THE foreign exchange reserves have crossed the unbelievable level of $9.00 billion, which is about three times higher than the best level, which we achieved during the last 50 years. The current account instead of being persistently in deficit is now in handsome surplus.

The bilateral debt of $12.5 billion has been rescheduled to reduce its present value by 40 per cent. Even the exports, which were stagnant for last so many years have risen by double digit figures in the last five months. Standard and Poors has raised Pakistan’s long term foreign currency credit rating from B- to B and the long term local currency sovereign credit rating from BB- to B+. Pakistan’s credit ratings are much better than that of India. The picture on the foreign front therefore could not be more glittering.

The glitter on the foreign front is matched by deep dismay on the domestic front. The glowing level of reserves is no solace to a graduate unemployed for many years, or to a middle class family which is forced to reduce nutrition to its children in order to pay ever escalating utility bills. The GDP growth of 3.6 per cent for 2001-02 (FY 02), as calculated by our statisticians is contrived and not real. The composition of Pakistan’s GDP is almost equally divided between commodities producing sector and services sector in the ratio of 50:50.

In FY 02 (2001-02) the commodities producing sector grew by 2.1 per cent whereas the services sector grew 5.1 per cent. Normally the services sector whose value addition is very difficult to estimate in any developing country is presumed to grow at the same rate as the commodities sector. As the main components of services sector i.e. wholesale and retail trade and transport, storage and communication grow at the same rate as the growth of commodities. The growth in commodities sector has far greater significance for the consumers as in the Consumer Price Index, the weight of the services sector is only one-third.

Moreover, the high growth in the services sector was in the sub-sector of Public Administration and Defence which grew by 18.2 per cent in FY 02 as compared to 1.2 per cent in FY 01. The phenomenal rise in this sub-sector is explained in the Annual Report 2001-02 of the State Bank of Pakistan (SBP) (page 35). “The higher FY 02 growth of Public Administration and Defence is associated with a number of factors including (1) an increase recorded in pay and pension of government employees in FY 02, (2) unusual troop and related activities due to tension in the Kashmir border and search operations at north western borders of the country, (3) increased activity under the head of public administration due to city government elections and April 2002 Referendum”. If we take away the padding of abnormal growth in Public Administration and Defence, the GDP growth rate in FY 02 comes round to 2.8 per cent only. This is the lowest GDP growth rate logged in last quarter century and about half the GDP growth rate of India in FY02, despite draught having affected agricultural output in both countries.

Low GDP growth rate and number of other factors have led to increasing poverty level during the last twelve years. According to the head count ratio, the poverty level has increased from 22 per cent in FY 91 to 32 per cent in FY 02. It is estimated that about 10 million more people have been pushed below the poverty line during the last three years. The poverty ratios are much greater in the rural areas, where this ratio is touching almost 40 per cent.

Low DGP growth rates have also led to increase in unemployment. Reliable figures on employment are not available. But the rate of unemployment, which was 5.9 per cent in FY 98 is now around 8 percent in FY 02 according to the State Bank of Pakistan.

The expectation that by following the IMF’s mantras of marketization, liberalization and privatization, the economy will suddenly embark on sustained rate of GDP growth was misplaced both on theoretical and practical grounds. Following the IMF’s advice at best results in stabilization without growth.The IMF correctly wants fiscal deficit to be reduced, current account deficit to be pruned and inflation to be controlled. No one doubts the prudence of these objectives. However, it is by forcing begging developing countries to devalue drastically, cut public sector spending, increase indirect taxes and all these without considering the broader socio-economic conditions of the country, leads to widespread deprivation.

When our foreign exchange position was week, we were forced to follow the IMF advice but the tragedy is that when our external position is so glittery, we are also allowing their advice without realizing that we are stuck in a deep and prolonged recession. At best the IMF provides the road map but an entirely different set of policies is required to kick-start the rickety engine of Pakistani domestic economy.

The established law of development economics is the inter-dependence among saving, investment and growth. Saving and investment have to rise to move from the vicious circle of low saving, low investment and low growth into virtuous circle of high savings, high investment and high growth. Higher growth also leads to higher employment and current sate of rising unemployment is due to low investment and low GDP growth.

