NO matter what amount of spin government spokesmen put on the burgeoning of Pakistan’s foreign exchange reserves as an outcome of good economic and financial management, the fact is that, notwithstanding the better macro-economic management that this country has witnessed in the last three years or so (which has certainly made its contribution), our change in fortunes has more to do with the events of September 11 than with any other factor.

Government spokesmen claim that the increase in reserves is one of the signs that the economy is on the mend, if not about to take off. The expected growth rate of 4.5 per cent for this year, when the rest of the world is experiencing a slump (less than one per cent in the eurozone and less than 0.5 per cent in Japan), is a notable achievement, which reflects the growing strength and resilience of, and confidence in, the economy, especially because two of the sources of the growth in reserves are the increase in exports and private remittances, — that is, non-debt creating flows, that are not reversible.

However, a closer look at the composition of these reserves will reveal that a significant part of their accretion is attributable to the grants from our western allies for services that we rendered post-September 11 and the State Bank’s purchases of foreign exchange from the banks and from the open market — this activity accounting for close to 60 per cent of the stock of reserves. These are abnormal, one-time flows, not based on historical trends.

Moreover, there were other factors contributing to this build-up of reserves which were debt creating, being money lent by the IMF, World Bank and the ADB and the deposits parked with domestic banks by non-resident Pakistanis. The inflow of external remittances through formal banking channels instead of being channelled, as in the past, through the hundi system, has saved the State Bank, and thereby the government, the premium of rupees three to four that had to be paid by the State Bank to buy dollars from the informal/kerb market.

In view of the above factors, some argue that this growth in reserves is not truly reflective of a strong economy that is poised for a take-off. They argue that there is disjunction between the performance in the external and internal fronts as increased foreign exchange inflows are not translating into real physical investments but finding their way into speculative investments in real estate, into the secondary capital market represented by the stock exchanges and advance bookings for cars. Financial sector activities by themselves contain limited forward and backward linkages, unless they are strategically linked to real sector activities and to the overall performance of the economy.

Why should we be maintaining large reserves of dollars, for which Americans should be grateful to us, for holding their currency essentially as a non- or low-income generating asset? The benefits to us of maintaining large reserves include the improved exchange stability of the rupee, greater confidence in Pakistan’s ability to carry out external transactions, honour its obligations and withstand shocks, and hence serve as a security blanket for external investors, while sending positive signals to rating agencies, although all gains are quite difficult to quantify.

While the opportunity cost of maintaining high reserves includes the cost of not prepaying foreign debt, foregoing trading and investment opportunities (the latter in high interest earning securities), the investment by the State Bank in lower yielding instruments is likely to reduce its profits by Rs. 15 to Rs. 18 billion on a full year basis. As a result, it will be interesting to see a big shortfall in the State Bank’s actual profits, compared with the Rs. 26 billion estimated as a potential receipt in the federal budget for this year. Moreover, despite the brave face it is putting up, the State Bank is clearly at a loss on what to do with these reserves essentially lying idle or in extremely low-yielding instruments.

To prevent the increase in reserves inducing inflationary pressures, the State Bank has chosen to contain monetary expansion through the sterilization of these reserves (mopping up the additional rupees in the banking system from those who surrendered their foreign exchange to the State Bank) through open market operations involving sales of government securities. In 2002 the open market operations of the State Bank were almost five times those in 2001, and roughly equal to the increase in foreign exchange reserves, reflecting the extent to which the State Bank through open market operations absorbed the foreign exchange reserves.

In the face of the unrelenting accumulation of reserves, the State Bank has been selling government securities to absorb the additional liquidity injected into the system in the process of buying up dollars. This abundance of liquidity in financial markets has facilitated large government borrowing at continually declining interest rates. All these activities and outcomes have become much more pronounced during the current financial year.

