When one looks towards the stands taken by different governments viz-a-viz the health of the country’s economy during last many years, he finds that the public has been kept to live under camouflages.

The intention simply had been to paint a rosy picture of the economy. Here a few instances are discussed. Reduction of poverty: In May-June this year when discussions began on the achievements in the fiscal year 2002-03 (FY-03) and the shape of the budget for the fiscal year 2003-04 (FY-04), the Finance Minister had claimed that there had been a reduction of 0.8 per cent in the poverty level during FY-03.

This was a misstatement as is evident from the reports released by the International Monetary Fund (IMF) and the Asian Development Bank (ADB) which talk of increase in poverty. The Annual Report of the State Bank of Pakistan (SBP)for FY-03 (AR-03) also reveals that the poverty level has grown from 20 per cent to 33 percent during the last 15 years including the 4-year tenure of the present economic managers.

The AR-03 claims that the increase in poverty did not occur as a result of the policies pursued during the tenure of the present economic managers. This assertion in itself is a camouflage and does not reflect the reality for following reasons . (a) The retrenchment in the staff from public sector enterprises including the banks [ although retrenchment in the banks and closing down of the branches particularly in the rural sector did not correspondingly reduce the establishment expenditure which rather increased ], (b) sharp reduction in the interest rates on National Savings instruments seriously affecting the middle/ lower-middle class segment of the population, (c) changes in the prices of petroleum products which hit the poor section of the population while provide relief to comparatively higher income group,(d) pursuance of the monetary policies resulting in a very sharp reduction in the interest rates of the banks which benefited the business sector including the corporate sector substantially enhancing their profits through sharp reduction in the lending rates but adversely affecting the depositors of the lower-middle/ poor class through sharp reduction in the deposit rates, (e) simultaneously permitting the banks to levy monthly charges on savings accounts where the amount of deposits falls below Rs 5,000.These are a few examples of the anti-poor policies of the present economic managers. Some foreign banks even require the depositors to maintain the minimum balance of Rs 100,000 to escape the monthly penalty which ranges upto Rs 300. Now let us have a brief review of these measures:

The impact of retrenchment of staff/ closing down of the branches by the three large banks and its adverse [instead of positive] impact on the expenditure can be gauged from Table A :

The decision of closing down of the branches was so unmindful that now when the government intends to reach the small farmers, it finds the available net-work insufficient. Consequently, there appears to be some rethinking for opening new branches in the rural areas.

The reduction in the interest rates on National Savings instruments is being repented upon by the whole nation as it had has thrown substantial portion of the population living in above-poverty level to the poor section of the society (though data on the subject is not available but this an obvious reality). The beneficiaries of the lending rates cut are not prepared to pass on a part of their benefits to the common man.

In this connection, we may quote the example of the automobile sector which is not prepared to reduce the prices while require the buyers to make cent per cent down payment. The economic managers have not only utterly failed to get the passage of the partial benefit of interest rate reduction to the common man, but they have also proved helpless before the cement manufacturers’ cartel in the matter of getting the benefit of the central excise duty cut of 25 per cent passed on to the public.

The study about petroleum prices is more revealing which substantiates the anti-poor policies of the government. The per litre prices of various products as on 01-09-2002 / 16-11-2003 are compared hereafter giving the quantum of increase/decrease: Petrol-MS 87 RON from Rs 34.32 to Rs 32.90, a reduction of 4.14 per cent; HOBC from 38.79 to Rs 36.71, a reduction of 5.36 per cent; Kerosene oil from Rs 18.41 to 21.47 an increase of 16.62 per cent; high speed diesel from Rs 19.48 to Rs 22.21, an increase of over 14 per cent. It is common knowledge that the kerosene oil is used by the poorest section of the population which does not have access to the natural/ compressed gas and likewise diesel is used by the public transport used by the poor section of the population.

