Interview: Dr Salman Shah

The gloss of politics

Economy pushed deliberately off-track

Dr Salman Shah was part of Gen Musharraf’s economic team – headed by former finance minister and PM Shaukat Aziz – that still prides itself for overseeing the best years of the economy in living memory. Indeed, considering how low growth, low employment and high inflation have dominated economic news since the return to democracy, few would deny that the years of 7-8 per cent growth were more preferable, even if a dictator was at the helm.

But that’s not how the ruling N-league, or even its predecessors in the people’s party, see it. Dictatorships are detrimental to democracy, and therefore must also undermine the economy. And the 4.1 per cent growth rate – achieved in the first year of the new government – is highest in four years, so things must have got better. But then the IMF was told that growth was really more like 3.3 per cent, actually lowest in three years, but budget headlines are long in the past, so little matter. They did say, though, that the 3.3 number was a typing error – another common feature of democracy, apparently – so it is difficult to make sense of the real economy.

So we talked to Dr Shah to understand things. He’s been away from policy making since the public’s resounding ‘no’ to their team in the ’08 elections. And he hasn’t been back to academics since leaving LUMS in ’94, even though there’s the occasional lecture at the Staff College and NDU. These days he’s more engaged with consultancy and financial restructuring.

“One has to be practical at this stage”, he says. “It’s more about earning a stable living”.

So what’s happening?

It doesn’t take a Salman Shah to know the economy is not as bubbly as the N league would want people to believe. And its desperation is evident in the spin it tries to put on facts and figures.

“The government is just trying to put a gloss on everything, to show they have been hard at work”, he says, obviously not impressed with the direction of the economy.

So far, it’s been fire-fighting mostly, according to him, which is hardly a surprise. The mismanagement of the PPP years left a nearly insolvent economy with very little elbow room, and it’s been pretty much about stopping the fall since Dar sb took over the finance ministry.

That does not mean, however, that the present setup is any more dynamic.

“There was gross mismanagement”, he adds. “Take investment for example. In our time it was 23-24 per cent of GDP. In the PPP days it dropped like a stone, to around 12 per cent of GDP. And the position hasn’t improved much in the last year. It is around the same level of 12-13 per cent”.

There are more numbers that don’t do much justice to democracy. And Dr Shah remembers all of them. GDP growth rate for example, chronically caught in the 3-3.5 per cent range, is a far cry from the 7-8 per cent growth engineered, and maintained, by their team. And inflation has just gone through the roof. Food inflation is even worse, with lower income groups now unable to afford even staple food. And it is very important to note that while the lower income groups’ lives have never been much to write home about in our Islamic Republic, the present situation where mere subsistence has become difficult finds few parallels in our history.

“Take atta (flour). Even in our last days it was priced at Rs12-13 per kg. Then it doubled, and then it redoubled. And now it’s in excess of Rs50 per kg”, he points out, stressing inflationary pressures are central to our vicious circle; low investment, low employment generation, and low growth.

The economy is still capable of growing at eight per cent and more, he believes. But that will need a far more effective strategy mix, and the practice of “glossing over facts” will have to stop. Policy should be geared towards lowering prices, which is crucial at a time when population growth is high and the youth bulge is expanding.

“According to Ishaq Dar himself 67 per cent of our population is under the poverty line”, he adds. “Such is the level of the crisis facing Pakistan”. And things won’t improve till prices are controlled so real incomes improve, and growth and employment are impacted to the upside.

Only hydel

That’s all fine. But is it possible to grow with our chronic energy problem; youth bulge, income generation and inflation control being another factor-mix altogether?

“To my mind, the issue is more about affordability of power than its availability”, he says, putting to rest arguments that it is not production, generation, or distribution where the fault lies, but dealing with the chronic circular debt, and punishing non-payers.

The economy is still capable of growing at eight per cent and more, he believes. But that will need a far more effective strategy mix, and the practice of “glossing over facts” will have to stop. Policy should be geared towards lowering prices, which is crucial at a time when population growth is high and the youth bulge is expanding.

“Circular debt was obviously an issue”, he adds, “but now the capacity of the transmission system is also a problem”.