The commercial banks and other financial institutions have also opted for the easier path of pumping this liquidity into government paper. Apart from being risk averse and fighting shy of financing all but the very creditworthy in the private sector, banks have also been lazy and continuously making large investments in government securities well beyond the statutory requirements, even after the sharp decline in the yields of such instruments. The increase in market borrowings by the government has resulted in the pre-emption of the lendable funds of banks. The asset portfolio of scheduled commercial banks shows that their investments in government securities have grown appreciably. As a result, the investments of banks in government securities as a percentage of total deposits were, at 30 per cent, double the statutory requirement of 15 per cent.

Resultantly, the link between liquidity, credit, money and economic activity appears to have been severed as a result of the continued over-investment in government securities as a substitute for bank financing to the commercial sector. Banks are reluctant to bring down their lending rates commensurate with the decline in the rate of return being offered to depositors, with the burden falling more on small and medium enterprises, which have limited access to funds.

Throughout the 1990s monetary expansion was the result of an increase in net domestic assets of the State Bank which induced an expansion in bank credit. In the last one year and a half the monetary growth has been accounted for by the increase in the foreign exchange assets of the State Bank, with some of the sterilization by the Bank taking place through a reduction in the credit lines to domestic borrowers, with the shrinking in the role of banks as sources of money. The high share of net foreign assets is the outcome of a conscious policy of the State Bank to intervene in the market for foreign exchange to keep the exchange rate lower than it would have otherwise been the case.

There is no doubt that the experiences of the last 18 months or so are a sharp break from the past. However, is the improvement in the external account in the face of slowing international demand a sign of greater competitiveness of the economy? Or is it that since domestic demand is weak industry is offloading its surplus inventories and production in international markets? If this indeed is the case then imports and widening trade deficits could quickly mop up the reserves as domestic demand picks up.

Also, the attack on money laundering networks which resulted in more stringent rules being applied, could have caused huge sums of illegal, unaccounted for, money in international capital markets to look for safer heavens. It is, therefore, quite possible that some of this money through over-invoiced exports and remittances, — hot money trying to dodge legal barriers — could flow back with the same ease.

The writer is a former finance minsiter of Punjab.

ON March 7 President Musharraf, in a message on the occasion of International Women’s Day, asked the nation to work for upgrading the status of women in society and for ensuring their effective integration into the mainstream of national development. He continued by saying it was an important day as it reiterated the commitment of all nations to the cause of women development.

According to the president, women were free to enter professions of their choice, both in the public and private sector, and he urged everybody to join hands on that auspices day to achieve the goals set by the UN. There was that point about the government of Pakistan having declared 2003 as the year of Madare-e-Millat, and somebody had coined the slogan of women and men being partners.

Then came the punch line. “By implementing this (enhanced representation of women in legislatures), we have given the future of women in the hands of women. Now it is up to them to use this empowerment and make a shift in focus from dependency to development. The rights of women are enshrined in the Holy Quran and the Constitution also covers gender equality. Article 25(I) states that all citizens are equal before the law and are entitled to equal protection of law and there will be no discrimination on the basis of sex alone.”

As a message, it was stirring stuff. Something that would have warmed the hearts of the late Emily Pankhurst and her suffragettes. But the president did not offer any guidelines on how women were expected to achieve the goals set by the UN, especially when their less fortunate sisters in the interior of Sindh and Punjab are being killed on an average of three a day, often on the flimsiest of excuses.

Since catching and punishing men who kill in the name of honour, is not really the job of the military, or the Rangers, or the para-military forces, and also does not appear to be of much concern the police who, in any case, take bribes and look the other way when a fourteen-year-old girl is ravished on the orders of a panchayat, what does the president expect the newly ‘empowered’ women to do? They could pray that somebody like Lee Kuan Yew and his Chinese police would fall from the skies. Or they could follow the example of the Neapolitan Comorra, by financing gangs of armed vigilantes to roam the rural hinterland in pursuit of men who murder their daughters, sisters and mothers, often because of a property dispute.

Whenever the issue of the total helplessness of rural women comes up, one is reminded of that terse scene in Richard Attenborough’s film Gandhi, in which General O’Dyer is being questioned by a panel of judges after the Jallianwalla Bagh massacre.

