| 16 January 2004 | Friday | 23 Ziqa'ad 1424 |
Giving in to the right?
The tragedy of the budgetary exercise in Pakistan today is the preoccupation with the size of the deficit. The obsession with the IMF-imposed budget deficit target has resulted in the book-balancing functions taking precedence over the much more critical and urgent requirement to redirect the economy in a way that the process of growth can be accelerated.
There is nothing sacrosanct about an overall fiscal deficit of four per cent of the GDP. The level of the deficit cannot be viewed in isolation of the manner of its financing. If it is being financed by borrowing at interest rates below the growth rate of the economy, say at concessional interest rates from the World Bank and the Asian Development Bank or through instruments like government T-bills and bonds at below the rate of inflation, then the limited latitude provided by the IMF imposed fiscal macro economic framework is unduly restrictive.
It typifies the IMF's dogmatic adherence to fiscal austerity and macroeconomic stabilization irrespective of its cost to the economy, being driven more by an ideological belief than sound economic and financial reasoning.
As long as the growth rate of the economy is higher than the rate of interest on government borrowings, the desire to fix the overall deficit to some magical number as a way of keeping debt levels under control is misplaced, even if the government's tax revenues to the GDP ratio, instead of improving, remains at current levels. In fact, borrowing at rates prescribed for instruments floated under the national savings schemes may become viable after January 2004 when they are programmed to be lowered further.
So, there is enough space available to increase the deficit by one percentage point of the GDP to finance essential infrastructure related maintenance and development expenditures. Additional fiscal space can be created by the closure or divestiture of the loss making public sector enterprises that are soaking up almost Rs. 50 billion a year of hard earned taxpayers money, reduce defence spending and re-orienting and re-prioritizing expenditures (which continue to be a big black hole).
By arguing for the need to increase government spending one is, of course, not recommending fiscal recklessness, since the principal reason for why we found ourselves in the state that characterized most of the nineties was the unfettered profligacy of successive governments.
However, just because bad investments were made in the past does not mean that that there are no pressing projects and programmes to remove critical infrastructural shortages, which could also stimulate economic activity. And one of the reasons for the low level of investments is the missing complementary investments.
For instance, public investments in physical and social infrastructure augment the supply side for the private sector, but the government had slashed the size of its development programme much more sharply than on defence.
The effects of the cuts in development expenditures accumulated in recent years are beginning to take their toll; reflected in the continuously expensive and unreliable supply of energy and other utilities.
The government can influence the growth rate primarily by providing adequate physical and social infrastructure and by creating the environment for private sector investment. Today, however, the government finds itself helpless in influencing the growth rate because of the single-minded pursuit of the objective of fiscal austerity.
As a result of the lack of investments in the sectors and the slow pace of implementation of much needed reforms in these areas, the cost of transportation continues to be rather high, affecting competitiveness of the economy, resulting in the cost of shipping wheat (including port handling costs in Pakistan) from Australia to Karachi being lower than bringing it by train from Lahore to Karachi.
For the same reasons the cost of energy produced by WAPDA and KESC is high and continues to accentuate the difficulties of industry in its efforts to compete internationally, especially the energy-intensive ones.
The sooner we dismantle and privatize these agencies the better not just for the competitiveness of agriculture and industry but also for the government budget through savings that will come from stopping the monthly haemorraging (leakages) caused by their losses.
And to begin with the law should be changed to allow free entry into the distribution of power. Competition would spur reform by bringing down the risk of investing in generation (even after the HUBCO fiasco); since power producers would no longer be obliged to sell their power exclusively to bankrupt WAPDA and KESC.
The gap in investment left by the fiscal retrenchment and massive cut in development expenditure has not been filled by the private sector, as had been envisaged under the IMF imposed structural adjustment programme.
Lower interest rates, although a welcome development, are not enough to raise industrial sector investment. Banks have partly been reluctant to extend credit due to lack of bankable projects.A better, though somewhat extreme, example is that of Japan where short-term interest rates have been almost zero for sometime but the economy is in recession and continuing to experience a credit crunch. In fact, the banking system has become a sophisticated post office for transferring household savings at increasingly lower interest rates.
The institutional reforms required to improve the environment for private investment remain unaddressed, neither having been spelt out nor implemented. The government has also not been able to maintain law and order and enforce contracts.
The impartial and consistent application of the rule of law, checks over arbitrary taxation, and policy consistency and predictability, etc., are factors that affect investment levels.
On several occasions policies have been changed after some players have made investments, i.e. after the initial investment has been locked in. such behaviour works to the disadvantage of the first investor/mover. Thus, after some hiccups and losses there are hardly any investors prepared to become the first-movers. Hence there is little investment in highly regulated sectors or in those requiring heavy resource commitment and have relatively longer gestation periods.
