Economy in light of budget
By Dr Akhtar Hassan Khan
THE articles by Sultan Ahmed and Shahid Kardar in the editorial pages seem to ignore the cardinal fact that any budget is indicative of marginal and not structural changes. Both of them have lamented on age-old weaknesses of Pakistan’s economy and its budgetary mechanism.
We should realize if we are realistic that structural changes in Pakistan’s economy can only be brought about by the replacement of the existing policy-making elite by a group which is less western, far more dedicated and sensitive to the poor. Budgetary changes are inherently marginal and in the existing socio-economic set-up, there can be only marginal changes.
An economy, like a coin, has two sides — one side is financial and the other is real. Normally they are two sides of the same thing, but often they present a different picture. In 2002-03, the financial side has done extremely well whereas the progress on the real side is tainted. But it is important to analyze the situation from these two different sides, which are inherently connected in order to reach a balanced conclusion.
The financial side has been boosted by an avalanche of remittances, which increased from one billion dollar in 2000-01 to two billion dollar in 2001-02 and now over four billion dollar in 2002-03. It is wrong to attribute the entire increase to 9/11 and subsequent elimination of hundi and increased insecurity among Pakistanis in the western world. The rate of increase from the UK, US and Middle East is almost the same.
Remittances have increased primarily because of a better rate of return on financial assets in Pakistan, as money everywhere, especially in an age of Internet transmitted information, flows to centres of highest returns. The weighted average return on National Saving Schemes (NSS) is 8.5 per cent and after deducting 3.4 per cent on account of inflation, the real rate of return is above five per cent. The real rate of return on corresponding Certificates of Deposits in the US is less than two per cent.
The second magnet is the stock exchange in Pakistan, which has outperformed all other stock markets of the world. In case of stock exchange, the sea flow of remittances is causing a self-perpetuating increase. As the remittances increased, they went into stocks and when stocks became more bullish, they attract more remittances. It is a textbook case of circular causation of an economic phenomenon.
The second tremendous impact of rise in remittances was to increase the liquidity in the economy. Interest rates have fallen across the board.
The rates of six-month and 12-month treasury bills fell from 15.4 per cent and 16.0 per cent in July 1998 to 1.65 per cent and 2.6 per cent in April 2003. Hence, the government can borrow more at cheaper rates and the burden of domestic debt went down from 48.4 per cent in June 2002 to 4.1 per cent of GDP in March 2003. In this short period of time, it is a substantial decline.
The most welcome change was the sharp fall in the weighted average lending rate from 14.2 per cent in January 2001 to 8.26 per cent in March 2003, a fall of six percentage points. Needless to say that a fall in lending rate leads to higher investment and now also in Pakistan higher consumption of consumer durables which should not be deplored.
Let more Pakistanis own cars, motorcycles, fridges, etc. The so-called PLS rate (it is never in loss) has also fallen by four percentage points. The spread between lending and the borrowing rate, which in developed countries is between two to three per cent, was eight to nine per cent in Pakistan reflecting the inefficiencies of our banking system and punishing good borrowers to accommodate for the losses on non-performing loans.
The spread has come down to six per cent, not because of any improvement in the efficiency of our banking system or reduction in the size of the non-performing loans (they have actually increased). The banks are flushed with money and cannot find borrowers. The advertisements for borrowers has reached the absurd limit of inducing people to go for holidays on borrowed money which any prudent person should not do.
The unusual financial beacon is the low inflation rate despite an increase in money supply. The consumer price index during July 2002 to April 2003 increased by only 3.3 per cent whereas money supply increased by 12 per cent and a large chunk of the 3.3 per cent increase was caused by an increase in utility rates. If they had remained stable inflation would have been in the region of 2.5 per cent.
There are three macroeconomic targets of all economies: an increase in GDP, stability of prices and a decrease in unemployment.
Most policy makers are prepared to trade off higher unemployment for lower inflation because inflation inflicts an inequitable burden on all except the rich asset owners.
The measures on the real sides are GDP growth, export growth, unemployment, productivity and poverty. The GDP growth rate for 2002-2003 has been estimated at 5.1 per cent, which is much higher than the 3.2 per cent average growth for the preceding three years. Agriculture has grown by 4.2 per cent, and manufacturing by 7.7 per cent. Construction, which has maximum forward and backward linkages and is most employment-intensive grew by only 3.4 per cent.
Electricity and gas had a negative growth of 3.9 per cent; normally it should be growing at the same rate as GDP. Services sector has been shown to grow by 5.3 per cent. Normally it should grow in tandem with the commodity producing sector. Mr Sultan is not correct in stating that last year’s GDP increased from 3.6 to 3.8 per cent. Actually, it has been reduced to 3.4 per cent, probably to provide a smaller base for this year’s growth.
Pakistan has been striving for last many years to achieve an export target of $10 billion-plus. Unfortunately, for the last three years, they have been falling short. This year we will cross this target by half a billion dollars. The export growth rate of 20 per cent was only exceeded half a century ago in the Korean boom years of early 1950s.