One of the interrogators turned a gaze of innocent inquiry on the general and asked him what he would have done if the women and children in the park had cried out for medical assistance. Unfazed and unrepentant, the general said that if the wounded women and children had asked for medical aid, he would have provided it. The interrogator then fixed the general with a cold stare and asked: “How does a child ask for medical aid if a hail of bullets from 303 rifles are flying all around him?”

There was a couple of seminars in Islamabad to commemorate Women’s Day, where the audience consisted of the usual mix of government functionaries, foreign guests and people who had nothing better to do at ten in the morning. Everything recognizably bureaucratic was pulled out of the bag at these two seminars. There were speeches which boasted a triumph of style over substance, sizable presence of officials who nodded with perhaps a little too much enthusiasm every time the man or woman behind the rostrum made a point about the new direction in which the country was heading. And some handouts that gave the impression that it would not be long before the women of Pakistan would be as free as the women of the former Republic of Yugoslavia under Josep Broz Tito. One woman did, nevertheless, inject a little life into the charade when she said that the women in the National Assembly, both of the veiled and the unveiled variety, were purely decorative, and it would be naive to expect anything from them.

But before the newly ‘empowered’ women get carried away, they should pay heed to what Feryal Gauhar, the UN Goodwill Ambassador, had to say on the subject. A glance at some of the statistics that were presented by her at a seminar held on the Human Rights Day in South Africa, read like a page from the diary of a serial killer. She has presented the desperate plight of poor women in Pakistan, especially in the rural areas, in graphic detail.

During the first quarter of 2003, 212 karo-kari deaths were reported, and around 50 per cent of these took place in Sindh. All these crimes are committed by the male members of the family. The figures for 2002 are equally revealing. In 346 of the 823 cases reported, the perpetrators were husbands of the victims, in 92 cases it was the in-laws, in 83 cases brothers, in 46 cases fathers and in 32 cases the sons of the victims. That is not all. Out of the 823 cases reported last year, 20 of the victims were minors. The statistics were peppered with unpleasant details. Between 70 and 80 per cent of women in Pakistan suffer domestic violence. And almost 100 per cent of women are victims of other forms of abuse, like being neglected as a child, being denied proper nutrition and a decent education, and the choice of a marriage partner.

Every adult male in this country who has even half a brain knows what is going on in the rural areas from where only a fraction of the actual killings is reported. The president and the government also know what is going on, but they choose to ignore these reprehensible happenings which continue to give a bad name to the country. The foreign minister regularly protests against human rights violations in Chechnya and Palestine. But what about human rights violations in Pakistan?

One has always been intrigued by the use of the word ‘honour’ as a prefix for the word ‘killing’. , which is intended to suggest that taking another person’s life is justifiable under certain circumstances. The French have something similar which they refer to as ‘crimes of passion,’ where judges have shown considerable leniency when doling out sentences. But the circumstances under which these crimes are committed are vastly different from what happen in Pakistan.

After the end of World War II , a number of French soldiers returning home, unexpectedly, caught their wives in conditions of in flagrante delicto. The soldiers reacted the only way they knew how and killed their wives and their paramours. But does anybody seriously believe that the women who are being killed in the interior of the country are being punished for infidelity?

Webster’s Dictionary devotes 19 centimeters of definition in extremely small type of the word ‘honour.’ After ploughing through the morass of words one could not come across a single reference would offer even a remote justification for the kind of activity which takes place in the towns and villages of this country. Honour killing is murder and must be tried under Section 302 of the Penal Code of Pakistan.

The National Assembly would not touch the issue with a barge pole. Nor will the Senate. In fact, when the issue of honour killing was once raised in the upper house, the honourable Ajmal Khattak said, “Honour is not an issue that can be discussed.” The honourable Waseem Sajjad, then the chairman of the Senate, readily agreed. And so did the other honourable members of the chamber. The new, ‘empowered’ women certainly have a problem on their hands. By the look of things, the millstone should be around their necks for at least another 150 years.

