December 17, 2001	Monday	Shawwal 1, 1422

For the past two years, the military government has been lurking in the dark. Most of its efforts to revive the country’s economy that has been proclaimed as vital part of the regime’s agenda, have remained fruitless, except for its success in keeping happy the two godfathers of modern international capitalism, the IMF and the World Bank.

With the average real GDP sinking to less than 3 per cent compared to the average of over 4 per cent even during the darkest decade of 90s, which period has been categorized as one of the worst in the history of Pakistan, the economic performance of the current government has been far from impressive. Most of its targets and plans, such as the realization of $3-4 billion from privatization, revival of investor confidence and industrial activity, enhancing exports, recovery of bank loans, restructuring and reforming of different tiers of government and public sector to enhance its efficiency, raising tax revenues, expanding tax base, imposing universal general sales tax system, devolution of powers to local district level governments, police reforms, and improvement in the governance as whole, had failed to yield results, as the wider economy had continued to drift.

The first quarter of the year prior to September 11 clearly depicts the continuing deterioration of the economic conditions in the country, as also corroborated by the SBP quarterly report. In this scenario of gloom, doom and despair came the horrifying events of Sept 11, followed by the so-called ‘war on terrorism in Afghanistan’ further aggravating the economic problems. It was in this background that General Musharraf took the decision to openly support the US led-coalition, against the religious extremism and hitherto followed policies of the military establishment.

What will be the ramifications and the long-term consequences of this policy, which effectively has reversed the establishment’s strategic policies of the past two and half decades? Has this decision changed the course of history and provided a new direction, and with it a new hope for the country? Does it present an opportunity to break with the past and put the country on a new phase of development, progress and prosperity? Based on an objective analysis of the conditions that have emerged, I have no hesitation to conclude that the current shift in the government’s policies together with some celestial help, has indeed provided a great opportunity of lifetime, and given the proper political and economic policies designed on the consideration of pragmatism rather than the emotionalism, and that are consistent and vigorously pursued with the sole purpose of transforming the lives of a vast majority of our people can reshape the country’s destiny.

No claims to clairvoyance and no prophecies but with little common sense and foresight, one can see that after a long period of hopelessness, despondency, decay and degradation, the decision of General Musharraf to join in the strategy partnership with the US and its allies in the war against terrorism and the accompanying policies have provided real opportunity for Pakistan to break with the past and make a new beginning, which can put us on the road to progress and prosperity. Already, the support of the US and its allies is beginning to bear fruit for the country. After over a decade, almost all the sanctions imposed by the US have been lifted paving the way for enhanced aid flows into the country. For the first time the country’s foreign exchange reserves have risen to nearly $3 billion (excluding the key reserves held by Pakistani banks). The IMF has approved its three-year soft, virtually interest-free financing arrangement of Poverty Reduction and Growth Facility (PRGF) of $1.3 billion paving the way for substantial loan restructuring and rescheduling of the Paris Club bilateral debt, which is estimated to be nearly one third of total external debt of the country. It is also hoped that this debt restructuring will be under what is called “Naples Terms” in the nature of re-profiling of the debt that will result in substantial reduction of net present value of such debt by approximately 60 to 70 per cent. The US has already provided $600 million out of its total pledge of $1 billion aid for various programmes. The office of the USAID is being reopened, which is expected to work mostly for improvement in the social sectors that are the most neglected sectors of Pakistan. The EU has agreed to provide increased market access for our exports that is estimated to result additional exports of nearly $1 billion in the next four years, and one can expect that the US will do the same. Already, the EU has removed the import duties on the garments imported from Pakistan. There have been varying commitments from the UK, Japan, Germany and Canada and the multilateral institutions to increase the aid flows at soft terms, mostly for development of social sectors. A conservative estimate of all the above benefits could be around $10-15 billion.

The improvement in our foreign exchange reserves, enhanced expected aid flows together with the IMF/Paris Club support has virtually solved Pakistan’s most critical problem in its external account insolvency — at least in the medium terms as it is envisaged that our annual debt service payments are likely to go down drastically in the next five years or so to a sustainable level. Thus, for the first time in the last nearly 15 years or so, the government has the opportunity to concentrate on real development of the economy without worrying about debt default.

This scenario has already bolstered the rupee, which has regained nearly 10 per cent and 6 per cent of its lost value against the dollar in the curb and inter-bank markets, for the first time in its history. Such an appreciation in the value of rupee has resulted in reduction of the rupee value of our external debt by nearly Rs120 billion. And as the premium on curb rate has almost vanished, the flow of worker’s remittances through banking channels have and are likely to further increase substantially. Such increase in remittances coupled with the aid flows are likely to further boost foreign exchange reserves in the next few months. Thus, the trend of dollarization that has been going on through out the 90s mainly due to the perception of continuing weakness of rupee is beginning to reverse bringing more rupees into the economy. Consequently, we have seen significant improvement in the KSE index and some improvement in the prices of properties. And, there are sufficient reasons to anticipate that such improvements are likely to sustain in the next few months.

