Pakistan was celebrating the 135th birth anniversary of its founding father, Quaid-e-Azam Mohammad Ali Jinnah; right after the clock struck 12 am, all the lights went out in many areas of Pakistan, including ours. Darkness on the eve of 25th December, however, evoked feeling of despondency, leaving one questioning oneself, as to how did Pakistan become a state of unmanaged people, institutions and culture? To my query, that i recently posed to one of my scholar friends, about Pakistan’s survival when practically the entire state machinery has broken down; a brief, but short response to my inquiry was, “foreign aid”. My friend readily drew my attention to the newly awarded 5.5 billion rupees aid to Pakistan by the World Bank. Aghast, my mind raced forward to the future that looked almost bleak. Almost simultaneously, I began pondering over the report that was published a few days back by the State Bank of Pakistan (SBP), on the economic performance of the government in the last one year. My heart skipped a few beats, as i recalled trade deficits, declining Foreign Direct investment (FDI), and the macabre of institutional failures, occupying the better part of the report.
The Fault Lines
Year after year, the economic outlook, published by the SBP, remained sordid in its attempt to explain the reasons as to why Pakistan has become an economic dwarf. in its recent disclosures, the central bank, has blamed fiscal problems, domestic debt and crowding out, power outages and governance for the 2.4 per cent GDP that Pakistan bagged in year 2011, against the forecasted 4 per cent. As one goes back to review the previous reports to find what ailed the economy earlier, surprisingly, the aforementioned fault lines appear out to be a lingering concern; something that has always been there. Still, the report eulogises government’s effort in gaining 2.4 per cent GDP on the face of two consecutive floods that inundated most of Pakistan’s agricultural land. The catastrophe that affected major capital inducing and employment generating sectors such as industry and agriculture raised inflation and unemployment; bringing future more trouble to the people already sinking under the deep waters of poverty.
The Economic Outlook
Unfortunately, the issue in hand is more about economic mismanagement than available opportunities and resources. Digging on the causes of fiscal failures, the report exposes the government for its inability to restructure the Public Sector enterprises, reform General Sales Tax, and broaden tax base, by netting the agriculture sector and services, and curtailing billions of rupees of untargeted subsidies. On the domestic debt, the frontier government is living on borrowing.
With 60.9 per cent of GDP to debt ratio, and 32.8 per cent of government’s revenue going into interest financing, the ability of the government to bring economic growth through fiscal policy is further stymied. Money is going into the likes of railways, PiA, and Pakistan Steel Mills, as well as on subsidies to energy department. The government’s reserves have always been empty for other expenditures. Debt financing has been largely taken care of through domestic as well as foreign funding. During FY11, the government borrowed Rs1.1 trillion from domestic resources, which accounted for 91.0 per cent of the fiscal deficit. Disciplining its borrowing habits, government instead of knocking the doors of the central bank, had opted to raise money from commercial banks through t-bills thus, crowding out the private sector. Why would commercial bank, finance private sector when it can secure its surplus liquidity by placing it under the wings of government; while also getting away with the trouble of stashing capital for credit risk? As a result, private sector credit only grew by 4 per cent in FY11 and on the flip side, government’s borrowing from commercial banks increased to 74.5 per cent.
Institutional Failures – The Mother of All Evils
If the business scenario of Pakistan has gone worse, owing to fiscal mismanagement, it has wretched up due to energy failure, causing many industries to slow down or shift their operations to foreign countries, applying further revenue supply shocks to the economy. Textile industry, supposedly the backbone of Pakistan’s economy, is closed for days in a given week for lack of gas. Small businesses, which largely depend on electricity to operate, remain dormant for hours, due to long power outages. As the report points out, government has so far taken three steps to reform the energy sector: installation of Rental Power Plants (RPPs), paying off 120 billion rupees in circular debt, and rising power tariff to secure funds to make up for the bad debts. RPPs have failed, circular debt has come back and consumers have filed suits against the government on charges of fleecing them in the name of fuel adjustment. According to the political pundits, institutional failures in Pakistan, have allowed this magnanimous mismanagement in the economic affairs. Going by definition of the World Bank, an economy’s governance or the ability of an economy’s institution to exercise authority depends on six indicators; voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption; if these six indicators are in place, then there is nothing to fear. All these parameters are dismally weak in Pakistan, leaving our institutions and policies, ineffective and fruitless.
The External Sector
Is there any margin for us to look forward to, especially when the world on the Western hemisphere is drowning in debt crisis? The economy of Europe and America has slowed down; they are into a battle that hardly allows trade relation on equal terms. The external sector has many questions posted on it; what would be the state of Pakistan’s export, especially when it has to pass through dual shocks and instable domestic as well as foreign market? The direct effect of this would result on low FDI that has already registered a relentless dip in FY11 to the tune of 27.7 per cent. The way forward lies in political will to alter the economic crises.
Tough Decisions to Turn Things Around
The initial steps required, begin by making the SBP independent in its working. The lender of the last resort should be free to make monetary policies on its own assessment. It is high time that the State Bank disciplines commercial banks to promote small businesses, by lending credit on reasonable terms and conditions. Any development on this front could only be possible if the government reforms its fiscal obligations and brings in more tax payers to the fold and increases the ratio of direct taxation. Presently, the entire developmental budget is diverted toward the rehabilitation of flood affected areas; it would have been wise if Benazir income Support Program has been tied to flood rehabilitation activities, so that sustainability could have been achieved across the board. it is completely imperative for the government to generate excess revenue receipts and for that, the State Owned enterprises should start generating funds; the bailout period should be called out. Some strict decision in the line of hiring competent staff, retiring unnecessary employees, lending a few operations on contract to private entities and getting rid of loss making operations, are urgently required. As Javed Hashmi and all the other political leaders joining PTI bandwagon to bring cleaner and fairer Pakistan said while standing at the mausoleum of Quaid-e-Azam, on his 135 birth anniversary that, “Unless, we take bold steps now and salvage this country out of the darkness that it has slipped into, because of bad politics, we will not be forgiven by the Quaid and by all those stalwarts for their efforts.”
The writer is a freelance journalist and can be reached at [email protected]
