COMMENT: Pakistan’s economy in dire straits —Mohammad Jamil

Our ‘financial wizards’ could not understand the basic difference between the
developed and developing economies and missed the point that the former have a
strong infrastructure, the latest technology and capacity to increase production to
match effective demand

Like other countries of Asia, Africa and Latin America, Pakistan also started
development plans in the 1950s and during five decades about eight plans were
made. But the planners had a flawed perception that if a lot of wealth was generated
at the top, the masses would automatically benefit from the ‘trickle-down’ effect.
However, evidence suggests that the best of economic plans cannot succeed so long
as human beings are treated as mere statistical numbers. The most serious aspect of
our dire economic situation is the growing public debt. It is unfortunate that despite
being a resourceful country, Pakistan has public debt around 60 percent of the GDP,
which includes a foreign debt of $ 55 billion. The question is, how has Pakistan piled
up such a huge debt; and secondly, how would it be able to manage when the
payments of instalments and interest on the additional loans would start from 2012?
Pakistan has seen perennial trade deficits, current account deficits and fiscal deficits,
and the shortfall was met through bank borrowing and foreign loans. Throughout its
history, Pakistan had a favourable balance of trade only twice — once in 1950-51
because of the increase in prices of primary commodities like cotton and other raw
materials as a result of the Korean War boom; the second time was after the
devaluation of the rupee and the oil crisis in 1972-73. Like the budget, trade policy is
a part of the planning process, but our governments had the tendency to fix
ambitious targets, which is why they could never achieve their targets. The increase
in oil prices in the international market of course is one of the reasons for the
widening gap; however the question is, why did the governments in the past fail to
balance imports and exports? They all had the penchant for foreign direct
investment, but they did not realise that when existing industry was not running at
full capacity due to power outages, gas shortages and deteriorating law and order,
and when local entrepreneurs were not willing to invest, how could they expect that
foreign investors would invest?
Our rulers had to follow the instructions of the IMF for increasing the rates of utilities
and privatisation of national assets to meet the shortfall in the budget and balance of
trade, but that proved a recipe for disaster. They should remember that with an
increase in portfolio investment in the stock exchange by foreign investors, and the
payment of dividends and profits on their investment in industry, the result would be
a massive outflow of foreign exchange in future, and which is already taking its toll.
The Fiscal Policy Statement (2009-10), issued by the Finance Ministry on Monday,
among other things said “that the pool of national savings must be enhanced,
allowing for required investment to be made, without jeopardising the government’s
fiscal benchmarks”. But for investment it is imperative to have savings to start with,
which are considered as the nuts and bolts of development. The present rate of
savings to GDP is around 14 percent and investment ratio to GDP is approximately
18 percent, which are low if compared with the developing countries and emerging
economies. But the problem is that inflation hinders the capacity to save, as it
erodes the incomes of the people, especially the salaried class and fixed income
groups.
In Pakistan, economic managers maintained that the economy could be driven by
consumption rather than investment. Since 1998, the State Bank of Pakistan started
reducing the discount rate and commercial banks reduced interest on term deposits
to bring it down from 9 percent to about 3 percent over a period of four years. On
the other hand, borrowers, whether industrialists, businessmen, credit card holders
or those availing auto-financing facilities were offered 9 percent against the earlier
rate of 20 percent per annum, which boiled down to subsidising the rich and higher
middle class at the cost of the poor and the lower middle class who put their hard
earned savings in the banks. They also suffered when National Savings schemes
reduced their returns from 13 percent to 7 percent. Former Governor State Bank of
Pakistan Dr Ishrat Hussain was the architect of this policy, who in his articles and
statements had highlighted that there would be compulsory savings from regular
instalment payments on account of loans given to consumers. But credit expansion
through credit cards and injudicious extending of loans by banks is tantamount to
creating money. And in economic terms, ‘when a lot of money chases few goods’, the
result is inflation. This credit expansion had also fuelled inflation, which had gone up
to 24 percent in 2008, and in 2009 it is still hovering around 12 to 15 percent.
Our ‘financial wizards’ could not understand the basic difference between the
developed and developing economies and missed the point that the former have a
strong infrastructure, the latest technology and capacity to increase production to
match effective demand. On the other hand, Pakistan is not a self-reliant economy,
and has to import hundreds of items to meet domestic demand. Experience indicates
that the idea of consumption as the engine of growth does not work in a developing
country like Pakistan. And promoting consumption through incentives of lower rate of
interest in a country with very low rate of savings and investment is not desirable. It
is universally acknowledged that investment is a major determinant of economic
growth, which generates employment and helps alleviate poverty. The government
should therefore take concrete measures to control inflation, and maintain its
balance of trade by discouraging the import of luxury items. Second, it should try to
increase power generation otherwise our industry would not be able to meet the local
demand, not to speak of increasing exports.
It is common knowledge that direct taxes like income tax are social equalisers in the
sense that they legally transfer funds from the wealthy to the indigent in the form of
social services provided by the government to the poor sections of society. And
indirect taxation through general sales tax and arbitrary increase in the prices of
petroleum products hurts the people. Any increase in the prices of petrol and diesel
results in higher cost to transporters who increase fares; people are adversely
affected by having to pay enhanced fares. In addition to the suffering of the people,
Pakistani products become uncompetitive in the international market. Will the ruling
and opposition parties rise to the occasion and instead of bickering over power-
sharing formulas, use their collective wisdom to rid the country of its multifaceted
crises?