Caretakers and Pakistan's economy.
The caretakers have struck again, when the Benazir government was dismissed on November 5 on the customary charges of corruption and mismanagement, fourth time since 1988. The caretaker government has promised to hold elections in 90 days on February 03, early next year. In the meantime, various measures are being taken and planned to bring the economy back on the track. The basic issue is that the nation has only 90 days to take steps inter alia to fight corruption or improve the economy. Last time, the caretaker regime of Dr. Moin Qureshi took certain important decisions such as introduction of agricultural income tax and autonomy of the State Bank of Pakistan but these were thrown overboard by the succeeding Benazir government. Similarly, the question comes to one's mind as to what is the guarantee that measures taken by the caretakers will at all be taken seriously by the new government that comes into power after the polls.
There is little doubt that the economy has been faltering for quite some time. The current year's budget levied heavy taxes which proved to be a bane for trade and industry and some taxes had to be withdrawn under the pressure of the business community. Export was tumbling and import surging leading to depletion of foreign exchange reserves. resulting in heavy pressure on rupee which led to successive devaluation in September and finally in October by some 13 per cent. Such a drastic devaluation pushed up the prices of petroleum products which are linked to value of rupee vis-a-vis US dollar as well as the international price of petroleum products. On October 22, a mini-budget was presented resulting in additional taxes of Rs.13 billion and cut in development expenditure of Rs.27 billion. All these measures were directed at the instance of IMF with which the previous government was entering into agreement for the release of $160 million tranche out of $600 million in stand by arrangement of 1995.
In the meantime, on the political front, cleavage between the President and the Prime Minister was fast appearing. As far back as August, Shahid Javed Burki, the present Advisor on Finance and Economic Affairs, got his articles published in the name of faultlines criticizing the government to overcome the economic malaise. Benazir blamed the World Bank for its anti-government instance. The charges of corruption were levied against the government for which an accountability bill was presented to the National Assembly. Ultimately, the government was dismissed and Shahid Javed Burki, Vice President of World Bank, took charge of finance. It has been reported that he is on 90 days leave from World Bank but later newspaper reports were appearing that he is on leave for two years, a fact which needs confirmation, but certainly adds to speculation. Soon after he announced that institutions like Pakistan Banking Council, IDBP, PICIC and RDFC are being abolished which sent a wave of uncertainty and unrest among the depositors who withdrew millions of rupees in a single day.
Several task forces were formed on vital aspects of the economy such as tax reform, privatisation, fiscal federalism and art in development expenditure which have submitted their reports to the government by end November and are likely to be made public towards the end of December. The measures suggested in these reports led to release of first tranche of $80 million by IMF according to Burk and additional credit lime of $231 million has been extended by September 1997 in addition to $600 million.
In the meantime, caretakers have taken economy measures such as cut in expenditure of federal ministries and reduction in perks of employees of financial institutions. In addition, a relief package for textile industry in the form of free trade of cotton, removal of import duty one cotton, reduction in import duty of polyester from 15% to 5% reduction in regulatory duty on viscose and acrylic fibre from 10% to 5% and withdrawal of 10% import duty on terepthalic acid and monoethylene glycol. Similarly, a package for stock market in the form of exemption of bonus share from withholding tax and exemption of mutual fund and NIT income from tax. But it has failed to boost the stock market which has been suffering from liquidity problem and lack of stable and sound financial policy of the government. Foreign investment is not forthcoming because of the prevailing uncertainty.
IMF has been demanding cut in deficit financing to 4% of GDP, reduction in defence expenditure, withdrawal of all subsidies given by the government, levy of agricultural income tax and rapid privatisation of public enterprises. The borrowing from the banking system at the middle of December stood at Rs.67 billion, Rs.25 billion above Rs.42 billion envisaged for the whole year. World Bank is insisting on reducing the staff of the nationalised commercial banks by a substantial margin. Will not this measure result in unemployment? Will not the frustration of laid off employees accentuate with the soaring inflation raging at an all time high of 20 percent compared to the to the target of 8.5 percent for the current year? The petroleum prices were raised twice by the caretaker regime, notwithstanding the reduction in the international market.