The exports have not been diversified in the sense that textiles still account for about two-thirds of our exports but there has been diversification in the sense that exports of traditional items like leather and carpets have decreased whereas exports of chemicals, engineering goods, marble and granite, cutlery and gems and jewelry — all non-traditional items have increased by more than 50 per cent although from a small base.
Even in textiles there has been more than a 30 per cent increase in high value added items like bedwear, knitwear, towels and readymade garments whereas increase in low value added item like cotton yarn and cloth was only three and 16 per cent, respectively. The increase in exports has been caused by a rise in value added items and a substantial increase in non-traditional items.
Unemployment figures in Pakistan are a foggy area, because there are no reliable statistics on changes in employment. In developed countries, there is unemployment compensation. When the figures of unemployment compensation rise, the unemployment is deemed to have increased.
In developing countries like Pakistan there is no such mechanism. It is not correct to compare unemployment in Pakistan with that in Germany and France because in these countries unemployment is rising despite declining population whereas in Pakistan the main cause of rising unemployment is new entrants to the labour force. The Economic Survey 2002-03 shows a fixed rate of unemployment at 7.82 per cent for the last four years. Neither the level nor the fixity of this figure is credible.
The most important measure of real economy is the productivity. Growth rates among nations vary according to the differentials in their productivity rates. The US economy has grown faster than EU economies because of a higher rate of productivity.
There is no data on agricultural or industrial productivity. However, the subsidy of Rs 55 billion for Wapda and the KESC shows that productivity in these two organizations is not increasing. The KESC is probably the only mega-city (more than 10 million populace) electric corporation, which is running in loss. Otherwise, in mega-cities with very low transmission losses electric supply corporations are money-spinners.
The KESC can only improve with the elimination of corruption and mismanagement. Nobody will buy it in the present state. There are no indirect indicators of growth in productivity in Pakistan.
Poverty in Pakistan has not decreased but rose by 10 per cent during last dozen years whereas in India it fell by 10 per cent during the same period. The decade of 1990s was very bad for the poor in Pakistan. It is interesting to note that the level of expenditure on government’s direct intervention programmes for poverty reduction like the food support programme and food subsidies declined during July-March 2002-03 as compared to the same period of last year.
It seems that PRSP (Poverty Reduction Support Programme) needs to be energized by higher allocations but more importantly by better implementation.
Mr Kardar is correct in stating that fiscal austerity ordained by the IMF has stifled economic growth. Our happy position on the financial front should enable us to get rid of IMF intervention because according to Nobel Laureate of 2001, Stiglitz, the IMF has a horrible record of ruining the economies of the developing world, the latest being Argentina. Sustained tutelage of the IMF can scramble Pakistan’s economy.
The government needs to ensure that its economic management will continue to improve because we are not going to have another doubling of remittances. We must sustain the growth in our GDP and exports with a stable price line for continuation of the existing momentum.
At the same time, we need to pay greater attention to poverty, productivity and employment so that the figures of good performance given by the government attract acceptability.
The author is a former Secretary, Planning Division, Government of Pakistan.


Engaging India at long last
By Ahmed Sadik
THOSE of us who have in the last few years been urging successive governments in Pakistan to take to the path of engaging India on a broad-based agenda have often been dismissed as soft liberals or pro-India. Of course, neither of these descriptions is correct.
But the more important thing is that those in government today are themselves now seeking a dialogue with India having arrived at much the same conclusion that serious talks with our eastern neighbour are necessary. And that too after having taken the longer route which in real terms is indeed the harder one.
In April 2001 Pakistan had a great chance of pulling off a direct bilateral deal at the Agra summit which politically would have shut off all the third parties that have been watching with glee or trepidation the South Asian ‘tamasha’ between India and Pakistan. Nevertheless, it is better late than never, because it is now pretty apparent that the public mood in both countries seems to favour a sustained dialogue between the two sides.
But one thing must be very clear: the negotiations with India are not going to be easy, particularly in view of the American nudging that is going on behind the scenes. It is indeed a prime necessity for us to take the high road to dialogue with India but surely we must also remain circumspect and not expect miracles from first contacts after a fairly long interregnum.
Without alluding to the proverbial ‘baniya mentality’ that is so often considered the hallmark of India, we must not forget that in the previous India-Pakistan meetings the Indians had come much better prepared than us and were able to hold their ground quite effectively on contentious issues.
In future an Agra sort of situation must never be allowed to recur. In short, the one-man show that we put up there must be avoided. It is good that this time our foreign office has shown foresight by categorically stating that talks are to be between the two prime ministers duly assisted by their respective teams of ministers and secretaries. It is indeed a good augury that politicians from both sides will come face to face with each other and exchange views. It will also be a great moment when the secretaries of the two countries have the opportunity to interact professionally and personally.
