Economic reform agenda, priorities and challenges for the caretakers.
The newly inducted caretaker economic team led by Mr. Shahid Javed Burki (the man from IMF, and an economist of International repute) who has been issuing economic prescription for Pakistan from time to time, has recently launched highly ambitious long-lasting economic reform agenda, to provide macroeconomic stability to the ailing economy of the country so that it realises its potential growth rate of 8 to 10 per cent. The economic reform package besides macroeconomic stability and high growth rate, includes revolutionary improvement and reform in the banking and financial sectors, improved relations with International donors specially World Bank and IMF, strengthening of supervisory and regulatory authority of the Central Bank (SBP), fiscal federation, abolishment of Pakistan Banking Council (PBC), merger of DFIs and acceleration in the privatisation programme. Besides overhauling the economy and financial sector, the caretakers have also set up six task forces which would deal with fiscal reforms, public expenditure privatisation, trade and tariffs.
The current economic situation is really very weak having ever depreciating currency, high rate of inflation and stagnant economy.
The root cause of the economic failures has been fiscal imbalance. The failure of the government in the achievement of targeted reduction in the budget deficit is the major factor responsible for widespread upsets in the overall process of macro-economic reforms. The ever-increasing public debt is jeopardising Macroeconomic stability in the country Pakistan's total Public Debt stood at Rs.1912.9 billion or 88% of its GDP at the end of fiscal year 1995-96 and debt servicing accounted for 63.2 per cent of the current expenditures of 1995-96.
The accumulation of such a large debt burden on the economy due to huge budget deficits in the past several years and the financing of big budget deficits through borrowings over the years has now started impeding the task of reducing budget deficit and achieving the macro-economic stability.
Many government-controlled banks and financial institutions are showing alarming ratio of bad debts.
The Moody's have downgraded the rating for Pakistan. The Government officials conceded that the last financial year had closed with the fiscal deficit at 6.3 per cent and not at 5.8 per cent showing that the tax effort in the budget was inadequate to reduce it to four per cent of the GDP and hence another mini-budget under IMF Conditionalities had to be announced by the State Bank Governor in October, 1996 involving resource mobilisation of Rs.40 billion. Due to low income and high expenditure in the first quarter of the current financial year, the Government had borrowed over Rs.60 billion as against the whole year target of Rs.20 billion. Foreign exchange reserves merely stood at $630 million and inflation is high in double digits.
The banking and financial institutions are being accused of abusing massive funds and accumulating enormous amount of bad debts and poorly managed by incompetent persons. Sincere efforts with better fiscal and prudent, management are required to turn the corner.
These banks and financial institutions (DFIs) since their establishment provided loans to textile tycoons, sugar barons, captains of trade and industry, mighty feudal lords, senior retired bureaucrats and retired influential armed services officials, who for one reason or the other are making excuses and not paying back their loans and shifted their capital abroad which is contributing to the financial difficulties of these institutions and the overall economy at large.
The task for caretakers is very difficult and economic problems are deep rooted and require long lasting remedies in due course. The mandate of the caretakers government is limited. Any ambitious plan of economic reforms would create doubts about their intention to hold elections in 90 days. It seems rather difficult that how the proposed economic reforms now introduced by the presidential order or ordinance could be made binding on the forthcoming National Assembly to endorse their continuity in future.
However, the caretakers should move quickly on two fronts, apart from preparing for the election. These two fronts are recovery of banks and DFI loans, taxes and arrears of utilities and imposition of farm tax on feudal lords.
Nevertheless, the caretakers have to be very careful in their deeds and words and think twice before they utter anything for public unfortunately the very first press conference of the Prime Minister Adviser on Finance Mr. Shahid Jared Burki resulted in an unprecedented panic rush on DFIs for withdrawal and these institutions lost nearly Rs.300 million in one day and were forced to sell their financial assets to cope with the unprecedented withdrawal at the very same time it eroded the confidence of the depositors in these long established institutions. The government, however, issued a clarification later denying that it intended to abolish these DFIS (IDBP, PICIC, RDFC etc.) but the damage was already done.
The government explanation issued a day after Burki's announcement can hardly repair the harm caused by few words of the newly inducted Finance Adviser to the Prime Minister.
Political stability is the essential prerequisite for economic reforms which need a considerable time to bear fruits in future. Major economic issues take longer time for their solution and such a period is only available to an elected government. The Caretaker Government for three months cannot take these issues which may cause problems for the forthcoming elected government to follow. We have precedent of caretaker government of Dr. Moeen Qureshi which created serious economic problems for Benazir Government resulting her soar relation in the end with IMF and World Bank for not implementing fully the agreed conditionalities.
Again the task of putting the economy on right path is entrusted to persons mostly connected with IMF and World Bank. The new economic manager should not repeat the mistakes of former IMF man Mr. Moeen Qureshi and leave the major issues to be solved by the elected government in future by considering the ground realities otherwise the ensuing uncertainty for implement of these reforms in future will not only undermine the Burki reform package but the entire economy.
Caretaker Prime Minister is well known for simplicity and created a lofty example of simplicity in letter and spirit. He practically did away with VIP culture and protocol paraphernalia. But the example of true simple and austere living the caretaker regime now set would be difficult to be adopted by the succeeding governments.
Late Gen. Mohammad Ziaul Haq also posed to the nation a very simple life style of living. He occasionally used bicycles for travel in the capital, but during his eleven years period of rule, Pakistan Foreign indebtedness rose from a mere $2 billion to $20 billion. With the result that debt-servicing consumes the major bulk of our GDP now, and poses a major challenge to the economy and a difficult problem for the present government.
The Caretaker Prime Minister who has a good reputation of being Mr. Clean and Well-known simplicist for years, might be in a position to take initiative for recovery of bank loans, realisation of income tax from feudal lords, a just and quick accountability process, and the holding of a free and fair election.
Hope he does so in a stipulated time of 90 days precisely.