PAKISTAN has existed from crisis to crisis. We remain in a state of flux and we are at a crossroads every few years. Every country has its share of upheavals but ours is an unusual predicament.

We got a truncated Pakistan, lost Kashmir, fought three wars with India and participated in two proxy wars in Afghanistan. What is worse is that our transition from a newly emergent state to a sovereign stable nationhood has extended over more than five decades. The definition of the ideology of Pakistan remains controversial and so is the role of religion in our body politic. We began with disadvantages after the partition. The Western wing was dominated by feudals while East Pakistan was populist in nature. We literally started from scratch. There was no government infrastructure nor was there an industrial base or established economic system.

We have since made significant progress in many spheres as part of the compulsive evolutionary process which inevitably goes on because nothing remains static in the world. Our failures however are fundamental and monumental. The oft-repeated story of constitution making and establishing a stable political order is the prime example. The constitution of Pakistan has been written, abrogated, suspended, held in abeyance and amended several times over. We took nine years to produce the first document which lasted only two years. We have since been subjected to successive martial laws each promulgating its own constitutional framework and each in turn being discarded by the successor. The 1973 document was soon amended by its authors and thereafter by others.

The basic fault has been with our political system. There were only a few leaders of national stature at the time of partition. Most of them were men of impeccable personal character. However, they were soon outmanoeuvred by the collusion of civil and military bureaucracy duly abetted by the judiciary, and the era of several short-lived governments was ultimately supplanted by direct military takeover. The first attempt — a failed coup — was staged in 1951 and then there were martial laws in 1958, 1969 and 1977 and there was a military takeover in 1999.

Political process was muzzled throughout these periods. Field Marshal Ayub Khan introduced presidential form of government while the rest were also essentially presidential in nature. The politicians nourished under military regimes grew fond of autocratic rule and therefore during the political intermissions there has been a constant tussle for appropriation of powers between the president and the prime ministry.

It was compounded by the conflict between the politicians and the military for supremacy. The authoritarian psyche is perhaps also a legacy of Muslim history and tradition, the hereditary monarchs did wield absolute powers and arrogated divine rights to themselves.

We are yet again at the crossroads. The perennial and pernicious issue of division of powers between the president and the prime minister and the parliament has again become a bone of contention in the forthcoming transfer of power from the military to the civilians. The proposed huge packages of constitutional amendments are being criticized by most of the political parties and the intelligentsia as unrealistic, self-contradictory and self-destructive. The old mistakes are being repeated without learning any lesson from our chequered history.

This Pandora’s box has been opened when we have a host of other pressing problems bedevilling us. Parochial, tribal, ethnic linguistic and sectarian divisions have made us a fragmented society with a deteriorating law and order situation. Our economy is in a shambles according to State Bank’s own admissions — the rise in forex reserves notwithstanding.

Money has been transferred from the country and there is no local or foreign investment forthcoming. Nothing worthwhile has been privatized so far. The common man is suffering from quarterly extra-budgetary increases in utility bills. Population explosion is straining our resources to the limit. Corruption has become rampant in every sphere and institution of society. We are termed as perpetrators of terrorism in Kashmir while we are subject to acts of terrorism on our own soil.

India is belligerently pressuring us by keeping their forces on our borders and has succeeded in convincing the world of cross-border terrorism which we are being told to stop. Our eastern border is unstable due to the hot pursuit of A1 Qaeda men allegedly hiding there. Our major asset, our nuclear capability, is under constant threat. Pakistan has labelled as a misdirected and even a failed state to likely to last a couple of decades by the detractors within and abroad.

The people of Pakistan are losing faith in all the state institutions, and the morale of the nation is at the lowest ebb. There is sense of dependency and bewilderment. Sindh and Balochistan continue to have legitimate grievances. The credibility of the politicians, the military and every institution of the state has been eroded and all sections of society are equally to be blamed for the rot.

There is a general perception that we are just drifting. The current crisis is as deep as the ones we have passed through before. We are fighting on so many fronts. It may appear to be a highly pessimistic assessment but unfortunately it happens to be the most realistic.

