Iran’s nuclear challenge

IRAN’S move to resume research on nuclear enrichment has irked the nuclear powers. They are over-reacting once again because they are convinced that Iran is enriching uranium to make an atomic bomb. The United States and the EU-3 have warned that they will ask the IAEA to refer the matter to the UN Security Council for the possible imposition of sanctions against Iran. This ham-handed approach, ostensibly to prevent nuclear proliferation, will not help matters. A moderate stance can still placate Iran and persuade it to go slow on its nuclear ambitions as experience has shown. Since August 2005 when President Ahmadinejad took over in Tehran and rejected the EU-3’s terms for an accord on the nuclear issue it has not been downhill all the way. Even after Iran had resumed uranium conversion in Isfahan in August, the dialogue with the EU-3 was broken off and the IAEA board of governors reprimanded Iran, Tehran continued to cooperate with the agency’s inspectors and allowed them access to more facilities, including a military-owned workshop. The EU-3 and Iranian negotiators also met in Vienna in December and agreed to resume their dialogue in January. Iran is still prepared to continue the dialogue, as confirmed by the UN secretary- general.

It would be a pity if at this stage the US and the EU-3 were to take the road to confrontation with Iran leading to an impasse. As it is, Iran has taken no step that can be interpreted as a violation of the NPT which allows member states to develop nuclear programmes for peaceful purposes. Iran has also declared categorically that it has no intention to manufacture nuclear weapons. By casting doubts on Tehran’s credibility, the nuclear powers are not moving to a resolution of the problem. A more sensible approach calls for adopting stringent monitoring processes and safeguards, as the IAEA has been attempting to do. The fact that the agency has succeeded in this to an extent — Iran has signed the additional protocol which has tightened inspection of its facilities — shows that monitoring could preempt Iran from becoming a nuclear weapon state.

The line taken by the West can prove to be dangerous. If the matter is referred to the Security Council, it cannot be presumed that sanctions will be imposed. Russia and China have not spelt out their position on the issue of sanctions so far and a veto by one or both of them would defeat the resolution. Besides, it is now widely admitted that sanctions are no solution to such problems because they do not get a state to do what is required of it. In this case, a show of force would drive Iran to retaliate and withdraw its cooperation with the IAEA’s inspection regime. It would, therefore, be more prudent for the EU-3 to resume the dialogue with Iran. As a confidence-building measure, Iran, for its part, should not try to provoke the EU-3 by taking any extraordinary measures right on the eve of the talks. Tehran is certainly on the legal high ground to resume nuclear research. But politically its space for brinkmanship is limited while strategically it would be inadvisable to attempt to challenge the nuclear powers. With the United States under a leadership that refuses to see reason, it is essential that Tehran enhances its political standing and equation with the EU before it adopts a hardline approach.

Bajaur incident

AS OF this writing, no clear picture was available of the Bajaur Agency incident in which 18 people, including women and children, were believed to have been killed in what is described by some as an attack carried out by US Predators and by others as an explosion inside a house in the village of Damadola early on Friday. Reports from US sources said CIA drones had targeted an area in which Al Qaeda’s number two, Ayman al-Zawahiri, was thought to have been present. There was speculation that al-Zawahiri may have been killed in the attack. The US defence department denied that any action had been carried out in Bajaur. Major-General Shaukat Sultan, ISPR director-general, asked to comment on the reports about al-Zawahiri, told the AFP on Saturday: “We are investigating and as of now we are not in a position to say ‘yes’ or ‘no’.” Federal Information Minister Shaikh Rashid Ahmad has said Pakistan is investigating what is going on.

CIA raids in the border areas between Pakistan and Afghanistan have not been entirely uncommon since the ‘war on terror’ began. Last month, an Al Qaeda commander was stated to have been killed by a US missile in a Pakistani-controlled area. Whether al-Zawahiri has been killed or not is important; but it is equally important for the Pakistan authorities to provide the exact details of the Friday incident. Did US spy planes intrude into Pakistani air space and fire missiles at a village? If yes, is this permitted under the rules of engagement with US forces based in Afghanistan? How can it be ensured that in the search for alleged terrorists, innocent people are not killed? Do the US military and its agencies seek prior clearance from Pakistan before they launch raids like this? Questions like this involve aspects of Pakistan’s sovereignty and need clear answers. We have got into a very murky area in the tribal regions in the anti-terror drive and are now seeing a resurgence of Taliban activity. Random attacks and the killing of women and children will only win public sympathy for shadowy operatives and organizations and create fresh problems for us.

Between glamour & essentials

THE KPT has proudly announced its port fountain to be inaugurated by President Musharraf on Sunday. Described as “another first by KPT”, this fountain that has been built at Oyster Rocks will supposedly be a “testimony to the president’s vision and will go a long way in making Pakistan a great destination” as claimed by the advertisement put out by the Trust in Saturday’s newspapers. But will it? On the shore just a few hundred metres away from the fountain jet — said to be amongst the tallest fountains in the world — lie mounds of coal imported for use in the country. The KPT which could spend Rs 225 million on the jet has found it difficult to mobilize funds to build silos for the coal that spews black dust polluting the air and environment in that part of Karachi.

