Benazir Bhutto’s forceful support for privatisation, de-regulation and free market economics notwithstanding, government-business relations are severely strained. This was demonstrated when accusations and counter-allegations flew thick and fast on the eve of the FPCCI’s strike last month.
Government officials have accused “politically motivated” FPCCI officials of “conspiring with the opposition to embarrass and destabilise the government”. Mr Ahmad Mukhtar, the commerce minister, has pointed out that the first businessmen’s strike last summer came when opposition leader Nawaz Sharif was touring the country and holding rallies exhorting people to rise against the government. The second strike followed during US energy secretary Hazel O’Leary’s visit to Pakistan in September 1994 and the third was on the eve of Mrs Hillary Clinton’s two day trip to Pakistan in March.
Mr Mukhtar’s argument is that the business community has hurt the “national interest” by consciously undermining the government’s efforts to attract much needed US private investment. The FPCCI’s demand that Ms Bhutto should sack her Sindh chief minister and send in the army under Article 245 of the constitution (a sort of mini-martial law) also reeks of an attempt to undermine the civil order. In retaliation, the government has sacked four top officials of the FPCCI and is threatening to bifurcate the organisation.
If Mr Mukhtar thinks he has a good case, he should be advised not to devalue the FPCCI’s current grievances. The FPCCI was protesting “the government’s indifferent attitude to the mounting problems of law and order in Karachi”. Businessmen live in fear for their lives. They are forced to pay “protection money” to gangsters and terrorists because the government cannot provide a safe and secure environment for trade and industry. Investment in Karachi is down and the Karachi Stock Exchange is reeling from the impact of continuing instability. “Traders are losing millions of rupees by the day because the government hasn’t been able to halt Karachi’s slide into anarchy and terror”, claims Mr M Munir, president of the FPCCI. “We have begged for a meeting with the prime minister but she doesn’t have any time for us”, he laments. Mr Tariq Saigol, president of the Lahore Chamber of Commerce and Industry, concurs: “Talks between the government and the business lobby are crucial”, he advises, “but by adopting punitive measures and keeping us in a state of fear, the government isn’t making matters easy”.
Mr Saigol is right. Far from initiating confidence-building measures with the business community, the government seems bent upon victimising leading businessmen. Mian Mohammad Mansha’s ordeal is a case in point. Mr Mansha is chairman of the Muslim Commercial Bank but he is under pressure to resign from the bank. Along with family members and business associates, he has been banned from leaving the country.
That is not all. Two former bankers, a businessman and the former head of the Privatisation Commission are behind bars. The FIA is conducting enquiries against several businessmen, including several leading members of the opposition, who are also barred from exiting Pakistan. The Central Board of Revenue is also scrutinising the tax records of many leading businessmen thought to be supporters of Mr Nawaz Sharif.
Behind the current tensions lie three decades of distrust and hostility between the country’s business community and the Peoples Party of Zulfikar Ali and Benazir Bhutto. The industrial and trading classes were alienated by Mr Bhutto’s nationalisation of many big and medium sized industries. When they were vengefully harassed and publicly humiliated by Mr Bhutto and his party cohorts, they became irrevocably hostile to the PPP.
Inevitably, therefore, the anti-Bhutto agitation of 1977 was fueled by large doses of money from the business community. When General Zia imposed martial law, the propertied classes heaved a sigh of relief. When Mr Bhutto was arrested, they were elated. When he was hanged in 1979, they couldn’t hide their glee. This has rankled deeply with the rank and file of the PPP and has widened the divide.
The business community remained General Zia’s strongest ally for eleven years. In exchange, it was lavished with billions of rupees in soft loans and concessionary industrial policies. In certain cases, previous loans were blithely written off by public sector banks. Businessman-turned politician Nawaz Sharif, a Zia protege, became one of the main beneficiaries of the military regime’s largesse.
After Ms Bhutto swept to power in 1988, hostilities were resumed when she officially elevated her father to the status of a martyr. Matters worsened when she made no effort to de-nationalise or de-regulate industry, let alone try and woo the business community. Fearful and bristling with anger, leading business organisations lined up behind Mr Sharif and began to exhort President Ghulam Ishaq Khan to boot her out of office. After he obliged, many business lobbies were quick to rally behind Mr Sharif by bankrolling his election campaign in 1990. Understandably, the PPP is bitterly resentful of such business mindsets.
Under the Sharif government (1990-93), the good times began to roll again. Key profitable state-owned industries were farmed off to business cronies and supporters. Public sector banks were compelled to hand out big loans to businessmen. And industrial policies began to be fashioned to suit particular business, rather than national, interests.
When Ms Bhutto returned to power in 1993, she discovered that the economy was in a royal mess. Reserves had plummeted to two weeks import bill, economic growth was down to 2.3 per cent in FY 1992-93, exports were falling, the fiscal deficit was approaching 10 per cent and inflation was about to gallop into double digits. More ominously, bad bank loans and defaults now amounted to over Rs 60 billion (about 25 per cent of the annual budget).
Prodded by the IMF and the World Bank, Ms Bhutto’s government has launched a structural adjustment programme to try and reduce the fiscal deficit. It is trying to tighten money supply, deepen and widen the tax base and reduce import tariffs in order to compel domestic industry to become more competitive. It is also putting pressure on businessmen to pay back non-performing loans (special banking tribunals have been set up to expedite cases of default).