The main problem, again, is faulty policy. Our natural strength and comparative advantage lay in hydel power. After Tarbela and Mangla, we had developed the human capacity and organisational setup required to expand the hydel setup. And Kalabagh damn was the logical follow-up for a host of reasons.

But with the IPPs we began moving in a different direction altogether. It became clear that the government of the day was less interested in the energy problem, or the logical way of preparing for it, and far more concerned about its own coffers.

“The IPPs gave a first time up front tariff of six cents per kilowatt hour (kwh), whereas the going rate was four cents per kwh. The unnecessary and illogical extra burden sent the power sector into a tailspin, ushering an era of perpetual crises. Wapda went bankrupt and it is little surprise that we have a colossal circular debt problem today”.

Now, those were the days when oil hovered around the $25-30 per barrel mark. Then a time came when Brent crossed $150 per barrel. It has now stayed consistently above $100/barrel for five to six years now, and the six cents issue now costs more like 20 cents per kwh.

By deliberately moving away from our natural comparative advantage, which was also economically feasible, to imported fuel where it was impossible to put a cap on its price, we now run an unprecedented perpetual oil shock risk, and suffer all the time for it.

“Instead of keeping government out of business, it has become the norm for the government to be in business, awarding contracts which enable the leadership to make money through kickbacks. The IPP case typified this exercise. This sort of corruption has become an art form. It’s almost folklore”, he adds sadly.

Then came the Rental Power Plant (RPP) farce. The corruption this time was so obvious that the main opposition party of the time – now in power in Islamabad – took the ruling party’s corruption to the courts, and the Supreme Court ultimately declared RPPs illegal.

So now the powers that be are looking to use coal for energy, still refusing to turn to hydel. And despite large reserves in Thar, the choice is to import coal for developing energy, apparently to save time.

“It is a matter of developing wealth creating projects”, he says. “And the choice is between creating wealth for the people and creating wealth for the rulers themselves”.

Interestingly, our government’s attention turns to coal just as it is losing favour in much of the world. It is not only an expensive way of producing power, it is also environment unfriendly. Plus, it will be at least 5-6 years before coal can produce the first unit of electricity, where Kalabagh can come online in a matter of 4-5 years.

“You can see that the argument against hydel is rubbish. It will also help water storage and add $11 billion to agriculture production. Availability of food will increase, poverty will decrease, and rural income will double”, he adds.

The benefits of hydel are so obvious, according to him, that it just does not make economic sense to overlook it. KB dam would be especially beneficial for eastern Sindh and southern KPK. People’s lives can change dramatically. Exports will rise, imports decrease, trade deficit narrow, reserves increase and the rupee strengthen. “The annual net benefit would be around $15 billion, but vested interests of certain political classes have overlooked such alternatives for their own personal, corrupt reasons. There is an urgent need to depoliticise water projects”.

Musharraf, Shaukat?

He remembers his time in Islamabad fondly, of course. The capital was more proactive in those days. The World Bank’s ‘ease of doing business’ placed Pakistan in the world’s top 10 reformers. The 2006-07 Global Competitive Index placed Pakistan above India. Our position now is much worse, needless to say.

Gen Musharraf was a hands-on leader, and was very aware of the need for a thriving economy. And Shaukat Aziz complemented him nicely. Nobody who was close to the general in those days would be happy about the fate that has befallen him lately.

Dr Shah thinks it was unwise of the government not to allow him to contest last year’s election.

“They should have let him contest”, he sighs. “If the people rejected him, that would be that, but the government made a mockery of the whole affair”.

It is difficult to find fault with the argument. The champions of democracy should have let democracy take its course.

“And there’s much to appreciate about Shaukat. He’s a self-made Pakistani. He is still sought after by the world’s financial elite. He left gracefully when he was not given a ticket. And he still carries a Pakistani passport”.

With that, I beg leave, since I can see him shuffling his suit – he was obviously ready to leave when he accommodated my interview request. There was no tea because of Ramazan, but his anecdotes and rationale for hydel-power benefits were fixating enough. His dog Heidi almost bites my hand off as he sees me off.

An instructive meeting with one of those few people who can say, without glossing over facts, that he was part of a team that made life better for Pakistanis.