The fact that India-Pakistan meetings are going to be held means the beginning of greater and more frequent civilian contacts between the two countries which, I am sure, will be a great thing. With a wide spectrum of our people interacting with those of India, there is every chance of an increase in trade and tourism among many other things to follow. Naturally this will lead to the middle levels on both sides being in contact with each other through correspondence that would naturally flow out of the prime ministers’ meetings.
One thing is certain and that is that there will definitely be some headway even if the bigger issues do not melt away in the course of one or two meetings. Re-establishing normal or even near-normal relations will be a slow process and therefore the difficulties must not be underestimated. In fact, our functionaries will do well if they negotiate hard and meticulously in pursuit of our national interest as Indians do in pursuit of theirs.
Our professional and other interest groups like civil servants, traders, lawyers, judges, engineers, industrialists, educationists, scientists, and journalists, all need to be kept posted with what is going on. We need to get out of any notion that we will be negotiating with India because the Americans want us to do. As a nation we should decide, on the basis of our own perception of things, what kind of equation we should have with another country and what to do and what to avoid to defend Pakistan’s vital interests. Neither the Americans, nor for that matter anybody else, can tell us to abdicate our rights and interests as a nation. Inertia is always a self-inflicted malaise and its cure has to be sought by the person or nation so afflicted by getting rid of that state of mind.
Engaging India certainly does not mean that from a position of antagonism we may land ourselves into a revisionist situation. Because there are always some elements in our country who are both simple and gullible, mainly among the affluent as well as intellectual classes, who tend to fall into that sort of a trap.
There are serious thinking elements in India across the political spectrum and they are not necessarily restricted to the right-wing parties such as the BJP or the revanchist groups such as the Hindu Mahasabha and the likes of the RSS, the VHP/and the Shiv Sena, who may well think this is time for ‘overcoming’ with external support what they perceive as their ‘Pakistan problem’.
In their drive towards peace in the subcontinent they feel that the post-9/11, post-Taliban and post-Iraq situations may well prove opportune for them to be able, with western support, to neutralize Pakistan for achieving their hegemonic ambitions. This situation therefore calls for far greater vigilance, dexterity and skill on our part to decide on every option and proposal before us for normalization of relations with India. Our greatest peril may well be that the forces at work at the international level today may well try to lure us into arrangements with India that may prove a trap for us in the long run.
In treading the path of safety, security and progress in the new scenario that has come about in world politics in the last few years we do need to up our antennae against new and more virulent dangers to our country under the cover of globalization, poverty alleviation, macroeconomic stability, foreign investment and the like. These are not tasks that we need to pursue in order to strengthen our survival strategy under the new international rules of the game. Our aim should be to take good care of these needs without allotting any major comprise on fundamental national interests in the process.
So in our pursuit of peace and normalization, it is essential that we do not get ourselves into a blind alley through overenthusiasm about peace prospects by giving away our trump cards. The Indians are exactly trying to pursue this line in defence of their country’s long-term interests. Sovereignty is their number one consideration. One does not, therefore, see how the Indians can expect us to lower our defences. Indeed, the strength of our sinews have to be kept intact so that even without any sabre-rattling we can hold our own.
In the new regional and international scenario that is developing around us, we will have to face the situation squarely in order to meet the challenges that lie ahead. In this, the Musharraf regime’s efforts to civilianize the government need to be continued unabated. The country cannot afford another setback of the sort that overtook the Junejo government in 1988 when instead of being able to capitalize on an extremely advantageous situation in Afghanistan we handed that country over to the bigoted Taliban with all its attendant consequences.
So in today’s circumstances, while moving towards a durable peace with India, we must not throw away our trump cards and we must insist first and foremost on mutual respect for each other’s sovereignty. In doing so we must press for Saarc arrangements and not Indian arrangements in the region. We need to carry on board Sri Lanka and Bangladesh which are countries that matter but struggling to preserve themselves in tough conditions.
We, however, need to realize that the Kashmir problem can only be solved peacefully and not by military means. Our military preparedness has been costly but absolutely necessary to ensure own security and freedom of action. The example of France comes readily to mind, especially when it invested in its ‘force de frappe’(its nuclear programme) in the 1950s after the coming to power of General Charles de Gaulle. This was done in order to provide the conduct of French foreign policy enough margin of manoeuvre that it needed to re-acquire a respectable place in world affairs.
Pakistan’s nuclear assets are therefore an essential element in our quest for durable security. Unilateral disarmament or even reciprocal disarmament is not the solution of the security situation in and around South Asia. When the chips are down nobody comes to anyone’s help. In the ultimate analysis each country has to fend for itself and Pakistan cannot be an exception to this fact of life.
Negotiate we must with India because it is our great eastern neighbour. We must indeed engage India because there is a great deal of commonality between us, which can prove mutually beneficial. One hopes the negotiators on both sides will keep in mind that this also is a moment of great opportunity for South Asia.