It is high time the rulers, the politicians, the intelligentsia and the general public realize the grim realities of the situation and rise above petty individual and group interests to give something back to the country which has given each of us so much. We must develop values of tolerance and accommodation — the basic attributes of democracy.

Unfortunately, there are not many elder statesmen to guide us. The NRB, given all the good intentions, is not the repository of absolute wisdom. The politicians too deserve a chance to prove themselves. The issues of national importance can only be decided by consensus among the elected representatives of the people. There is an agreement on a democratic form of government. But there are several variations of democracy being practised the world over. The Turkish model is not relevant to our situation and the Westminster type may not be entirely suitable for us.

We have to evolve our own democratic system and this is the job of the elected representatives of the people. The role of the army is well defined in democracies the world over and Pakistan is no exception. We should have a National Security Council composed of the president, prime minister, chief justice and Supreme Court, chairman of Chiefs of Joint Staff Committee, Chief of the Army Staff, Leader of the Opposition, Chairman Senate, Speaker of the National Assembly and provincial chief ministers and its role should be confined to national security as its name implies.

The checks and balances envisaged can be secured by accepting the ultimate supremacy of the Senate / National and Provincial assemblies, drastically revamping the judiciary and establishing an autonomous authority for accountability under a constitutional provision with a mandate to proceed against the highest. The October elections should be conducted in a free, fair and transparent manner and the fears generated by the rumours already circulated in the press about the old practice of government officials lobbying around for favourite candidates, as has been happening in the past, must be allayed forthwith.

The country has a vast potential of human resource. It is also endowed with immense natural resources. Radical reforms in the educational sector only can bring about an overall change in society. Similar reforms with resetting of priorities are required in all sectors. The size of the government and civil and military bureaucracy has to be reduced to ensure good governance. A national austerity campaign needs to be launched. People’s perceptions about basic concepts have to be changed and credibility of state institutions re-established in their minds. The criteria of merit should be seen being observed in al spheres of life.

The confidence of the people especially the younger generation in the destiny of the national has to be restored by the formulation and implementation of sustainable policies in all spheres of national activity. Give the hope and opportunities they will toil hard and make all sacrifices to make this country prosperous.

Sincerity of purpose is imperative but it has to start from the top from where it will trickle down to the masses. The leadership has to set an example. It is a tall order, but in the ultimate analysis only a “truly” democratically elected leadership accountable to the people and the state institutions can deliver.

The writer is a retired lieutenant-general of Pakistan Army.

FORGET for a moment the justification or otherwise of the heavy-handed violence visited upon the residents of Sri Saral and Pind Sangrial, the two villages on the outskirts of Islamabad waiting to be gobbled up by that inhuman piece of engineering called the Capital Development Authority (CDA).

In what other country claiming to be civilized would policemen use live bullets against unarmed civilians? In what other country would policemen aim their 7mm rifles to kill?

This is what happened in these two unfortunate villages and if all those sham NGOs which earn a living in the name of human rights are not aghast or up in arms, it is because there is one set of values for the well-heeled and another for the poor.

How many were killed? Two or five? How many injured? How many beaten black and blue by the police? How many indicted before, of all things, an anti-terrorist court? It doesn’t matter. Since when have hapless peasants counted for anything in the scales of justice of the Islamic Republic?

Could the CDA and the Islamabad police have carried out such an assault in one of the capital’s richer sectors? You must be kidding. There is a law which bars residential houses in Islamabad from being used for commercial purposes. Will the CDA ever be serious about enforcing this rule? Again, you must be kidding.

Whose fault was the firing? The threads of responsibility stretch right up to that master of the inept statement, the interior minister, Lt Gen Moinuddin Haider. He it was who chaired a meeting a few days ago and directed that ‘development’ work should start with full vigour in the two affected villages, ‘development’ being the standard euphemism for the knocking down of old villages. Thus getting its cue from on high, the CDA set to work with the help of the Islamabad police, with what deadly results we all know.

Surely, however, the order to open fire on unarmed villagers did not come from the interior minister. This was the work of the officers on the spot. Confronted by angry villagers brandishing nothing more lethal than sticks (the thing about villagers with firearms being a canard) these officers panicked. Or did the constables under their command panic and open fire on their own? We do not know and perhaps never will, because the police machinery has already gone into overdrive in trying to fabricate a cover-up story.

