February 24, 2003	Monday	Zul Hijjah 22, 1423

Will heavy and accelerated borrowing from international financial agencies to reduce the pervasive poverty in Pakistan bring real relief to the very poor?

Poverty reduction has now become a major concern of the international aid agencies after 25 per cent of the world’s population of six billions have been found to be living below the poverty line of a dollar a day, but will the stepped-up borrowing from those agencies for reducing poverty in Pakistan deliver the promised dividend in a real and sustained manner?

Pakistan can fight poverty in its midst, which affects about 40 per cent of its population without big loans, but in a country where poverty is increasing instead of decreasing, that is going to take a long time and the people are not ready to wait that long or almost indefinitely. Secondly, any major reduction in poverty would call for large social and political changes of a structural kind for which the ruling and owning classes in the country are not prepared. They would only make token concessions to the poor instead of agreeing to restructure the society altogether.

It has now been estimated that Pakistan needs about $6 billion initially to fight poverty, reduce it substantially within three years and place it on the road to the kind of economic growth that will reduce poverty.

A large part of such assistance is available from the Asian Development Bank, World Bank and the IMF who are coming up with aid designated to fight poverty. The Asian Development Bank has committed itself to $2.4 billion over a three-year period. The World Bank has indicated it is ready to offer $1.8 billion in three years. And the IMF’s Poverty Reduction and Growth Facility offering $1.3 billion is to expire by the middle of next year. The Asian Development Bank has indicated it may be ready to raise its annual contribution to one billion dollars.

Committing itself to the $2.4 billion package, the ADB has also clarified that if the aid is well-used for poverty reduction or social sector development. And if the aid is not well-used that may be reduced or delayed instead of wasting it.

Such large aid is not for free or a grant; but the World Bank proposes to give $600 million each for three years beginning with the current year, at the IDA terms which is virtually interest-free. And the assistance to be obtained from the ADB is at an interest rate of 0.7 to one per cent which is far cheaper than the rate of interest for domestic loans even at the current interest rate for Pakistan Investment Bonds which has come down to 3.5 per cent - way down from the 17 per cent the government used to pay as interest for its loans from banks and others.

If foreign loans have always been cheaper than domestic loans in Pakistan for the government, they have become far cheaper now. Hence the government’s interest in obtaining foreign loans despite the foreign exchange reserve the country has been able to build up. And now that the dollar has come down in relation to the rupee by 10 per cent the government feels it is judicious to get foreign loans at nominal rates of interest.

However the Advisor on Finance to the PM, Mr Shaukat Aziz, is firm he does not want a new package from the IMF after the current three - year Poverty Reduction and Growth Facility, with its $1.3 billion,expires by the middle of next year. While the aid which comes through IMF is small it comes up with too many rigid conditionalities and he finds the domineering attitude of its junior officials even less acceptable.

But even if Pakistan does not seek a new package from the IMF, the IMF approval of our financial management and certification of the good health of the economy will continue to be essential when we seek assistance from the World Bank or the Asian Development Bank or private foreign banks.

Before the new World Bank package becomes available the elected government, including the provincial governments, have to approve and adopt the Poverty Reduction Strategy Paper which had been approved by the military government led by President Musharraf. And that approval with a clear commitment to make a success of it has to come before June for the programme to start from the next financial year.

The aid indicated by the international agencies is subject to Pakistan fulfilling a good many conditionalities, including upholding and speeding up the reforms already underway and implementing in full the agreed reforms.

The reforms as a whole are designed to ensure good governance and effective use of the aid committed and more to come. It is led by the comprehensive finance sector reforms, which include a thorough revamping of the Central Board of Revenue for which external financial assistance already has been made available. They want the CBR reforms not only to plug the vast leakages in revenue collection and increase the revenues but also make it easy for the people to pay the taxes.

The government is committed to doing away with about 55 income tax exemptions when the next budget is presented in June. And that will follow 55 other exemeptions which have been withdrawn when the current budget was presented or had lapsed as they were time-bound. Among the major taxes which have gone is the wealth tax which was too nagging for many people in the manner it was levied and collected.

The tax exemptions to he done away with in June are to affect government employees and pensionsers who have been given various reliefs. And there can be an uproar in the central and provincial secretariats. The Jamali government may find it hard to dismiss the clamour of the government employees or increase their emoluments correspondingly to make up for the loss of their income.

The government has also to go ahead with its privatization programme as committed, though if there is a war on Iraq that may upset this carefully prepared apple cart. The PSO privatisation is going ahead as scheduled and bids are to be invited by April 26.

But the young Communications Minister Awais Ahmad Khan Leghari says privatization of Pakistan Telecommunications Ltd will not take place if the bids did not cover the Rs 32 billion revenues of the company, including Rs 19.5 billion as profits and Rs 12 billion as taxes.

At the same time he says the government is losing Rs 90 billion annually through the public sector units. Earlier the figures was Rs 100 billion. Has the privatization done so far reduced that loss by Rs 10 billion? Now what about privatizing the Habib Bank and the KESC and the gas companies? The Balochistan government does not want total privatization of Pakistan Petroleum Ltd relying mostly on gas from Sui in Balochistan. The provincial government wants to acquire its shares and manage the company and its cabinet has passed a resolution in that regard and the governor has approved that, while that takes the federal government and the aid agencies by surprise altogether.

The aid agencies also want civil service reforms, police reforms and judicial reforms for which subatantial funds have been earmarked under separate heads. There are funds for local government development as well as democracy reforms. You name a reform, they have a fund for it. The question is how effective are the reforms or how well they are sustained? They want the right-sizing of the government at the federal and provincial levels as the provincial governments too are now seeking external aid directly. They want the right people to be appointed for the right job. And they want pay and pension adjustments according to merit. They want the same kind of reforms in autonomous bodies.

The agencies also want deepening the banking sector reforms, strengthening the supervisory and regulatory capacity of the State Bank. The World Bank is ready to extend the maximum technical assistance to carry out such reforms.

The World Bank also wants the government to improve its public service delivery mechanism which, in the case of the utilities in particular, is atrociously poor. The break-down in the supply of water and power is too frequent and too exasperating. And it would need a virtual revolution to improve such systems.

Above all, the aid agencies want good governance reforms. That would demand rule of law uniformly and observation of rules by government officers within their offices and enforcement of law by the police and the judiciary. All that may be a far cry from what obtains today. But without such reforms effective and sustained poverty reduction will be an illusion, and we may have far more loans in the name of poverty-reduction and far more poverty than before and greater human misery.