Will There Be Light?

Written by Javed Ansari • June 2008

It has been a rough ride for the Pakistani economy these past months. Will the next national budget bring relief for the people or further add to their problems?

If there is one person who is happy to lose his job these days, it is Ishaq Dar. He had the finance portfolio in the new coalition government but since the country has been deprived of the expert services of the PML(N) ministers, Ishaq Dar too has lost his job. Javed Ansari explores.

He is one of those specialists who also batted as finance minister in the second Nawaz Sharif innings back in the nineties. While his performance then was nothing to write home about, it was becoming increasingly obvious ever since he had joined the cabinet line-up this time around that he was in for a pretty rough ride. The non-closure of the judiciary issue was something that was not palatable anymore for Ishaq Dar’s captain, Nawaz Sharif,. In fact, he got so frustrated with the way the PPP was dragging its feet on the issue that he decided to withdraw his players from the cabinet team. Obviously, this was a God-sent opportunity for Ishaq Dar to jump off a train headed for disaster!

The ball is now in the PPP’s court and developments in the coming weeks will tell how things play out for Naveed Qamar, the PPP minister entrusted with the additional portfolio of finance. The business community in particular and the people in general have pinned all their hopes on him to successfully navigate the country through the impending economic quagmire and deliver a palatable national budget for the next financial year.

That Pakistan’s economy is currently in tatters is not lost to the policymakers. The omens are certainly not good. An indication of things to come was witnessed on May 23, when the Karachi Stock Exchange index of 100 shares plunged by 615 points on what many investors thought was ‘Black Friday’ for the market. It was the biggest single-day decline since the start of the current year. The crash came on the heels of a State Bank hike in interest rates and further fuelled investor anxiety over the country's mounting economic and financial crisis.

The country’s premier stock market had been a strong performer in recent years, thanks to sizzling economic growth and a boom in service sectors such as banking and telecommunications. But now investors find their confidence eroding in the face of accelerating inflation and yawning budget and trade deficits. They also seem to doubt the government's ability to tackle the problems.

The new government, led by Prime Minister Yusuf Raza Gilani, has been accusing the Shaukat Aziz regime of neglecting and concealing problems such as the ballooning cost of imported oil and falling foreign investment. These and other serious factors have now become roadblocks in the preparation of the 2008-09 federal budget as it must include unpopular spending cuts and tax hikes in order to contain a rising budget deficit.

Moody’s has lowered Pakistan’s Bond Ratings to B2 from B1. The country’s growing economic imbalances and political uncertainties prompted them to do so. Moody’s has also brought Pakistan’s Foreign Currency Bank Deposit Ceiling down to B3. They are not alone in changing their views about the country’s economic health. Standard & Poor’s have also downgraded Pakistan’s ratings in view of the uncertain political and economic conditions currently prevailing in the country. The negative international outlook will certainly drive the international markets to think twice before investing in Pakistan or to extend loans to the country.

Without doubt, it is Pakistan’s long drawn out political uncertainty that has created problems for its already struggling economy. This has been further aggravated by the negative impact of the economic policies of the previous government that are now being described as ‘lop-sided’.

International analysts do not see the country’s fiscal loosening and poor tax collection with a favourable eye. The budget deficit for fiscal year 2007-08 is estimated to be at Rs. 956.6 billion. The outgoing government of Mr. Shaukat Aziz had put it at Rs. 450.6 billion. According to revised budget estimates, federal revenues will now stand at Rs. 890 billion. This is Rs. 12.2 billion less than the projected figure. While the total tax revenues were projected to be Rs. 1.03 trillion during the current fiscal, the revised estimates are Rs. 995.5 billion.

There was a revival of hopes when the new government came to power and Pakistan’s image as a country moving on the path of democracy received a boost. However, the economy has hit huge rough spots ever since, as reflected in the wheat crisis, power shortages, fuel hikes, rocketing inflation and a deteriorating law and order situation. Pakistan also continues to have the image of a country that has corrupt institutions and officials in abundance.

In this backdrop, it has become highly imperative for the new government in Islamabad and the ones in the provinces to draw up a route map that would provide some relief to the people. Further, a correct course must be charted for the economy to move forward with some stability, both in the short and long term. It is strongly felt that Pakistan’s economic management needs to be decentralized with more powers being given to the provincial and local government. In this manner, greater focus can be put on providing basic needs and services to the people.

The first priority, experts say, should be to identify the main economic problems that the nation is confronted with and to then start moving in the direction of providing solutions. According to Shahid Javed Burki, a leading economist, shortages of various items of consumption and interruptions in the supply of some basic services and widening income disparities must be addressed at once, preferably in the first hundred days.

He says Pakistan has always experienced fluctuations in food production, some of which can be extreme and the best way to handle these is to put in place a food security plan that has many components, including the building of buffer stocks, creating a fund for managing the stocks and establishing a forward trading market for stabilizing prices.

He also says that the previous government had no excuse whatsoever for allowing shortages to develop in the supply of electric power and natural gas. According to Burki, the Musharraf government was made aware of these problems in as early as 2003. The president was given a detailed presentation by the World Bank, the main thrust of which was that unless investments are made quickly, Pakistan could face serious supply shortages by the end of the decade.

Mr. Burki says that the second serious problem produced by the way the economy was managed in the early 2000s was to allow income disparities to widen among different segments of the population and also among different regions of the country. This need not have happened had the government adopted policies for promoting the development of the sectors that provide productive employment to the poor. Value-added agriculture, small-scale engineering, domestic commerce, inter-city and intra-city transport, and domestic tourism are some of the sectors that could have benefited from the government’s attention. Instead, Islamabad encouraged foreign direct investment in the areas that exacerbated income inequalities.

However, all is not lost. Sources in the country’s business circles are attaching great importance to expected Chinese investment in the deep-sea Gwadar port, power generating units at Lakhra and hopefully Thar coalfields, and political stability in neighbouring Afghanistan.

There have been some encouraging indications from the government about creating a conducive economic environment. For instance, the government has expressed its intention to give full attention to the manufacturing and agriculture sectors. It intends to address the issue of sick industrial units and take steps to revive them and focus seriously on the entire taxation regime to make it progressive and direct.

In the view of the country’s leading businessmen, this sort of approach on part of the government is creating tremendous confidence and the atmosphere could be further improved if the business community were made a part of the budget-making process and could also contribute to formulating the country’s future economic strategy.

All said and done, the man in the street wants a pro-poor budget that will offer him better wages, better healthcare, uninterrupted power supply, essential food commodities and a secure environment to live and work. This is a budget recipe that has been demanded – and promised – by succeeding governments year in and year out throughout the past six decades. How many times have these governments – democracies and dictatorships – delivered on their promises? The people of Pakistan need not wait beyond a few weeks to find out if there is some light for them at the end of the tunnel or whether it will be more of the same, plunging them into a deeper darkness.