Caretakers have taken upon themselves the responsibilities they are not supposed to undertake. If election was their sole objective, it could have been undertaken in an impartial manner. But the present government has taken upon itself the tasks for which it is not suited or equipped. Burki has time and again said that the reforms undertaken by the caretakers will continue to be implemented after the election as the President has assured him so. But the basic question is: If the upcoming government does not feel committed or reneges the promises by caretakers to IMF, what can the President do under the situation.
The present economic malaise stems not from the policies by Benazir government alone but by the successive government since the early 1970's when a massive nationalisation move has done irreparable damage to the economy. Corruption, huge public expenditure, lack of tax culture, extravagance demonstrated by the people in general and upper class in particular, loan default, breakdown of law and order are all symptoms of the same disease. The onus rests not upon the government alone which is, after all, elected by the people but in the people themselves. Lavish living style is appreciated throughout the society irrespective of the source of wealth. VIP culture, which Meraj Khalid wants to eradicate through closing VIP lounges at the airports, extends far beyond to the feudal nature of the society. This has been existing since the beginning and virtually no efforts have been made in the past to eradicate it over the period. Land reforms were only an eye wash.
Undue reliance on Bretton Woods institutions is not in country's interests. Our policy makers should frame economic policies suited to the people and the country and not to IMF or World Bank. The question often being asked is whether Burki is serving the interest of World Bank of which he is employee or Pakistan. It must be made clear that the prescription of World Bank/IMF per se is not harmful but the problem arises when it is taken piecemeal, that is, some proposals are accepted and others not, or when abrupt changes take place such as the proposed laying off of banks or other public sector organisations' employees. Caretakers must realise the socio-economic implications of the policies they are administering at the behest of Bretton Woods institutions.
The confusion resulting from the shifts in economic policies is further compounded by latest news reports about the likely postponement of election. The cases challenging the dismissal of the government and dissolution of assemblies are lying with the Supreme Court. What happens in the next few weeks is crucial and will further add to uncertainty and confusion.
The caretakers aim at recovering a significant part of Rs. 130 billion outstanding loans from the defaulters of the banks and DFIs. That is why major reshuffling and changes are taking place in the financial circles. Those who are loan defaulters or got their loans written off are likely to be debarred from contesting in the upcoming election. Will not the contestants go to the court challenging this decision of the government. President has, however, assured that everything will be done within the jurisdiction of law.
Dr. Salman Shah, Chairman, Privatisation Commission in a recent interview has chalked out a strategy of accelerated privatisation. He has talked about the privatisation of banks by end 1997. Similar statements have been made by Burki that by next year, $3 billion is to be realised through privatisation. The basic question is that caretakers are talking of future whereas their term is to end in February. The fact is that caretakers have taken upon themselves the tasks which is beyond their tenure. Can they really frame a policy framework for the future government? But whether the future government will adhere to it is a moot question. The other point is that the life of the caretaker regime is likely to be extended to 1998, the year when the tenure of the dismissed assemblies expires. Benazir is reported to have telephoned IMF that she is being restored by the court. All these are adding to all sorts of speculations which must end, if the confidence of investors is to be restored.
To recap, Pakistan is unfortunately reaching a stage of "cul-de-sac", where fundamental issues such as land reforms and illiteracy remain unaddressed. Even holding census has assumed political proposition which was due in 1991 but could not be held. Over and above, corruption and prodigality have become ubiquitous to such an extent that its control seems next to impossible. Unless decisive political will, which has been lacking so far, is firmly demonstrated, such issues would continue to haunt Pakistan in future. The caretakers cannot tackle fundamental issues nor they are supposed to do so. Yet any forward step in this direction will be taken as a great feat on their part.