A week before the Pakistani government devalued the rupee by 7 per cent and slapped an additional “regulatory” duty of 5-10 per cent on most imports, prime minister Benazir Bhutto had categorically ruled out devaluation. She had been against Mr Moeen Qureshi’s devaluation in 1993 and she was not in favour of it now. Ms Bhutto had also promised that there would be no mini-budgets this year. But prime ministers are entitled to have a change of heart every now and then, aren’t they?
Following the unexpected announcement, however, Mr V A Jaffery, the finance advisor, said that the rupee would be devalued further if necessary. But Makhdoom Shahabudin, the minister of state for finance, now says that no such thing will happen. Alas. The finance ministry remains as notoriously fickle as ever.
The official justification offered for this controversial “mini-budget” is simple enough. Pakistan’s exports are stagnant while imports have risen sharply following a reduction in duties when the last budget was announced in June. The deteriorating balance of trade had led to a dangerous erosion of reserves. In the absence of support from the International Monetary Fund, which suspended payments to Pakistan after the 1995-96 budget abandoned IMF conditionalities, something had to be done quickly to salvage the balance of trade. The new regulatory duty is also expected to dampen imports.
The mood in business circles, however, is mixed. Those industrialists who are used to sheltering behind high tariffs are happy to get a new lease of life. However, leaders of the textile industry, which accounts for over 55 per cent of all exports and has been in the doldrums for the past three years, say that if the government had consulted them they would have advised against devaluation. Much of the advantage of devaluation will be offset by the imposition of the new regulatory duty, they say, because up to 80 per cent of the cost of inputs into the textile industry is “tradeable inputs” which will register an increase in prices.
Independent economists are also wary of the export benefits of devaluation. Our primary exports are quite inelastic, the argument goes, therefore devaluation could well lead to a reduction of earnings from such exports.
The new policy, it is learnt, was hastily assembled by the finance ministry and presented to Ms Bhutto soon after she returned from a trip abroad. The cabinet was not consulted. It appears that, despite its inflationary repercussions, Ms Bhutto approved the mini-budget because officials of the finance ministry dangled the prospect of up to Rs 20 billion in additional revenues to the treasury. The finance ministry is strapped for funds because no one is prepared to pay taxes or stop cheating the government. Also, the government is under pressure to curtail monetary expansion because its borrowings in the last five months have already outstripped the budgetary target of Rs 30 billion for the year.
This is not the first time Ms Bhutto has been compelled to volte-face on the economy. The original budgetary proposals for 1995-96 had envisaged additional taxes of about Rs 55 billion and maximum tariffs of 45 per cent, in line with IMF recommendations to bring the fiscal deficit down to 4 per cent. However, at the last minute Ms Bhutto abandoned the idea of imposing a heavy tax burden on the people, fixed maximum tariffs at 65 per cent and settled for a fiscal deficit target of 5.6 per cent. Now she has resorted to devaluation and higher tariffs in order to balance her books. This is the price we must pay for fiscal mismanagement and monetary profligacy.
This stop-go economic philosophy is leading the country nowhere. There are serious structural faults in the economy. Semi-feudal relations, for one, remain a drag on agricultural production. Therefore agriculture cannot survive without a subsidy in the form of cheap inputs, tax-free incomes, loan write-offs and defaults. But because it is subsidised, agricultural output is not allowed to get international market prices. This has enabled the textile industry to become the leading sector of the economy on the basis of relatively cheap cotton and low-value added exports. If a government tries to intervene at any point in this vicious circle, it runs headlong into trouble with one vested interest or the other.
The answer, of course, is radical land reform to remove the shackles on agricultural productivity. With the elimination of the rentier class, there would be no need of state subsidies and hand-outs, farmers would get inputs at real costs, they could sell products at market prices and they would pay tax on their incomes. Industry would have to pay competitive rates for agricultural raw materials and would be under pressure to diversify or add greater value. Capital would then flow into sectors where the rate of return was higher. Efficiency and growth would follow.
There is no getting away from the logic and necessity of land reforms if Pakistan is to come out of its long term economic crisis. The question is: when will we have a government that will bring it about?