the social safety net virtually non-existent, coupled with rampant terrorism, poor law and order and the aftermath of devastating floods are a recipe for disaster. Our expenditure on health education and clean water as a per cent of the GDP is dismally low even by Third World standards. With such poor social indicators, sustained economic growth is impossible.
Ironically, Pakistan is a nuclear power and its armed forces rank seventh in the world.
Its defence budget is about $5 billion, or 3.5 per cent of the GDP. On the other hand, the country is virtually bankrupt. It is becoming increasingly impossible to match Indias defence capability, which incidentally is now one of the fastest-growing economies in the world.
However, our present security paradigm does not permit us to reduce our defence outlays or the size of our armed forces. A legitimate concern for some is that perhaps the Indians are bleeding us in the same manner as the US bled the former Soviet Union, trying to achieve the same end-result. Nevertheless, economic mismanagement has long-term security implications. The second Benazir Bhutto government was sacked on this basis, with the concurrence of the Army.
The writer is a former newspaper editor. Email:
arifn51@hotmail.com