But someone has to carry the blame. After all, unarmed people were killed and wounded, violence was carried out on a large scale. Who was responsible for these excesses? Thanks to the atmosphere he is nurtured in, the ordinary constable is easily prone to brutality and the use of excessive force. But he doesn’t give the orders. That is the responsibility of his high-ups, in this case the inspector general, Major (what else?) Akram, the additional IG Rao Iqbal, and the senior superintendent, Kaleem Imam.

Will any heads roll? Perish the thought. Such things are not done in Pakistan. Will there be a cover-up? Something far more effective than anything seen in Watergate has already started. Will the villagers get justice? Stop kidding. Should they keep knocking at the doors of the courts? Well, two days ago they tried going to the court of the Islamabad sessions judge and for their pains the Islamabad police, the very institution they were trying to protest against. We talk so long and hard about democracy. This is the state of democracy in the federal capital.

I have a whole posse of good friends among retired and serving police officers. Among them, Zafar Iqbal Rathore, former interior secretary and head of the Intelligence Bureau, great lover of books - his study stuffed with high-grade learning from floor to ceiling; Nawaz Malik, the founding IG of the Islamabad police; Nazir Malik, former IG. Also a host of lesser fry, DIGs serving here and there.

All these friends of mine are great mahatmas of police reform and on the rule of law and its requirements can hold forth endlessly. I have a simple request to make of them. Could they ask the leaders of the Islamabad police, in the name of God if nothing else will do, to stop brutalizing the villagers of Sri Saral and Pind Sangrial?

What these villagers have already suffered is great enough. In order to cover their own butts why must the Islamabad police terrorize them further?

My Lord Chief Justice, Shaikh Riaz Ahmed, is making a name for himself by taking suo motu notice of rapes and other such offences in far off places. Can he spare a moment to take suo motu notice of the rape of justice right under his nose on the outskirts of the capital?

As for the genial interior minister, there is no cure for his malady. Far from being chastened by the chain of events starting from his door and ending on such a bloody note, he has chaired another meeting and ordered that the development work in D-12 (the sector covering the unfortunate villages) should be restarted with renewed vigour. This is pouring salt over open wounds but who’s to stop him?

Let me draw an analogy. Moin Haider’s counterpart in India is L. K. Advani, the home minister. Can anyone in his wildest dreams imagine Advani concerning himself with the acquisition of land for municipal purposes in New Delhi? Is this the interior or home minister’s job? Has he nothing better to do?

But if, suppose, having inadvertently set in motion a train of events leading to the killing of two or five villagers, would Advani have the gall to order that the work interrupted by the killings be resumed? Sanjay Gandhi, during his mother’s Emergency, was crucified in popular legend for much less. But nothing it seems can puncture Haider’s complacency.

With what cheek can we talk of human rights violations in occupied Kashmir when without the least sense of shame we commit mind-blowing human rights violations right in the capital of the Islamic Republic?

Of one thing, however, we can be proud and that is the role of the press, especially the Urdu press, which has done a great job of highlighting the excesses in the two calamity-hit villages. While newspapers gone corrupt are a curse, those guided by a sense of duty and freedom are a blessing, especially in a climate such as ours.

A word about ‘land acquisition’. The foundations of Islamabad rest on one of the most gigantic frauds ever carried out in the name of development. Islamabad has been built on land forcibly occupied from its original inhabitants in lieu of nominal sums in compensation. State resources were then used to ‘develop’ this land by laying roads and providing electricity, water and gas.

This developed land, its value immeasurably enhanced, was then doled out through a less than transparent process to members of the gentry, the salaried classes and the privilegentsia. As this seizure proceeded apace, old habitations which had existed along the foothills of the Margallas for centuries were obliterated.

It is on this vast enterprise of plunder, the appeasement of privilege and the displacement of people that the glories of Islamabad rest. No wonder the star of this city is crossed. No wonder nothing has ever worked here. Why is every government that comes to Islamabad doomed from the start? Why is there no stability in our affairs? Might this have something to do with the desecration of old places, the curses of suffering people?

