Political economy – Pakistani ishtyle

http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=2738&magId=10&catId=30

By Ihtasham ul Haque

The widening divide between the ruling PPP coalition and its political opponents is forcing the Zardari-Gilani government to keep avoiding the bold and unpopular decisions that could avert the looming economic crisis. This calamity, it seems, cannot be warded off without a bailout package from IMF and the mending of fences with the US in the immediate term. The role of the US assumes added importance in context of the influence it wields on other economic blocs and the IFIs

As such, the utopian balloon – a people-friendly; investment-oriented budget and one that claims to address the burgeoning fiscal deficit by collecting an unprecedented Rs 2.3 trillion in revenues and by the promotion of local and foreign investment – is liable to be punctured after the IMF’s refusal to offer the $4 billion to $5 billion desperately needed to help pay off urgent debt liabilities.

Finance Minister Abdul Hafeez Shaikh has reportedly been refused funding by IMF officials and told not to expect new assistance unless Islamabad decides to implement a string of harsh conditionality. The Fund officials were obviously showing their resentment at the PPP government’s having succumbed to the pressure mounted by its coalition partners – particularly the MQM – and not having implemented the general sales tax in 2010. The minister was palpably embarrassed in Washington, where he was blatantly told that the PPP government could not be trusted to fulfill its promises. This leaves Mr. Shaikh between a rock and a hard place.

On his empty-handed return, the finance minister confessed in the post-budget news conference that Islamabad was still negotiating with the Fund to secure a certain bailout package and insisted that all was not as bad as being painted in the media. While my heart is hoping he is right, my mind has reasons for believing otherwise.

Insiders reveal that the IMF has urged him to line up new resources by taxing agricultural income and speedily arresting the decline in revenues, both steps hard for the government to undertake at the moment due to political interests and the proximity of election season. At the same time, the US Deputy Secretary of State Thomas Nides, the guy who actually controls the American wallet, has also refused to provide assistance in the absence of an agreement regarding the reopening of NATO supply routes. Significantly, since NATO Secretary General Anders Fogh Rasmussen struck a new transportation deal with the Central Asian States of Uzbekistan, Kyrgyzstan and Kazakhstan last week, the US forces’ Ground Lines of Communication (GLOCs) through Pakistan will start carrying lesser meaning every passing week.

According to military experts, as troop levels start receding in line with the US withdrawal plan, the requirement of supplies will also scale down fast. This will increase American leverage in any future discourse on financial settlement regarding NATO supply routes. Pakistan, as of now, seems to be running out of options to cash on this economic opportunity. We didn’t get an apology from the US for Salala; we don’t seem to making much headway on the economic front either. The moral high ground that we commanded after the Salala incident is eroding fast from the international conscience.

That said, all is not bad on the diplomatic front. The recent visits by the Chinese foreign minister and the Russian president’s special representative to Islamabad are comforting events. (However, the show of support is not surprising, given Washington’s decision to not take China or Russia into confidence regarding endgame in Afghanistan and omitting their names from the Chicago Summit invitation list.) Both emissaries, particularly the Russian, are believed to have assured President Zardari, Prime Minister Gilani and other senior military and civilian officials of long-term strategic commitments, dispelling worries of isolation. Russian President Vladimir Putin is scheduled to visit Pakistan soon, making it the first such visit in decades. This event is being hailed as a most significant joint effort for manifesting a combined front in withstanding US pressure by Moscow, Beijing and Islamabad. That said, whereas this would undoubtedly strengthen political and defence relations between the three countries, it would do little in the short-term on the economic front for Pakistan since this combine cannot be a substitute for the US, EU, IFIs and other international agencies who provide economic support necessary to survival.             

Meanwhile, the bleeding Pakistan economy is plagued by internal issues which are exacerbating its woes. These include a nightmarish power crisis that has, on the one hand, brought most of the population on the verge of a mental breakdown at the beginning of what is predicted to be one of the hottest summers in decades and, on the other, forced many investors to shift their businesses to Bangladesh, Middle East and Turkey.  As much as up to 40 percent of Pakistan’s textile industry is said to have shifted to Bangladesh. And additional flight of capital is anticipated, especially now that New Delhi has allowed Pakistanis to invest in India.