GEORGE BUSH may be averse to reading up on the Vietnam war, which he managed to duck, but how about recalling the famous “rumble in the jungle” in the Congo, the heavy weight fight between the unbeatable George Foreman, none of whose opponents had lasted more than three minutes in the ring, and the up and coming, always boasting, Muhammad Ali?

The fight was at 4.a.m so that the air was cooler and the American TV audience could watch it in prime time. In round two, the weaker Ali appeared to cower against the ropes and Foreman pounded him again and again, whilst Ali whispered taunts in his ear, “George, you’re not hittin’” and “George, you disappoint me”. Foreman lost his temper and his punches began to flow wild, while Ali let the spring in the ropes help him absorb those he landed. By the fifth round Foreman was exhausted and in round eight Ali simply knocked Foreman to the ground and he stayed there.

History is replete with examples, long before Vietnam, when the weakest win. In his book “Why Big Nations Lose Small Wars” Andrew Mack argues that a country’s relative resolve explains success in what the war jargon now calls asymmetric conflicts. And Stanley Karnow in his landmark study of the Vietnam War observes, “As a practical strategy the bombing backfired. American planners had predicted that it would drive the enemy to capitulation, yet not only did the North Vietnamese accept the sacrifices, but the raids rekindled the nationalistic zeal, so that many who may have disliked Communist rule joined the resistance to alien attack.”

It goes without saying that victories of the weakest are a minority outcome. One doesn’t have to go back to Thucydides to be convinced of that — the bombing of Afghanistan, Belgrade and the first Gulf war are evidence enough. Yet it happens enough to be worrying. Ivan Arreguin-Toft writing in Harvard University’s “International Security” has examined all the wars of the 200 year period 1800 to 1998 and found two related puzzles.

Weak actors were victorious in 30% of all wars and that in the more recent era it has happened more often. Could it be that strong countries have a lower interest in winning because their survival is not at stake? (The opposite case being true for the weaker party.) Delays and reverses on the battlefield all work to discourage war-weary publics from pursuing a war, if victory seems very far away. Guerilla warfare as perfected by Mao Zedong has been one, well copied, way of reversing the tables. “In guerrilla warfare”, the victor in the Chinese civil war wrote, “select the tactic of seeming to come from the east and attacking from the west; avoid the solid, attack the hollow; attack; withdraw; deliver a lightning blow, seek a lightning decision.” It was probably Mao’s contribution to military thought, influencing wars in Cuba, Algeria, Malaya and the Mujahideen against the Soviet forces in Afghanistan that has changed the balance of the statistics in favour of the weaker one winning over the last half century.

Since strong actors tend to have inflated expectations of their own superiority such tactics can be extraordinarily demoralising, extending a war long after it seems than the conventional forces have been defeated. (The war in Vietnam continued for four years after the US military concluded they had “defeated” the enemy.) The US should try now to put itself in Saddam’s shoes.

Unlike last time Saddam now knows that he is at an immense disadvantage. His air force has gone, half his navy is destroyed, and half his tanks. He probably has no nuclear weapons, but does have chemical and biological weapons with fairly primitive means of delivery. How does he turn the tables? Clearly his objective should be to draw the U.S. into urban guerrilla warfare, not to meet a military advance head on in the desert as last time. Neither should Iraq even consider an attack on Israel.

This urban warfare against the American invaders will be a bloody affair, causing immense civilian suffering, which doubtless will be aired on television all over the world, putting immense pressure on the American leadership to get the war over quickly. At that point Saddam could attack the American supply lines from the rear with chemical weapons, disrupting the fighting and weakening the urban offensive.

The U.S., deeply engaged in the cities and towns of Iraq, could not reply in kind, even if wanted to, since this would stymie its own forces as much as the enemy’s. Saddam’s strategy has to be as much psychological as military — to convince neighbouring Arab and Muslim populations that an injustice is being done, and thus precipitate upheaval and political change in the most vulnerable states, Jordan and nuclear-armed Pakistan in particular, whilst causing real headaches for the regimes in Saudi Arabia and Egypt.

