Mr Sartaj Aziz has recently promised an economic revival within months. But independent economists and World Bank officials insist that the economy is in a “perilous” condition. Nor, despite an array of incentives, is the business community terribly sanguine about its prospects. What are the facts?
Mr Aziz’s hopes of an economic upturn, ironically enough, were pinned on agriculturists rather than businessmen. He thought the cotton crop, which accounts for over 55% of our exports, would tip the scales at 11 m bales and add 1% to our growth rate this year. But that is not going to happen. We would be lucky to get 9 million bales. Mr Aziz’s prayers for a bumper wheat crop are also not likely to be answered. Taking Kabul’s requirements into account, we might have to import at least 3m tonnes this year, which is double Mr Aziz’s heroic forecast.
Mr Aziz has recently doled out some “reassuring” statistics. But no one is fooled. He claims that revenue collection will be only “slightly” off-target in the first six months of the fiscal year. But CBR sources say that it was already Rs 33 billion (25%) short of target by end November. At this rate, we are looking at a fiscal deficit of 7 per cent in June 98 instead of the 5% forecast.
Mr Aziz has talked approvingly of our level of reserves. He also claims the trade deficit in the first six months of FY 1997-98 was lower than that in the corresponding period last year. But he is obscuring the facts. Our reserves fell by alarming amount of US$ 320 million during November. Furthermore, there is no justification in juxtaposing the trade deficit of 1996 —the worst year in economic history — with that in 1997 which is supposed to become a good year! Despite a recent devaluation of over 8%, exports have increased by only 7.8% as opposed to a target of 15%
Mr Aziz’s government has now unfurled a new “investment policy”. This is supposed to attract foreign investors into Pakistan by the droves because it offers tax holidays and low tariff structures. But these “incentives” will adversely affect the government’s revenue collection measures. They also fly against the agreement with the IMF last October which clearly forbids the sort of tax havens outlined in the new investment policy. Clearly, the government’s right hand doesn’t know what its left one is doing. How is Mr Aziz going to explain this transgression by the Board Of Investment to the IMF when the next aid tranche comes up for review?
Mr Aziz is likely to face similar problems with the World Bank when a review is undertaken of the downsizing promises made by the federal government. Mr Aziz had agreed to “rightsize” the federal government by one-third (100,000 employees) by end-November. This golden-handshake is now proving prohibitively expensive. The World Bank had offered US$ 250m out of the US$ 750m required. But the treasury is empty and the scheme has evaporated into thin air. Worse, it transpires that a majority of applicants come from the very social sector departments of the government which are already understaffed by WB standards! The same sort of muddled thinking is evident in other areas of downsizing: for example, the national assembly was told that UBL employees would not be retrenched even as UBL was insisting before the courts that there would be no let up in its firing policies.
Meanwhile, the financial problems of WAPDA, KESC, SNGPL, SSGPL etc are hanging fire. A vicious “triangular debt” has trapped these organisations in bankruptcy. WAPDA alone has a deficit of over Rs 60 billion. For months, the World Bank and the IMF have insisted upon power rate hikes of 25%-50%, followed by early privatisation of these companies. Yet Mr Aziz is still dithering about giving the green light.
Pakistan’s debt servicing liability is Rs 248 billion this year, only slightly less than the total revenue collection forecast. If the economy does not pick up, next year’s debt repayments will exceed projected revenues. In the event, government expenditures on development, defence and administration will have to come exclusively from bank borrowings and money printing. Bank borrowings will squeeze credit for the private sector, push up interest rates, reduce investment, increase the fiscal deficit and raise the debt burden. Money printing will fuel inflation. That is when we will default on our foreign payments and face economic collapse.
The rupee is under strain. If Pakistanis pull out even 10% of their US$ 9 billion dollar deposits, the exchange rate will collapse, hyper inflation rates of over 100% will throttle the urban poor and middle-classes and we will be faced with riots, chaos and anarchy. A glance at the market meltdown in South Korea is instructive. The 11th largest economy in the world was propped up by a US$ 57b package from the IMF last week. Yet, as The Economist points out, “every morning when the currency markets open, the won collapses within minutes to the maximum amount of 10% allowed against the dollar. Then, the stockmarket follows suit. As riot police line up outside the banks, anxiety is turning to outright panic”.