ARTICLE (October 13 2008): Recently a close friend of mine was diagnosed with cancer. It came as a huge shock as she was super fit, jogging around 4 kilometers each day, six days a week and was into a healthy balanced diet with ample daily portions of fruits and vegetables. She began the chemotherapy, and was put on some other oral medication. Soon she was literally dragging her feet.
When I asked her why she said she had contracted arthritis. But, I spluttered, you are around 40 years old and that is no age for arthritis. Her doctor had told her that it was the cancer medication that had brought forward the arthritis by at least a couple of decades.
The experience of my friend is strangely reminiscent of Pakistan's economy. High inflation, a credit crunch of a magnitude never before witnessed in this country, the rupee losing its value at an unprecedented level, rising energy shortage that is impacting on productivity and consequently on government revenue, and a government that has so far proved unable to deal with the situation.
If the liquidity crunch is tackled through injections, then the inflationary pressures which are already alienating large parts of the population from the democratically elected PPP government may well prove to be the last straw on the camel's back, leading to riots and a call for fresh elections. And if a tight monetary policy is continued in an effort to check the rate of inflation, then the credit crunch would assume alarming proportions and may well lead to a further decline in productivity with its obvious implications for employment levels and the ability of the government to generate revenue for its coffers.
Amidst all this bad news the State Bank has at times appeared at odds with the government with frequent statements attributed to its Governor and to those working in the finance ministry from the minister down to his senior and mid-level staff blaming each other for the current financial morass.
The Governor of the State Bank has reportedly, laid the blame on heavy borrowing by the federal government and the federal government has laid the blame squarely on the State Bank for its prescriptions to deal with a worsening rupee value and the liquidity crunch that are 'too little, too late'.
While there has been a noticeable decline in the rhetoric from both sides it is imperative for President Zardari to ensure that such public bickering on the part of the State Bank and the Ministry of Finance ends forthwith. Both the institutions must be committed to working together to ease the financial crisis that the country is facing.
Because foreign assistance, given the nature and extent of the global crisis, is unlikely to be extended on a scale needed the overriding principle must be an indigenous action plan to reform the economy: a plan that must not rely on our local experts, be it an advisory council staffed by experts from the private sector or public sector bureaucrats, directing the government to seek as much foreign assistance as possible. An indigenous plan must thus consist of trying to make ends meet given what the government can realistically be able to access in terms of both tax and non tax revenue and foreign assistance.
Expenditure must then be drastically curtailed in an effort to ensure that the budget deficit is within manageable limits which, in turn, would reduce the pressure on the government to borrow from the State Bank, reducing inflationary pressures in the long run. This would enable the government to meet its internal financial requirements.
But can Pakistan meet its external financial requirements in the short run? Our foreign exchange reserves are just about adequate to pay for two months of imports. The much talked of Saudi oil facility or deferring oil payments for one year remains elusive in spite of statements attributed to the Pakistani officialdom that the delay is because the Saudi oil minister has been on vacation. While even for Pakistanis used to frequent holidays by our leadership, the Saudi Minister's absence for over four to five months is incomprehensible.
Yet there is evidence to suggest that the Saudis have agreed, in principle, though no one has explained the cause behind the continued delay in actually penning the agreement. The government also needs foreign exchange to honour its 500 million dollar Euro bond obligations apart from the normal debt servicing payments that are due each year on past loans.
Then of course there is the element of foreign exchange reserves providing a buffer to the domestic value of the rupee. Banks have, reportedly, imported a huge consignment of cash dollars, against their funds held abroad in corresponding banks, in an effort to meet the sudden surge in local demand which has been attributed to the perception that the government may take drastic measures to stem the eroding confidence in the rupee, including freezing foreign currency accounts as in 1998. SBP has revealed that foreign exchange reserves have risen by 190 million dollars - an amount that is almost a drop in the ocean given our need for about 10 billion dollars to stem the decline in the economy. Meanwhile, the rupee value has eroded further and reached the all time high of over 80 per dollar. And its arrest is nowhere in sight.
The government would have to change its fundamentals before the check would take effect which, in turn, would require restoration of public confidence, increase in energy supply on an emergency basis, a tax system that is perceived to be fair and equitable and a budget deficit that is sustainable.
The PPP government's response to all this: bring Shaukat Tareen, a technocrat, as an answer to our economic woes. The people of Pakistan may be wary of technocrats, Shaukat Aziz as a case in point comes to mind, and expectations are at an all time low. However Tareen, like Aziz before him, is essentially a commercial banker and his capacity to overhaul our macro-economy is, therefore, not tested.
Be that as it may, it is hoped that pressure groups, and one has to include members of the stock exchange who met with Zardari when he was only a party co-chairman, and put pressure on him not to impose capital gains tax, are not allowed to make deals with politicians, which bypass the finance ministry. For this to take effect, the office of the President and the Prime Minister must allow Tareen not only carte blanche in dealing with pressure groups but also the heads of departments of international financial institutions. Strengthen the hands of the advisor and not countermand his orders on political grounds must be the new mantra. Only then would we have a chance to turn the economy around.