Come to think of it, we said goodbye to East Pakistan when the capital was shifted from Karachi to Islamabad. The people of East Pakistan could relate to the cosmopolitanism of Karachi. How could they relate to the insularity and military mindset of the Pothohar Plateau?

In any other scheme of things the old villages of Islamabad would have been made part of the new city, to lend it colour and piquancy, instead of being razed to the ground and covered in concrete. Instead of the CDA looking through hostile eyes at places like Saidpur, Noorpur Shahan, Golra and the rest, it would have interwoven the charm of these old villages into the planning of Islamabad. But this would have required a revolution in taste and culture, something that has yet to hit Pakistan.

To look at what we’ve done to tradition, just visit the shrine of the great Barri Imam. Once a place of infinite peace, it has been transformed in the name of development into a concrete quadrangle. We presume too much upon divine indulgence. For some sins there is no forgiveness.

THE market participants were in no hurry to either hoard the dollars for their future requirements or to withhold supplies in anticipation of further depreciation of currency.

This confidence-building measure, along with favourable external developments such as stringent conditions imposed on hundiwalas in the US and the UAE, helped a great deal by accelerating inflows of workers’ remittances to Pakistan through the banking channels. The experience of the unforeseen shocks recorded during the last one year does substantiate the belief that large reserves do act as a cushion against possible exchange rate instability and consequential flight of capital.

Fourth, in addition to improving liquidity in foreign currencies, high level of reserves also contribute to the creditworthiness of the country. By repaying most of its expensive commercial and short-term liabilities during the last two years, Pakistan has improved its debt indicators. The standard practice of the Bank of International Settlements is to show net external debt and obligations of each country.

This figure is derived by deducting the country’s reserves lodged as deposits overseas from the gross claims of the external creditors. The reserves of the country reflect both the SBP’s and banking system’s holdings. But for the purpose of net external debt calculations we use only the SBP’s own reserves.

In 1999 when Pakistan’s gross external debt and liabilities amounted to $38 billion and the liquid reserves held by the SBP were slightly above $1 billion, the net external debt and liabilities of Pakistan was approximately $37 billion and the net debt/GDP ratio was 62 per cent. As the SBP has accumulated reserves of about $5 billion and the gross debt stock has been reduced to $36 billion, the net external debt and liabilities at end-June 2002 amounted to $31 billion. The net debt/GDP ratio has lowered to below 50 per cent.

This improvement in creditworthiness and debt indicators has helped in upgrading the rating of the country by Moody’s and S&P and also has a direct influence on the decisions of foreign direct investors and portfolio investors. It is another matter that the perceived security and political risk of Pakistan is still quite high and thus acts as an inhibiting factor in the flow of foreign investment.

What is optimal level of reserves of Pakistan? There is no precise measure which can provide a guidance to this question but a number of partial indicators can be taken into account. One is the traditional indicator — i.e. coverage of months of imports. On this indicator we have progressed from a low of three weeks of coverage to seven months’ coverage — almost a nine-fold jump. The second is the ratio of short-term external debt to foreign reserves. This ratio has come down significantly from 207 per cent in 1999 to 42 per cent at end June 2002. Third, we have to relate the level of reserves to servicing of external debt and liabilities.

In 2001-02 the country actually paid about $6 billion in servicing its external debt which is almost 40 per cent of foreign exchange earnings. This was despite the rescheduling of our Paris Club debt on which we saved $1.5 billion debt servicing. Had the reserves been low it would not have been possible to make such large payments. Finally, comparison with other countries in the region can also provide some insights. In 1999, the ratio of foreign reserves held by India was 40 times that of Pakistan. By June 2002 this ratio declined to eight times while the size of Indian economy is about 6 to 7 times that of Pakistan.

It can be seen from the above indicators that the country hasn’t yet reached the optimal reserve level as the debt burden is still quite heavy and needs further reduction.

(b) How did we accumulate these reserves? There are two popular viewpoints expressed in the media about the sources of reserve accumulation. Prior to September 11, 2001, the concern was that the SBP was purchasing dollars from the open market and this was not the right way to build up reserves. As explained on numerous occasions in the past, the country did purchase almost $4 billion from open market during 1999-00 and 2000-01. Pakistan had no other choice as medium-and long-term external capital flows to the country had turned negative in both these years (minus 380 million in 1999-00 and minus 738 million in 2000-01).

