Not the right indicator

ADDRESSING local businessmen in Karachi on Friday, Finance Minister Shaukat Aziz claimed that ‘well directed policies’ of this government have resulted in foreign exchange reserves (forex) going up to seven billion dollars. Without meaning to de-emphasize the importance of this achievement, it must be pointed out that this is hardly indicative of an upswing in the recession-ridden state of the economy. In fact, the foreign exchange reserves have gone up to the highest ever level in spite of the recessionary policies being followed by the government since it came to power. These policies have resulted in shrinking economic growth (from an average of 4.5 per cent in the decade of the 1990s, it has fallen to an average of 3.5 per cent in the three years of this government), rising budgetary deficits (it was seven per cent of GDP in the outgoing year against 6.5 per cent when this government took over in 1999), stagnating revenues, sluggish foreign trade, declining investments and galloping unemployment. It would, therefore, not be very far from the truth to say that there is hardly any link between the real economy on the ground and the record growth in foreign exchange reserves.

Most of the accumulation has taken place because of a dramatic improvement in the current account balance in the last two years but the share of the more lasting and sustainable factor — the capital account balance — is next to nothing in this improvement. Even in the current account balance the major improvement has occurred as a result of purchases of dollars from the market, reduction in imports, and the sudden jump in the inflows of remittances and official transfers. The issue of purchasing dollars from the market remains a highly controversial matter in that sufficient incomes have to be generated through higher exports of goods and services to be able to do that. And where does one get these rupees from in a situation of falling revenues? Then there is the question of who buys these rupees and what happens to the overall economy when a massive infusion of the rupee into the economy takes place through a route other than normal economic activity?

This kind of windowdressing could even turn out to be disastrous on the scale of the Argentinian crisis or scandals like Enron WorldCom in the US. Let us now take up the advantage accruing to foreign exchange reserves as a result of a reduction in imports. This decline has occurred because of falling imports of machinery and oil and despite the six per cent appreciation in the value of the rupee. This is indicative of a continuing recessionary trend in the economy. It is patent that as long as the economy remains in the recessionary mode, the advantage resulting from lower imports will keep the forex reserves intact. But the moment the wheels of the economy start turning at an accelerated speed, it would be impossible to stop at least the foreign trade-related share of forex resources from decreasing rapidly. This is so, because there appears to be no hope, at least in the next 10 years, that the exports would be overtaking the imports if the economy is growing, say, at the rate of 5-6 per cent.

Once the trade deficit starts expanding in response to an improvement in the real economy, the kerb premium for dollars is also likely to rise, rendering the official channel of remittances less profitable. The official transfers, which include 300 million dollars provided by the US for ‘logistic support’ and another 600 million-plus cash grants from its allies for services rendered in the war against terrorism are all one-time gains which would not be available from this year onwards. Finally, the savings from debt reprofiling granted in December 2001, which comes to about an average of 650 million dollars over the next 17 years, too, would disappear in 2017 and the country would have to resume servicing the past as well as the new debt accumulated in the intervening period. So, most of the resources in the forex reserves by their very nature do not seem to be self-sustaining. However, if what we have accumulated is used prudently in building up and expanding socio-economic capacities and are not wasted on purchasing costly military toys, and increasing current expenditure, it is possible to benefit from these windfalls meaningfully and durably. In this context, the decision of the government to appoint internationally reputed fund managers for productive utilization of these forex reserves is encouraging.

Gunning for Saddam

UNDETERRED by widespread criticism, the Bush administration seems bent on pursuing its misguided plan of attacking Iraq. Various blueprints for such an attack, aimed at ousting Saddam Hussein from power, have been leaked to the press in recent weeks along with fantastic stories about Baghdad’s production of weapons of mass destruction and its alleged links with the Al Qaeda terrorist network. Clearly a disinformation campaign is now underway to soften up world opinion and prepare the ground for an attack. Thankfully, most world leaders are still not convinced. Even British prime minister Tony Blair, normally the most faithful of US allies, tried to publicly distance himself from Washington by claiming that there is no question of any attack until solid proof that Baghdad is attempting to acquire weapons of mass destruction is presented before the public. Tony Blair finds himself in an awkward position on Iraq. While there are reports suggesting that he has given an assurance of full support to Bush in case of an attack, he still has to sell the idea to a deeply sceptical British public and media, not to mention a large section of his party. Meanwhile, the European Union is deeply disturbed by the Bush administration’s growing unilateralist stance on a whole range of issues. Iraq is only the latest example of the US pushing its own agenda without seeking to build a consensus even among its closest allies.

The Europeans are worried that an attack on Iraq could not only destabilize an already volatile region but also provoke a serious backlash in the Muslim world. Even the normally pro-US regimes in the Middle East have been trying to persuade Washington to avoid an attack on Iraq. Saudi Arabia has categorically refused to allow US forces from using bases on its territory to launch a strike against Iraq. Jordan and Turkey, which were touted by Washington as potential staging posts for an attack, both seem fairly lukewarm to the idea. Fears are also being expressed that targeting Iraq could shatter the current international coalition against terrorism. Despite all these dissenting voices urging caution, President Bush seems to have made up his mind that Saddam, whether actually guilty of acquiring weapons of mass destruction or not, must be ousted regardless of the cost. The obsession with getting rid of Saddam could well open up a Pandora’s box that could lead to unpredictable and potentially catastrophic consequences for the highly volatile region.