The ADB on Pakistan concludes, “The declining development expenditures resulted in higher unemployment in Pakistan”. In FY 02 Public Sector Development Expenditure (PSDP) declined to 2.9 per cent of GDP. It has never been so low in the history of Pakistan. In heydays of 1980’s PSDP was above 7 per cent of GDP. Regression analysis shoots that growth of GDP is dependent upon growth in PSDP.

However, the IMF wanted the budgetary deficit to be reduced to 5 per cent of GDP. As the tax revenues were stagnant and the defence and non-development public expenditure could not be squeezed, the axe fell on the PSDP. The first step towards kick-starting the economy towards higher growth is to increase the PSDP gradually to 4, 5 and 6 per cent of the GDP. The best strategy for creating fiscal space is to increase the tax-GDP ratio with greater emphasis on direct taxation rather than GST. In FY 02 CBR collected less than 12 per cent of GDP whereas other countries which are at the same stage as Pakistan are collecting 15 per cent of the GDP. The restructuring of CBR has been advertised for long specially in last 3 years but nothing has been done as it suits the vested interests to leave the CBR as it is. Moreover even if we have to borrow for a larger PSDP we should borrow at very low rate from the SBP rather than at higher rates from commercial banks. Greater borrowing from the commercial banks also crowds out private sector borrowing.

The PSDP mainly consists of infrastructure schemes and social sector programmes. In the infrastructure greater reliance, has to be placed on small projects rather than big dams like Gomal Zam and Mirani, which are the discarded projects of 1980s. In the social sectors and poverty eradication programmes, implementation efficiency is more important than allocation of funds. The implementation of social sector as well as poverty reduction programmes is horribly inefficient. The first order of business in these sectors should be to improve the management and monitoring before pouring billions of rupees. Brilliantly conceived Social Action Programme (SAP) failed to achieve its objectives because of poor implementation.

The construction sector which grew by less than one per cent in FY 02 and -0.4 in FY Ol can grow by 5 to 10 per cent if given the proper lead. Some months ago the Economist wrote a cover story on “The houses which saved the world economy”. The upshot of the article was that despite sinking stock market and sliding manufacturing output, the World economy and especially the US economy has not slipped into recession due to buoyant market and investment in houses.

In Pakistan due to exorbitant land prices and failure of LDA, KDA, CDA, and others to develop new sectors there has been freeze on investment in housing. F-11 was the last sector to be developed by the CDA and that was ten years ago. Instalments for D-12 and EL-12 have been taken 7 years back but both these schemes which could elicit private investment of more than billion rupees are languishing due to tortuous land acquisition procedures and CDA’s inefficiency. The same is true of other big cities. LDA has initiated a laudable scheme for more than ten thousand new houses and others need to follow it.

If the federal and provincial governments were to direct development authorities of all cities to develop at least ten thousand plots per years the investment activity in major towns could pick up considerably. Ironically the loans given by housing finance companies including HBFC have declined from Rs829 million in FY 01 to almost half i.e. Rs460 million in FY 02. If we take the percentage given to loans for housing in other countries we should be lending at least Rs10 billion per year for housing whereas we are lending less than half a billion.

The agricultural sector can be given shot in the arm by immediately removing the GST on fertilizer and pesticides. After the imposition of GST on fertilizer the Annual Report of the State Bank of Pakistan (Page 13) correctly concludes: “Faced with limited resources, farmer opted to cut down production expenses by curtailing the use of fertilizer. During FY 02 the urea offtake was 7.3 per cent lower than in FY 01. The use of DAP was more than 10 per cent lower in FY 02 as compared to FY 01 as the imposition of GST was compounded by increase in CIF price of DAP which is fully imported. The CBR collected only Rs 1.2 billion as GST on fertilizer whereas the national economy lost agricultural output of Rs 4 billion. Moreover, the paltry amount of Rs 1.2 billion along with Rs28.8 billion of tax money poured into the UBL to make it privatizable to an English knight and a Gulf prince.

The production of major crops in FY 02 was -0.5 per cent less as compared to FY 01. And it was -9.8 per cent less in FY 01 compared to the previous year. Hence we have to increase agriculture output by 10 per cent to reach the level of FY 00 which is highly unlikely and more so if we persist with GST on output-enhancing inputs like fertilizer. One must admire the candour and courage of the finance minister in admitting that the GST on medicines was a mistake. He must with similar courage and candour admit that GST on fertilizer is a mistake and is hampering agricultural output.