External sector: The position in the external sector has no doubt substantially improved as we now have current account surplus. The improvement owes its origin to larger inflows of workers’ remittances [ over $ 4.2 billion in FY-03], increase in exports reaching $ 11 billion, increase in the defence receipts for our rendering logistic services to the USA in its war in Afghanistan, substantial cut in outflow on account of rescheduling of Paris Club debts. The contribution of the economic managers in this improvement is hardly worth mentioning.

However, the question is whether the economic managers did use the advantage of the above improvement for lessening the country’s burden of the external debts and liabilities. To illustrate the position on this issue, the details of the country’s external debts/liabilities is given in Table B. The statistics contained in this Table have been derived from the SBP annual reports for the fiscals FY-02 and 03. It will be seen that despite the respite made available by the rescheduling of the Paris Club debts,the government has not halted the borrowing strategy. There has been a net addition of $ 2.067 billion in the external debts between June,1999 and June,2003 while foreign exchange liabilities have reduced by $3.193 billion. During this 4-year period, there has been an addition of $4.351 billion and $ 734 million in the debt owed to the multilaterals/ Paris Club respectively.

Here, it will not be out of place to mention the point of difference between foreign debt and liability. Where servicing/ repayment entails dishing out of funds from the government account, the relative category of liability will be termed as “debt” and in cases where servicing/repayment requires the government/SBP only to provide foreign exchange through the inter-bank market and no rupee amount is required to be provided out of the government account that category will be termed as “liability”. Judging from that viewpoint, there are some misclassifications in the SBP’s data. Table 2.

In view of these misclassifications the figures of debt and liabilities have been recalculated in the second part of Table”B” which places the addition in the external debt during June,1999 and June,2003 at $ 3.006 billion. Had USA not written off debt of the order of $ one billion, this addition would have reached over $ 4 billion i.e. one billion dollar per annum. This is not the end of the matter.The government intends to borrow more from the World Bank and Asian Development Bank at $ 2 billion a year instead of one billion dollar. In addition,the government is also floating euro bonds of half a billion dollar value. Dr Ashfaq Hasan Khan, Advisor in the Ministry, in his article published in Dawn EBR (17.11.03) indicated the reasons for going to bonds market which, inter-alia, are: (a) Pakistan was out of bonds market for several years; (b) it will help seeking foreign investment [which during FY-03 was only $ 798 million and will reduce to $ 590.5 million only if we exclude the privatization proceeds ofthe United Bank Ltd. amounting to $207.5 million], (c) despite high reserves, many countries are borrowing through the bonds market etc.

Are these cogent reasons for resorting to the additional borrowings? Certainly not. The actual reason seems to be to collect funds to bridge the gap to be created due to premature retirement of $ one billion expensive debts of the World Bank / Asian Development Bank for which government may not be in a position to dish out rupee resources from the budget for FY-04.

The significant reduction of the slightly over $ 4 billion (equivalent to workers’ remittances in FY-03) is seen in the external liabilities where no dent on the budget was required and simultaneously quite a fair portion of it [$ 1.5 billion-foreign currency accounts balances held by the banks] continues to form part of the country’s reserves.

Domestic debt: The position with regard to addition in the domestic debt is still more alarming. The outstanding amount of the domestic debt increased from Rs 1392.5 billion [on 30-6-1999] to Rs 1852.4 billion [on 30-6-2003] a hefty increase of 33.02 per cent. This hefty increase is despite substantial savings to the government in the interest expenditure on account of sharp reduction in the interest rates on government papers/ lesser expenditure on foreign debt servicing /repayment owing to the rescheduling of the Paris Club debts. Had these elements not existed, the increase in the domestic borrowing may have roughly crossed 45-50 per cent mark.