Second, the issue of the staggering Rs 400-billion circular debt – the major cause of increased power outages – remains unresolved despite the finance minister’s repeated assurances, thereby further diminishing hopes of settling the issue before the upcoming elections.

Small and medium industries are rapidly closing down across Pakistan, forcing exporters to cancel orders. If media reports are to be believed, orders worth over $2 billion have been cancelled.

The Punjab chief minister is crying himself hoarse, blaming the centre for deliberately destroying industries in the province.

Unfortunately, the new budget does not contain a road map for the resolution of the energy crisis. The government-IPPs conflict is far from settled; the 8,500MW shortfall is increasing by the day. The duration of power outages cannot be reduced since the IPPs are not producing enough electricity because the government has yet to pay them. The government, experts maintain, wasted four years in trying to come up with a solution to the power crisis and finally opted for the controversial rental power agreements, which were ultimately scrapped by the Supreme Court. The initial agreements signed with the rental power producers were for the generation of 2,250 MW of electricity, which were later scaled down to 1,450 MW and finally settled at a mere 264 MW. In the process, according to a senior energy expert, Rs 3 billion to Rs 4 billion were funneled into the corruption blackhole. This depletion was first identified by the Asian Development Bank (ADP), which funded most of the initial project. The amount could have been significantly higher had the Supreme Court not intervened, recovering Rs 6 billion from the dubious RPPs. Besides the RPPs fiasco, no worthwhile long-term arrangements to arrest the crisis have been made so far, neither to import electricity from Iran or India nor to import gas from Iran, Qatar or Turkmenistan.

Meanwhile, experts are intrigued by the way the government is trying to claim a 25 percent increase in revenues. The 35 percent depreciation of the rupee against the greenback; the doubling of imports to $40 billion besides a 26 percent levy on oil imports – all automatically enhance revenues and the government cannot claim much credit for any of these. Recent statements by credible analysts such as the former chairman of the Board of Investment Wasim Haqqie and the former chairman of the FBR Abdullah Yousaf lend validity to this view.


Despite these economic woes, the president and the prime minister are said to have agreed to make a special allocation of Rs 300 billion for PPP candidates in Punjab to help win the upcoming elections. How the government intends procure these funds is anyone’s guess. The government is already printing notes to the tune of Rs 3 billion everyday and owing to a total lack of accountability and financial discipline, there’s nothing stopping them from printing even more. The governor of the central bank has allegedly been coerced into maintaining silence by the Ministry of Finance, failing which he may be asked to resign.

In the revenue generation context, a few other factors merit review. Flight of capital can also be attributed to the acute law and order situation, particularly in Karachi. It’s unlikely that the city will continue to generate over 60 percent of Pakistan’s revenue in such an environment and the situation will deteriorate further if the MQM calls for a separate province on ethnic grounds (although the party so far maintains that Karachi will continue to be part of Sindh). Meaningful trade also remains a distant dream due to lack of exportable surplus, thanks to the crippling power crisis. The US and EU continuously ask for enhanced productivity before they allow Pakistan to seek concessions for duty-free imports to their countries.

Meanwhile, rampant corruption is causing fantastic losses to the national exchequer. Former finance minister Shaukat Tarin maintains there is corruption worth Rs 500 billion in the FBR alone each year.

Annual haemorrhaging due to inefficient public sector enterprises eats up another Rs 500 billion, according to government officials.

According to National Accountability Bureau Chairman Admiral (retired) Fasih Bukhari, the amount embezzled everyday is Rs 5 billion, which racks up to Rs 150 billion a month.   

What remains astonishing is the indifferent attitude of the people at the helm of the affairs. Our economy has never been substantially stable but the dire straits today look more ominous than ever. Pakistan’s social development indicators are being compared to those of Ghana and Uganda, inarguably the lowest in the world. The airwaves are aflood with programmes featuring bickering over non-issues, where obnoxiously virulent language is used to win frivolous arguments. And none of the talkshows provide concrete solutions to any of the problems. Our rulers seem to be surgeons with excellent scalpels and lancets, who operate beautifully on the dead and torture the living

The writer is an Islamabad-based senior journalist.