Prospects of peace and reconstruction of Afghanistan: The setting up of the new interim government in Afghanistan so swiftly on the collapse of the Taliban through the UN-brokered agreement between major Afghan factions in Bonn clearly indicates the extent of seriousness and firmness of commitment of the international community for the restoration of peace and stability in Afghanistan. The recent conference organized by the World Bank for reconstruction of Afghanistan is reported to have attracted enormous interest and the minimum estimates of aid commitments for the reconstruction and development in Afghanistan ranges between $10 to 20 billion. And the development and reconstruction of Afghanistan is simply not conceivable without the participation of Pakistan’s industrial and service sectors owing to deep-rooted cultural ties and our geography, notwithstanding our present misgivings with the Northern Alliance that dominates the interim government.

Based on the statements of important US functionaries and the funding commitments that have been announced for Pakistan as well as the reconstruction of Afghanistan by the West, there are clear signs that the US and its allies have no intention to repeat their earlier blunder of abandoning the Afghan people, once their key immediate targets of apprehending Osama bin Laden and Mulla Omar are achieved.

There should be no doubt that the collapse of Taliban regime and shaving of breads will not solve the problem of terrorism. I believe that there ought to be two major long-term objectives of the US-led coalition for this region, if they want to prevent the recurrence of gruesome terrorist incidents of mass-scale killings and other terrorist acts on a sustained basis. Obviously, they have to eliminate the roots of terrorism that lie in the twin disease of extreme illiteracy and abject poverty, from which emanates frustration and terrorism. For this, the West has to commit substantial amount of funds and also ensure that they are spent for the right purpose and where they are needed the most to eradicate these deep-seated maladies. All this is not possible without maintaining their long-term presence and commitment. Therefore, there are clear signals that the US and its allies will maintain their strategy presence in the region and will participate in the reconstruction and development of this region in a significant way.

Apart from the interest of the West to eliminate terrorism from its roots, there is another reason, which is reported to be at the bottom of the US interest in the region. That reason is said to be the enormous wealth of oil and energy resources in the central Asian countries bordering Afghanistan. if this were the case, it is yet another good news for the people of the region, as this would improve the chances of profitable utilization and exploitation of such resources for the benefit of all.

In the above background conditions, especially if the new interim government of Afghanistan with the support of the multinational forces is able to establish peace and stability, for which there are reasonable expectations that it will, there is bound to revive a major investor interest in the development of this region.

The risks: There are, of course, downside risks arising out of the ongoing War in Afghanistan, in terms of increased insurance cost due to the War Risk Insurance, reduction in revenues from foreign airlines and tourism revenue, temporary departure of expatriate staff of multinationals and cancellation/lower export orders owing to heightened risk perception. These factors, together with the deepening recession in the major economies that buy our goods and stronger rupee have adversely affected the exports as well as the domestic economy. Unfortunately, an extremely ineffective administrative machinery, slow pace of decision making due to red tape and archaic government rules, pathetically low calibre of majority of the civil servants coupled with a badly designed and unworkable devolution of power scheme has further retarded the efficiency and spending capacity of the government. Consequently, the recent aid flows and earlier enhancement in funds for poverty, alleviation and social sectors have so far failed to make an impact.

What needs to be done? Obviously, the current opportunity has developed out of unforeseen circumstances without any exception or preparation. Naturally, the country can only benefit from this opportunity, if both, the government and the private sector has a proper understanding of he underlying conditions, and they prepare to exploit them fully to their and the country’s advantage. Unfortunately, so far, the government has been very slow in responding to the current change with any major strategy initiatives. The steps that the government should take in the current situation are discussed below.

First, the most urgent issue that should be addressed by the government is to enhance the speed and efficiency of the government machinery so that the funds received are properly and promptly invested. This requires resolving the issues of parallel jurisdictions at district levels that have arisen due to flawed devolution scheme and by strengthening the district Nazims, i.e. if this system is to be continued. Second, major part of the fiscal space, which is being provided through the additional grants must be spent on our social sectors and building infrastructure rather than spending this money on tanks and F-16s. Third, to respond to the current extraordinary situation and slowdown of the economy, more fiscal leverage should be negotiated with the IMF to allow the government increase its public works programme by increase the fiscal deficit to at least 7 per cent of the GDP. Fourth, the government has to revisit its foreign policy, both with regard to the Northern Alliance in Afghanistan, which is likely to remain in the dominant position there in the foreseeable future, as well as India, with a serious effort to improve the relations, even if it is at the cost of reducing our focus on the Kashmir issue, at least for the near term. Fifth, the focus and efforts on the governance related reforms must be redoubled. Sixth, the government and the private sector have to make their strategic plans to participate fully in the rebuilding and development of the Afghanistan by keeping a close watch on the plans of the international community and the Afghan government in this behalf. Our industrial sector, such as cement and steel, and our service sector, such as banking, insurance, transport etc should be encouraged and facilitated to fully participate in the construction activities in Afghanistan. The upshot is that a lot of thinking, strategic compromises and shifts in our policies and planning will be needed, if this time we have to realize our vision of economic prosperity for the country.