An unexpected July rally at the Karachi Stock Exchange has generated some confidence in the economy. Many people who had forecasted more doom and gloom by year’s end now seem hopeful. This is all to the good. A forward-looking, optimistic mindset, especially among businessmen, is a pre-condition for economic revival. But some intriguing questions remain.
Benazir Bhutto’s government, it might be recalled, was accused by President Farooq Leghari and the IMF of poor “demand-management” and gross “financial indiscipline”. The caretakers were thus ordered to follow the IMF’s recipes to the dot and reduce the fiscal deficit to 4% of GDP. This was to be done by substantially reducing government borrowings and expenditures and bringing every business and every item under a rigourous tax regime.
Now Mr Sharif has stood that philosophy on its head, and everyone, from the President to the IMF, is lauding it beyond belief. Government expenditures and borrowings this year are put at above last year’s targets. The tax regime has been considerably softened. And the CBR has been ordered to lay off the business community. Where we were once told that businessmen could not be relied upon to pay their dues, we are now informed that their tax contributions will be sufficient to meet higher targets. Indeed, where the IMF was once insistent that a fiscal deficit of more than 4% would never be tolerated, we are now assured that the Fund is quite comfortable with a deficit of 5%. Why has the IMF suddenly thought fit to default on the economic advice it has given every Pakistani government since 1988? Why, when it was not even prepared to enter into a paltry “standby arrangement” of a few hundred million dollars earlier, has the IMF now jumped ahead with promises of an “extended facility” of over US$ 1.6 billion? There are some other disquieting developments which should make us wary of dubious signals or quick-fix solutions.
Ms Bhutto’s dismissal was approved by the KSE, as expected. When Mr Sharif became prime minister, everyone thought the market would go through the roof. That didn’t happen. We were then told to wait for him to unfold his business-friendly policies. When these were announced, we glanced at the KSE index, found it slumbering and consoled ourselves by digging in for the long-promised pre-budget rally. But the budget came and went and the stock market remained aloof. Then Mr Sartaj Aziz flexed his plumes, sat down to talk to the IMF and said all signals were go. But the bulls were still unimpressed. The much-awaited trade policy in late June also failed to provoke any signs of life at the KSE. Then, in early July, much before a detailed agreement with the IMF was actually announced by the government, there was a bolt from the blue, the KSE shot up and has not calmed down since. In fact, some people are forecasting that the index will soon break all records. What’s going on?
Brokers admit that funds from Hong Kong, London, USA and the Middle-East are mainly responsible for the KSE’s current bullishness. They also admit that this feverish activity is confined largely to a few blue chips which lord it over the stock exchange. But no one has so far adequately explained why foreigners have suddenly decided to invade the KSE from all corners of the globe. The situation is curiouser still when we realise that one of the main beneficiaries of this “rally” is Hubco, the very company which is known to have serious on-going problems with WAPDA and is threatened with the prospect of having to re-negotiate its tariff rates with the government of Pakistan.
Naturally, a host of conspiracy theories abound. One has it that Mr Sharif’s “foreign benefactors” have deliberately injected some zing into the KSE in order to restore confidence in a beleaguered government. Others are less outlandish. All, however, are highly speculative. No one seems to know what’s going on. That is why experts are now openly describing the market as “reckless” and “shaky”.
Why don’t we face facts? The fact is that Mr Sharif’s economic strategy is full of gaping holes and no one really knows whether or not it will eventually succeed in vitalising the economy. Indeed, it is highly probable that the agreement with the IMF, even after it has been signed in October, will be very difficult to uphold, much like it was during Ms Bhutto’s tenure. Why is that?
The fact is that there is no real economic basis for the optimism triggered by the bullishness of the stock market. There is no real basis because a number of substantive decisions — hauling up loan defaulters, downsizing government, reducing subsidies, privatising the bureaucracy, eliminating terrorism, revamping public corporations, etc — still remain to be taken to put the economy on track again. If these are postponed yet again for political reasons, we are doomed to remain in the thicket of gloom for some more time to come.