Payments of $3,756 million and $5,101 million had to be made for debt servicing in 1999-00 and 2000-01, respectively. We had two options available — either to resort to the usual commercial borrowing and thus add to an already unsustainable level of debt causing additional debt-servicing obligations for the future or purchase the remittances of Pakistani workers channelled through open market at the prevailing rate which was Rs 2 - 3 higher than the inter bank rate.

We chose the second option, made all the payments that were due on time, built up our reserves, avoided commercial borrowing and saved the country from future debt servicing of approximately $400 million annually. In the process, we paid Rs 11.6 billion over and above the inter-bank rate to acquire this amount of $5.2 billion. In terms of cost-benefit analysis, the country was definitely a net gainer by choosing this option. After September 11 it is being argued that all this build-up has taken place because of political and non-economic factors as Pakistan had aligned itself with the US in the fight against terrorism and this largesse is a direct result of this reward. In other words, this is a one-off phenomenon which is unlikely to recur in the future and thus the government should not self-congratulate itself on this achievement. They believe that the fundamentals have not changed in any significant way and the underlying determinants are still weak.

What are the economic fundamentals which determine the path of reserve accumulation while moving towards a path of debt sustainability? These are (a) reduction in trade, fiscal and current account balances, (b) net inflows of non-debt-creating foreign private capital i.e. remittances, FDI and portfolio investment, (c) reduction in debt-servicing payments, (d) net inflows of official assistance on concessional terms from international and bilateral donors.

During the last three years (1999-00 - 2001-02):

* Trade gap has narrowed from $ 1.6 billion to $ 1.2 billion. Current account balance has turned surplus to $ 2.7 billion from a deficit of $ 1.9 billion.

* Fiscal deficit has been reduced from 6.1 per cent to 4.9 per cent of GDP.

* Remittances have jumped 2.5 times from $1,060 million to about $2,400 million.

* FDI flows have averaged around $ 400 million annually.

* Reprofiling of bilateral debt stock has resulted in a saving of $1 billion annually.

* Repayment of $4.5 billion private, commercial and short-term debt and liabilities has reduced the stock of debt and thus future debt-servicing obligations.

* IMF, World Bank, ADB and other donors are providing concessional assistance of about $ 2.5 - 3 billion annually while their hard-term loans are being repaid.

It may thus be seen that reserve build up has in fact taken place mostly through a combination of those measures which are underpinned in economic fundamentals. The end result of the above measures is that Pakistan has generated a current account surplus for the first time in many decades and its vulnerability to external shocks has reduced to a large extent.

Will this process sustain itself over time? Conceptually, the positive reserve would result from the interaction of current account and capital account balances. Very few developing countries can show capital account surpluses until the foreign direct investment exceeds all other capital outflows. The only plausible way is to generate current account surpluses which are larger than capital account deficit. Again, developing countries cannot be expected to have exports higher than imports on a consistent basis for long periods of time. Thus, current account surpluses are likely to originate from services and current transfers accounts and by reducing net imports to a manageable level.

Services include interest payments on external debt. As bilateral debt has been restructured, only moratorium interest payment will be made. Multilateral debt is undergoing a shift in its composition as new loans are being contracted on concessional terms and old non-concessional loans are being repaid. Expensive commercial debt and short-term debt were repaid during the last two years, thus reducing the interest payments due.

The more critical factor in case of Pakistan is workers’ remittances. In 1999-00 and 2000-01 these remittances were channelled by the State Bank of Pakistan by using the open market as well as the inter bank market. These aggregate inflows into the current transfers averaged about $ 3 billion annually. Since September 11, 2001, these remittances are coming mainly through the inter bank market but the overall amount has remained unchanged as the inflows from open market have consequently declined. As foreign exchange market is further liberalized and the two markets are unified this volume of $ 3 billion will continue to flow into the current transfers account. It is quite likely that it may in fact go up as our foreign exchange market becomes integrated and thus more efficient.

To be concluded

The writer is Governor, State Bank of Pakistan