Fiscal responsibility: As per press reports, Fiscal Responsibility and Debt Limitation Law has since been introduced in the parliament according to which the government will, inter-alia, limit the quantum of borrowings to 60 per cent of the GDP by (perhaps) June,2012. Will the linkage of the borrowing with the GDP really reduce the liability in the absolute terms? Let us examine. Say as on June 30,2003, the GDP is Rs 100 and the debt amount is also 100. If GDP grows at 5 per cent annually and it is compounded on year-over-year basis, it will stand @ Rs 155.13 by June,2012. If the volume of the outstanding debt on that date remains at Rs 100, it will work out to Rs 64.46 per cent of the GDP- nearer to the prescribed target. If GDP grows at a slightly higher rate, the target will be fully achieved without reducing the current stock of the debt. As a corollary,the government will also have the opportunity of simultaneously resorting to the new borrowings to the extent of the scheduled repayments effected. The proposed law will, therefore, be a big camouflage. If at all the debt burden is sincerely to be reduced, the reduction should be in the present debt stock.

Non-performing loans: This is the subject which is discussed in the press very frequently and on which the concerned authorities present conflicting views from time to time. Section 6.3.3 of AR-03 (page 102) puts the volume of Non-performing Loans(NPLs) as on June,30-2003 at Rs 227.7 billion. which is stated to depict the reduction of Rs 7 billion in FY-03 while new addition to the stock of NPLs during the period has been put @ Rs 10.1 billion.

In an article published in daily Dawn [October 21-22,2002], the SBP Governor had contended that 20 per cent of the 1999 stock of NPLs amounting to Rs 40 billion (or above) had been recovered in cash. It was further mentioned in the article that the National Accountability Bureau (NAB) had recovered Rs 17.5 billion including rescheduling of which separate amount was not identified. It was also mentioned in the article that prior to 1999, 24 per cent of the loans were going bad but now this ratio has come down to the international level of 5 per cent. In his address delivered by the SBP Governor on the 26th July,2003 at the Institute of Bankers (IBP), he put the cash recovery figure at Rs 124.1 billion. The Governor also raised the amount of NAB recovery to Rs 86.6 billion. The articles appeared in Dawn/Business Recorder contesting the recovery figures. The Chief Spokesman of the State Bank of Pakistan [Dawn 9th August,2003] clarified that the figures given in the above article pertained to “defaulted loans” only while the position presented in the address at the IBP pertained to the entire NPLs stock. This position was again wrong because the outstanding stock of the “defaulted” loans/ NPLs as of 30th June,1999 respectively were Rs 143.13 billion and Rs 212.1 billion respectively [page 93 of SBP annual report for 1999-00] and the recovery figure of Rs 40 billion (or more) constituted 20 per cent of the entire NPLs June,1999 stock.

Now let us have a look in the matter from still different angle. The NPLs stock on 30-6-1999 was 212.1 billion. The total advances of the scheduled banks amounted to Rs 730.254 billion and Rs 988.825 billion on the 30th June,1999 and 30th June,2003 respectively. Therefore, [unless the old NPLs were transformed into new loans during this 4-year period data of which is not available ] one can estimate that the net amount of the new loans disbursed during these 4 years and outstanding by the close of FY-03 amount to Rs 258.571 billion [Rs 988.825 billion - Rs 730.254 billion] and 5 per cent of which works out to Rs 12.93 billion. If we take into account the recovery figure given in the SBP Governor’s address at the IBP, the position emerges as under: NPLs as on 30th June,1999 Rs 212.10 billion Addition in respect of new loans Rs 12.93 “ TOTAL NPLs Rs 225.03 “ Cash recoveries as given in IBP address Rs 124.10 “ Amount that should have been outstanding Rs 100.93 “ on 30th June,2003

But the latest figure of NPLs puts it at Rs 227.7 billion. This indicates that the data about recovery of NPLs issued from time to time was inaccurate.

The AR-03 no doubt contains the strategy about write-off of the loans but the strategy about the recovery is conspicuous by its absence.

Fiscal deficit: It has been indicated on page 6 of AR-03 that the fiscal deficit has been brought down to 4.4 per cent of the GDP during FY-03. This is yet another camouflage as the real quantum of the deficit is 6.6 per cent of the GDP as is evident from the footnote No. 4 on the same page. As can be gathered from the contents of the said footnote, the quantum of the fiscal deficit has been cut down by ignoring the heavy payments amounting to Rs 52 billion on account of Karachi Electric Supply Corporation’s recapitalization and CBR bonds. These payments have been termed “one off expenditure” which is not factual as this utility is incurring losses continuously on account of line losses or in other words electricity theft of over 40 per cent which could not be controlled despite the fact that the utility is under the control of the uniformed person. The losses of KESC and WAPDA will have to be borne by the government in future also.