At the same time, since he knows that the support for going to war with Iraq has been a very volatile matter inside the United States itself, with polls showing wildly different moods over a relatively short time span, he will do his utmost to make the fighting as bloody as possible and push the U.S., as the French did in Algeria, to overreact and use methods that bring it into disrepute, knowing that world opinion will hold the U.S. to a higher standard than Iraq. And then remember Murphy’s law: what can go wrong will go wrong. — Copyright Jonathan Power

HISTORICAL analogies are often misleading, but have you noticed that Saddam Hussein, in recent TV broadcasts, looks more and more like Joseph Stalin? That’s how he’s positioning himself politically, too.

Like Stalin during the Second World War, he is effectively telling Iraqis to forget about the socialist ideology, the purges and all the rest, and unite against the foreign invader. As in the old Soviet Union, a lot of the citizens seems to be listening.

Stalin’s finest hour was in 1941, when Hitler invaded the Soviet Union with the confident expectation of destroying it in a matter of weeks. He had this brilliant new military technique, blitzkrieg, which allowed relatively small numbers of German troops to spread ‘shock and awe’ among the defenders (the phrase was first used in the Nazi magazine ‘Signal’) and achieve a rapid victory at low cost.

The blitzkrieg technique had beaten France in six weeks in 1940, and Hitler calculated that it ought to work even better against the Soviet Union because the vast majority of Soviet citizens hated Stalin and the Communist Party. Stalin’s secret police had murdered millions of people, and all the non-Russian citizens of the multi-national empire Soviet Union (essentially, the old Russian empire) hated Russian rule. So masses of Soviet troops would defect at the first opportunity, and the non-Russian half of the population would greet the Germans as liberators. Sound familiar?

In July of 1941 the German army launched its armoured columns into the Soviet Union in Operation Barbarossa, and within weeks its tanks were many hundreds of kilometres (miles) inside the country. Hundreds of thousands of Soviet troops were cut off and left behind as the tank spearheads raced for Moscow; points of resistance were bypassed in the interest of speed; ‘shock and awe’ was the essence of the strategy.

But the cut-off Soviet troops did not surrender, the garrisons of the bypassed towns attacked the German supply lines, and the people did not strew roses at the feet of the invaders. Most Soviet citizens remained loyal to their country despite the monstrous character of its ruler. The German spearheads ultimately got quite close to Moscow, but after such delays that winter closed their offensive down and the Soviet capital was never captured. Instead the war turned into a nightmare battle of attrition that eventually destroyed the German army.

This history offers some precedents that must be keeping the current commanders of the American forces in Iraq awake at night. This is not to imply that George W. Bush is like Adolf Hitler, or that the US government’s goals in Iraq resemble Nazi Germany’s in the Soviet Union. But American military strategy now does resemble German military strategy then, and there are equally close parallels between Stalin’s Soviet Union and Saddam Hussein’s Iraq.

Look at the US strategy in Iraq. It depends on ‘shock and awe’, mostly in the form of air power delivered right on target (Stukas then, cruise missiles and JDAMs now), to bewilder and demoralise the defenders. It bypasses points of resistance, ignores traditional military wisdom about securing your lines of supply, and heads straight for the capital. Above all, it depends on the assumption that the enemy state and ruling party are so rotten, the enemy’s ruler so universally hated, that the whole edifice will collapse at the first hard push. But it didn’t in the Soviet Union, and it hasn’t in Iraq.

Iraq under Saddam Hussein’s rule has always been essentially a Soviet-style state. Indeed, during the 1970s, before war and sanctions ruined Iraq’s economy, the ruling Arab Renaissance (Baath) Socialist Party used Iraq’s oil revenues to built a very impressive welfare state: free and universal education, free health care, subsidised housing, the lot.

The wars were Saddam’s fault (though they were not simply cases of unbridled aggression) — but the reason he survived them is precisely because he is a mini-Stalin. —Copyright