Moreover, it defies logic that official circles should expect the private sector to take a long-term view when formulating its investment plans even when the government, for its own seemingly understandable reasons, takes a short-term view.
The private sector must take the lead from the government and adjust the time horizon of the pay back period of its investments to bring them in consonance with the signals emanating from government.
After all, the investor acts under a great deal of uncertainty. Any investment in an asset other than financial is irreversible, as it cannot be undone. When an investment decision cannot be reversed, the opportunity cost of investment is the cost of "waiting". In Pakistan, this cost has been rising with uncertainty.
Confidence remains weak, owing to the unpredictability of government policy and the general attitude of the revenue collecting and other regulatory agencies.
The head of a leading industrial group summed up rather well the dilemma that Pakistani entrepreneurs face. He said that there were two major threats to commercial activity that the private sector businesses encounter, China and Islamabad!
He argues that China as a competitor will become more than a handful both in international markets and domestically (the latter after the fresh round of tariff reductions to be introduced in the budget for the next year).
However, it is Islamabad that he is infinitely more scared of. He finds it the more formidable, and easily the most unpredictable, opponent, following a Punjabi maxim - a clenched fist near your face is more dangerous than the wrath of a far away Allah.
He rejects the fond hopes of many that Islamabad can some day become an enabler. In his opinion, preventing government from being a disabler is the real challenge. His only plea is for the government to get out of his way.
Meanwhile, Islamabad is looking towards foreign investment to raise the growth rate of the economy. It makes little sense to expect foreign capital to rescue us, even if, for the moment, we ignore how the long drawn dispute with the IPPs has affected foreign investor sentiment. Foreign investors follow a boom, they cannot create a boom. Foreign investment only supplements and complements domestic investment.
The earlier experience of SE Asia and later of China bears testimony to this. Foreign investment in China is high because domestic investment is high and not vice versa, and also partly because public investment is high. How can, and why should, foreign capital come to a country whose domestic entrepreneurs, being less than sanguine about the country's economic prospects, for whatever reasons, are reluctant to invest in the local economy. The writer is a former finance minister of Punjab.
Giving in to the right?
The BNP government of Khaleda Zia has imposed a ban on "all kinds of publication, sale, distribution and retention of all books and booklets on Islam published by the Ahmadiya Muslim Jamaat." The ban, as some leading lawyers have pointed out, violates certain provisions of the Bangladesh constitution that uphold freedom of expression of all citizens in general and the right of all the religious groups to preach and practise their faiths.
Politically, many believe that the action is an example of the BNP's surrender to rightwing forces that had been demanding such a ban. The opposition Awami League too appeals to have tacitly endorsed the government step.
Its leader, Sheikh Hasina, found the action undemocratic two days after the ban, and that too when she was questioned by a group of journalists on January 11. Meantime, the left-leaning parties and dozens of socio-cultural organizations have continued to protest against the ban.
The BNP government had earlier shown similar disregard of another minority group, the people of the Chittagong Hill Tracts and has not implemented the accord signed in 1997 with the Parbatya Chattagram Jana Sanghati Samiti.
A similar undemocratic attitude has been adopted towards the small Garo community living in Madhupur, and the government has continued to stick to an eco- park project in the area at the cost of the aspirations of the indigenous people.
On Jan 3, police killed a member of the Garo community and injured many who were protesting against the government plan, which, if implemented, the Garos fear, will seriously affect their livelihood, not to mention their culture.
Then, the BNP is still far from getting rid of the allegation that the party is biased against the Hindu community. And now comes the question of the BNP administration's attitude towards the Ahmadi sect.
The Ahmadis have been practising their faith in the country since 1912, and living in harmony with others without causing any disorder. Rather, it is the leaders of a few religion-based political groups, some of whom are at present partners of the BNP-led ruling alliance, that have been making aggressive statements against the small community of some 100,000 citizens.
The clerics have recently demanded that the government declare the Ahmadi community as non-Muslims and ban all publications of the sect. The government has given in, presumably to secure the support of voters the religio-political parties supposedly command. This is, therefore, a clear case of political opportunism on the part of the BNP. And this is the same reason the Awami League, which occasionally calls itself a secular party, has not stood up to protest more vocally.
A spokesman of the Ahmadis, Abdul Awal, has pointed out that the government has "bowed to religious terrorism." A section of political analysts in Dhaka argue that the government ban and disregard of the interests of the ethnic minorities, and the Awami League's subsequent silence on the issue, clearly show that the ruling elite, belonging to both BNP and AL, cannot afford to be democratic in the true sense of the term.