May 5, 2003	Monday	Rabi-ul-Awwal 2, 1424

The fears expressed prior to elections that once an elected government was in place it would become well neigh impossible for the new chief executive to own up completely the economic reform agenda as agreed by the non-elected government of President General Pervez Musharraf with the multilateral donor agencies seem to be coming true.

Already reports have appeared in the press that the World Bank has withdrawn a $350 million structural adjustment credit (SAC) III because the deadline for passing the fiscal responsibility law and anti-money laundering law could not be kept. Moreover, the WB is said to have taken a very dim view of the failure of Wapda and the KESC to overcome their losses despite all the reforms that the two organizations underwent over the last several years. The slow pace of privatization also seems to have caused the WB to take a fresh look at its SAC-III arrangement with Pakistan.

This is not all. Even the IMF is said to have delayed the process of fifth review relating to the 3-year Poverty Reduction and Growth Facility (PRGF) amounting a total of over a billion dollars. As a result it is feared the disbursement of the fifth tranche of $117 million would also be delayed.

According to press reports, the IMF’s ire in this case springs from the failure of the Pakistan government to present an acceptable financial improvement plan (FIP) for Wapda and also because its attempts to back off from its promise to withdraw at least 55 tax exemptions in the next budget.

The multilateral donors seem to have come to the conclusion that the present political government was incapable of keeping the element of populism from the process of economic decision making. That is why they believe it is dragging its feet on decisions relating to increasing the utility charges, downsizing of public sector enterprises for privatization, reduction in the size of the government and reforms envisaged in civil service, police and judiciary.

The donors also appear to be not very happy at the seeming unwillingness of the political government to take firm action against those in the province of Balochistan who are trying to disrupt the supplies of gas to other parts of the country.

And, indeed, the way things have taken shape on the economic front since the advent of the new government it appears that the element of continuity has been confined to periodic announcement of intentions only. The on ground political realities seem to have compelled the new government to disown rather quietly the ‘reforms’ that were launched by the military government and which are in the process of implementation.

The political government while appearing justified in trying to tailor the reforms to suit its own political limitations and strengths, however, seems to have ignored the havoc that continued adherence to the policy of economic stabilization is playing with the real economy. As a result, investment has continued to stagnate. Though the interest rates have come down considerably but still the private sector appears too apprehensive to make use of the seemingly more economical capital perhaps because the system of under the table greasing of palms continues. Large number of private entrepreneurs continue to be deprived of investment capital at the official rates.

They still have to borrow at very high rates because of being ‘high risk borrowers’. In order to become low risk borrowers, these entrepreneurs are made to cough up the balance of capital cost under the table. Bankers on the other hand complain that it is becoming increasingly difficult for them to keep their operations reasonably profitable because of the shrinking spread between the interest rates being charged to borrowers and depositors.

The increasingly inadequate supplies of social and physical infrastructure is said to have also acted as a stumbling block in the way of an accelerated investment activity in the country. The educational institutions are said to have failed to produce persons with the right kind of skills in the right quantity because of which the investors both the local as well as the foreign feel reluctant to launch major industrial ventures requiring skilled manpower. On the other hand, the lack of enough physical infrastructure facilities like roads, bridges, ports and railway tracks as well as costly utilities make even medium sized manufacturing enterprises difficult to be taken in hand.

The textile sector has been the main focus of our private sector investors. In fact one could easily discern excess capacity in this sector and a lot of which has become sick. What would happen to its ability to earn foreign exchange through exports in the wake of the phase-out of the Agreement on Textile and Clothing (ATC) due by end-04.

According to the latest ABN AMRO Economy Watch ( April 30, 03) the news on the diversification front appears to be less than optimistic for upto the medium term, given the strong linkage between export growth and fixed investment in prior periods. According to this report since over the last few years almost the entire investment in the export sector appears to have been concentrated in the textile segment, it is unlikely that non-textile exports will experience a boom large enough to compensate for any loss of textile exports (should one occur) in the aftermath of ATC phase-out.

A recent Asian Development Bank report says that in the medium term while the rate of inflation would start going up, the rate of unemployment too would increase. This would mean that while on the one hand investment rate would continue to stagnate culminating in expansion in the sea of unemployed and shrinking of supplies, the increase in demand accelerated by the enhancement in the inflows of remittances from overseas Pakistanis would start pushing up the prices making the life of even middle class families very difficult.

It is, therefore, now time for the government while it is in the process of tailoring the donors’ reform agenda to fit its political strength, to also give a fillip to public sector investment in social and physical infrastructure projects. This will make available , say in the medium term, enough skilled manpower to manage investment in real economy and create the needed infrastructure capacity to accommodate and absorb the expected acceleration in the rate of investment. And in the process it will generate enough jobs, put money in the hands of the people at large to spend, thus spurring more investment activity.

However, if the government continues to follow the economic policy based solely on the prescription of the IMF and the World Bank, which know no other way of reforming an economy except by squeezing the under-privileged and by handing over even the most basic obligations of a government like health, education, water supply and energy to the private sector whose motivation has never been anything other than profits, then the country is likely to head straight on the path which took Argentinean economy to its disastrous end.