The present economic managers have been inventing theories envisaging camouflages in order to paint a rosy picture of their performance. A year or two back, they had presented the theory of “current account surplus” after taking off the amount of interest payments out of total external payments even though the current balance is always worked by accounting for all the receipts and payments.

The Government has all along been telling the public that the public sector enterprises (PSEs)are putting a dent of Rs 100 billion each year on the budget. There is no likelihood of this dent coming down as there are no chances of the loss-giving entities being privatized.The government is, however, following the faulty policy of selling profit-earning entities like Oil and Gas Development Company Ltd., Pakistan State Oil Company Ltd. and Pakistan Telecommunication Company Ltd.. Obviously, the sale of these companies is against the national interest.

While on the one hand, there is no chance of PSEs dent on the budget being decreased or eliminated in the coming years, one loss-giving entity would get added to the list in the current fiscal and it is State Bank of Pakistan. In the past, SBP had been transferring its profits in billions of rupees to the government. But during the fiscal FY-03, its profit has reduced to the very nominal figure of Rs 243.058 million [from Rs 28.469 billion in FY-2001-02]. It is true that SBP is not a profit-earning entity but at least, it should be in a position to meet its expenditure from its own resources. It will be perused from page 81 (volume II) of AR-03 that during FY-03,the SBP incurred an expenditure of Rs 10.265 billion. Therefore, SBP’s going into red shall entail double dent on the budget; first the government will lose non-revenue annual income of about Rs 20-25 billion and secondly it will be required to reimburse SBP annually the expenditure of the order of approximately Rs 10-12 billion.

Will the economic managers, in these circumstances, be able to contain the real fiscal deficit to 4.4 per cent of the GDP or bring it still down? Obviously not . But they can play with their invented theories of showing the expenditure at the reduced level by putting certain expenditure below the carpet as has been done in FY-03 viz-a-viz disbursements to the KESC.

Government revenues: Government revenues are normally divided in two broad categories — tax revenues and non-tax revenues. Taxes are classified into direct and indirect taxes. The direct taxes are recovered from the persons based on the actual income accrued to various categories of assessees while indirect taxes are spread over the whole nation irrespective of the income of the payers or their capability to pay. The direct taxes are, therefore, considered as “progressive” while the indirect taxes “regressive. AR-03(page 69) stipulates that the indirect taxes form 67 per cent and direct taxes 33 per cent of the total receipts. But these are also the camouflaged figures. First the details of the tax recoveries during FY-03 as per Table 4.3 (page 69) of AR-03: (A) Direct taxes are Rs 151.30 billion; (B) Indirect taxes are (a) sales tax, Rs 194.80 billion, (b) central excise duty, Rs45 billion, (c) customs duty, Rs 69.1 billion; total (B) 308.90 billion; gross total of (A) + (B), Rs 460.20 billion.

The direct taxes include the withholding taxes as well some of which are in effect indirect taxes, for example withholding tax on imports amounting to Rs 17.5 billion (Table 4.5 page 71 of AR-03). Further petroleum surcharges amounting to Rs 66.9 billion have separately been classified as “non-tax” revenue even though this is a clear item of indirect tax as its burden is borne by the whole nation. If we properly account for these taxes, the amount of the direct tax recoveries will come down from Rs 151.30 billion to Rs 133.80 billion while the volume of indirect tax recoveries will stand enhanced to Rs 393.3 billion [Rs 308.90 billion+Rs 17.5 billion + Rs 66.90 billion]. Thus the proper classification of the revenues will put the quantum of the direct/indirect taxes to 25.39 per cent and 74.61 per cent respectively. Will the concerned authorities consider reclassification of the categories of tax receipts.