In Pakistan 90 per cent of the agricultural output depends on irrigated water. However, almost 50 per cent of the water released from the canal head-works is lost through seepage. If canals, distributaries etc. could be lined with cement, much of this seepage could be reduced and the water availability to the crops correspondingly increased. But cement is very expensive in Pakistan and the cement industry has its own irony. It has a capacity of about 17 million tons whereas its offtake is only 10 million tons. Moreover, there is an excise duty of Rs 1000 per ton and GST of 15 per cent on the sale price which includes excise. If the cement factories be persuaded to sell at their variable price and the government gives refund of excise and GST, cement could be made available at Rs 2000 per ton and the farmers association along with the government could set up the machinery for lining the canals.

There are at present more than 200 factories, which are closed due to number of reasons. No one is prepared to buy them with their liabilities. The practical recourse is to lease them to the best available bidders through open auction. Otherwise the machinery and other equipment in these mills is depreciating year by year.

Pakistan has vast resources of gas and fewer of oil. The success rates of digging wells for oil/gas is 50 per cent in Pakistan whereas the world average is 10 per cent. However, the wells discovered are not very big and we are still digging for a guzzler. Even these small wells are the best returns on investment in Pakistan and about half of FDI is in oil and gas sector. This sector needs to be encouraged by providing more resources to OGDC which has had a series of success. And by providing better security cover to foreign drilling companies.

We should also give up the pipe dream of attracting very large FDI as in China, which attracts $50 billion each year. The reasons are not for to seek. Firstly the security situation is not good. Secondly, utility rates are among highest in the world. Thirdly labour Is uneducated and under-skilled. Fourthly we have too many regulations inefficiently administered.

The new government has taken a very commendable step in reducing the electricity tariff by 12 paisas per unit. However, it was depressing to read the statement by the Advisor on Privatization that government will continue with the IMF-dictated policy on privatization, which is not in national interest. Firstly no profit making public enterprise should be sold as they help to reduce the budget deficit. Moreover, big vital and strategic units like the OGDC, the PTCL, the PSO and the HBL should not be privatized to foreigners who may be cover agents for countries which could be hostile to Pakistan. If we privatize PSO, the entire oil distribution in the country will be in the hands of foreigners. The fact that in national crisis the foreign oil distributors could choke supplies needs to be appreciated by strategists sitting in higher policy making. The same is true for PTCL. If we privatize OGDC, the rate of drilling oil and gas wells will be determined by multi-nationals and not according to the needs of Pakistani economy and in long term growth. Electricity distribution companies and units like Falettis should be privatized in a thoughtful sequenced manner and not as an IMF theology.

We are seeing a new democratic dawn in Pakistan. It would be tragic if the democratic government persisted with the IMF-led policies of the previous government. In short we need to take a different path with measures as summarized below:

1) Increase in the PDSP by 2 per cent to 5 per cent of GDP by increasing taxes and borrowing from the SBP on concessional rates rather than from commercial banks.

2) Drastically improve implementation mechanism of social sectors and install a computerized monitoring system for tracking the progress of social sector schemes, zakat and poverty alleviation programme.

3) Create at least ten thousand plots in every city and allocate Rs 10 billion credit for housing sector as every Pakistani has a dream of owning a house and there are more then 20 million families in Pakistan.

4) Remove GST on fertilizer and pesticides as no country in the world has 15 per cent GST on these items.

5) Encourage lining of canals by duty drawback and persuading manufacturers to sell cement at variable price.

6) Lease out all closed industrial units at best available prices.

7) Give a big boost to drilling for oil and gas by diverting resources from big dams to OGDC and providing better security cover to foreign drilling companies.

8) Stop privatization of strategic assets like PSO, PTCL, OGDC and HBL as selling them to foreigners would not be in national interest.

Pakistan had an average growth of more than 6 per cent in 1980s. In 1990s the GDP growth averaged more than 4 per cent. In the two years of the current decade it has been less than 4 per cent. To raise the GDP growth rate to 6 per cent, reduce poverty and unemployment and saving strategic units from predatory foreigners should be the first priority of the democratic government.

(The author is a former Secretary, Planning)