Naturally, businessmen don’t like these policies. Exporters complain that cost-push inflation (16 per cent interest plus rising utility charges) has made their products uncompetitive in world markets. They are upset that the government has backtracked on agreements to expedite the payment of export duty drawbacks worth billions of rupees. “Protected” industrialists are unhappy at the speed with which import tariffs are being reduced (down to 40 per cent this year) under pressure from the World Trade Organisation. Manufacturers are putting up stiff resistance to the 15 per cent sales tax imposed by the government on a host of goods and services. And traders do not want international pre-inspection agencies like Cotechna and SGS vetting their import and export invoices and delaying shipments.
“This government is run by landlords and is hostile to urban business interests” claim businessmen. The textile industry has been severely stretched following the government’s decision to raise the price of raw cotton and bring it to international levels. Cotton exports, especially low grade yarn, account for over 55 per cent of Pakistan’s exports and many cotton mills have been forced to close down because of rising raw material costs.
The government counters with the argument that agricultural production has been declining in recent years because of a lack of financial incentives (Pakistan’s cotton crop is expected to be about 8 million bales this year, 1 million bales short of projected demand). “It is high time the textile lobby stopped living off the fat of the land and became internationally competitive in value-added products”, argues Makhdum Shahabuddin, the state minister for finance, pointing out that the country’s export of garments is still less than that of Bangladesh. The government also remains opposed to any quick and substantial devaluation because it fears a public backlash on account of inflation.
Meanwhile the economy remains in a slump. The government’s tax collection drive has failed to take off — revenue targets have been revised downwards from Rs 260 billion to Rs 230 billion by end June 1995 — and the fiscal deficit is hovering around 6 per cent. With another belt-tightening budget forecast for next June, the opposition is gearing up for an onslaught on the government. In this grim and loaded political situation, with allegations and counter-allegations being flung about, government-business relations have once again hit rock bottom.
This doesn’t auger well for the country. The government and business community need to hammer out an agreement on the broad macro-economic framework for economic growth. Once the “rules of the game” are in place and both sides demonstrate their willingness to abide by them, micro disagreements can be separately negotiated between different industrial and trade lobbies and the ministries of commerce and finance. How can this be brought about?
The government must realise that it has seriously erred in its blanket acceptance of the IMF prescription to reduce the fiscal deficit from over 6 per cent to 4 per cent in just one year. The only way this could have been done was by substantially raising revenues or cutting expenditures. In a stagflationary situation, however, this has proved to be a difficult task.
The IMF recommended a way out. It asked the government to cut import duties so that cheaper imports would stimulate the demand for importables (thereby leading to an increase in revenues from import duties) as well as provide cheaper raw materials for local industry (whereby inflation could be reined in). It also pushed the government to impose 15 per cent sales tax on a host of goods and services so that the gap between revenues and expenditures could be closed.
On paper, of course, this looked like a good solution: the sales tax is deflationary but the reduction in import duties is reflationary. One offsets the other while the government ends up balancing its budget.
In reality, however, things haven’t worked out in this manner. The 15 per cent sales tax has met with resistance from businessmen for two reasons: in a sluggish economy it is difficult to pass on such a big sales tax in one leap to consumers without eroding demand or cutting into profit margins; and in a largely undocumented economy, it is impractical to believe that businessmen will cheerfully abandon their modes of capital accumulation and tax evasion overnight, coolly tote up their sales taxes and hand them over to the government so that they can be held accountable for all times to come. Similarly, without a detailed exercise to determine the price elasticity of various imported goods and services, it was stupid to expect that a blanket reduction in import duties would generate greater demand for importables as well as an increase in import revenues.
It now turns out that the government’s concreteness was misplaced. It hasn’t been able to collect the sales tax in full. And it has also lost revenues from falling import duties. In the bargain, the hefty and largely indiscriminate sales tax has antagonised large sections of the business community. And the drastic reductions in import duties of many finished goods have alienated sections of domestic industry which feel they are not ready to face the world without high protective barriers. Perhaps, if the sales tax and import duty reductions had been staggered over two or three years, the government might have achieved its objectives in a less unsettling fashion.
Nor has the government served its cause by angrily denouncing businessmen as “crooks, loan defaulters and tax dodgers”. If the CBR and the public sector banks are infested with corrupt officials and if the senior bureaucracy is hand in glove with rapacious big-wigs in government, how can the prime minister take a holier-than-thou approach in trying to combat financial misappropriation and misconduct in the private sector? The government is victimising a number of businessmen simply because they happen to be supporters of Mr Sharif. If it is genuinely interested in “accountability”, it should begin at home. God knows there is no shortage of “crooks, loan defaulters and tax dodgers” among political leaders and supporters of the PPP government.
The business community also needs to address its failings. There is no doubt that a number of businessmen have exploited their colleagues’ sentiments for purely political reasons. There is no harm in this, of course, provided that it is not aimed at undermining the legitimacy of an elected government to complete its full term. However, when business lobbies openly call for an army intervention or lend their forums to those bent upon provoking the anarchy of the street, their colleagues must draw the line and tell them where to get off. The business community should not pit itself as an aggressive political adversary to the PPP government.
That said, we need to focus on the next budget straight away. Ms Bhutto should invite leading trade and industrial bodies to submit their proposals. She should take out time to explain her compulsions to the business community and listen to theirs with patience and empathy. This state of confrontation hurts the country. The sooner both sides negotiate mutually acceptable “rules of business”, the better. Otherwise, we are in for a long, hot summer in which both sides will do each other irreparable harm.