One is astounded by the government’s priorities which allow it to spend money on a mechanism to shoot up sea water over 600 feet in the air and then pat its own back for beautifying the city. The ugly spots that come under the KPT’s jurisdiction are not considered to be an eyesore and it is not felt necessary to clear up these. Be it the coal or the polluted seashore that one sees at the harbour front, the KPT should have attended to these first. It should also be pointed out that these are not simply unaesthetic to look at, they are also extremely harmful for people’s health. The KPT’s priorities obviously suffer from the image syndrome. Cleaning the beaches or building silos are uninspiring jobs. You can’t invite the people to watch the “thrilling event” of the seashore being cleaned up or coal being stored in silos. Besides, the president or prime minister do not inaugurate coal silos.

Larger aid for reforms

SOME of the donors have made a detailed study of the loss to the economy from the devastating earthquake of October 8 and the cost of making us the overall loss suffered by the affected areas. The Asian Development Bank and the World Bank are stepping up their aid substantially not merely to repair the damage but also to expand the economy and increase its productive capacity.

The ADB is coming up with a three-year (2006-2008) aid package to develop the economy as a whole instead of the usual $600 million a year it used to offer until a few years ago. The World Bank is ready to offer around two billion dollars to help rehabilitate Pakistan’s entire logistical network, including roads, railways and port facilities, in addition to large soft loans for reconstruction and rehabilitation of about four billion quake victims.

The ADB‘s latest economic update for the country projects an economic growth rate of 6.5 per cent of the current financial year in place of the official target of seven per cent. The Social Policy and Development Centre estimates that the growth rate could come down as much as 1.5 per cent below the target. But if enough money is spent on the reconstruction quick and many of the 320,000 thousand jobs lost are restored, the fall in the growth rate could be smaller.

But one point on which all are agreed is that inflation could become more acute. The ADB says that inflation, which was 9.3 per cent in June last, could come down to only nine per cent in November. And as more and more money is pumped in to the economy for the reconstruction, the inflation rate can rise further. Meanwhile as the food prices came down, says the ADB, the world oil prices went up. Along with that also rose the transport charges, freight rates and the cost of drinking water.

The Social Policy and Development Centre expects inflation to rise by two percent above the earlier estimates in the current financial year, and by one per cent next year.

The high world price of oil which the government is determined to sustain at home even when it comes down abroad, has already cut down the foreign exchange reserves of the government by one billion dollars and brought it to $8.8 billion. But that is enough to meet the import bill for over four months, says the ADB.

Under the present trend, trade deficit is expected to be seven billion dollars even if the $17 billion export target is achieved. The high world price of oil, plus unlimited import of fully assembled cars, sugar and wheat have inflated the import bill. But the government likes those imports as that means larger customs revenues, including the 15 per cent sales tax. The current account deficit is expected to be a record $5.8 billion which cannot be sustained for a long time.

The ADB says that if the government wants to maintain a high growth rate close to the 8.4 per cent growth achieved last year, it has to ensure overall larger investment. To achieve that it has to collect far more revenues or reduce the budget expenditure or do the both.

The World Bank is now urging the government to step up revenue reforms, particularly relating to sales tax collection with few exemptions, and mobilize larger income tax. Otherwise there can be a reduction in the economic growth rate by four per cent this year and up to one per cent next year, says the ADB.

Making a high growth rate difficult, the financial year has begun unhelpfully with the poor performance by the large-scale industrial sector. Growth in this key sector declined to 8.7 per cent in the first quarter of the financial year compared to a growth of 24.9 per cent in the same period last year. The textile and food sector underperformed, but the construction sector performed far better as also did the power production sector.

The service sector too expanded, particularly the mobile phones, the wholesale and retail trade as well as imports recorded large growth. Due to such adverse factors the ADB expects the budget deficit to rise from the targeted 3.8 per cent to 4.2 per cent.

Two factors have helped to reduce the current account deficit. The first is the home remittances of overseas Pakistanis which will be over three billion dollars this year. The other is the rising income from privatization and foreign investment, which is to rise by three billion dollars. The foreign investment has already touched $1.5 billion and several major public sector enterprises including the State Life, OGDC, PPL and the Sui Northern and Sui Southern are to be privatized this year.

The shrinking foreign exchange reserves, which have come to $8.8 billion, excluding the private holdings will also rise as the privatization income comes in.

Foreigners too are showing interest in the portfolio investment on the Karachi Stock Exchange. And the billion Dollars worth of GDR of the OGDC are to be sold abroad and within the country. The government is also to float a foreign loan this year. All that should help boost the foreign exchange reserves in a substantial manner.

The ADB says that the interest rates for lending by banks had been negative until September when it became positive. That was because the lending rates were low till then, while the inflation rate was over nine per cent.

But the ADB and banks are not concerned about negative interest rates which the savers or depositors in banks have been getting and still get. That is because while the average interest rate of the depositor is two to four per cent, the inflation rate is over eight per cent officially and far higher actually.

The saver or the bank depositor is a heavy loser, while the banks are the gainers as they have a large margin between their lending and deposit rates. So they declare very large profits and their shares are quoted at high rates on the Karachi Stock Exchange and in fact often lead the KSE-100 index.

In a country where saving is imperative and large investment is essential, the savers are getting a raw deal and so many prefer to buy luxuries rather than save with the banks.

Before he retired as governor of the State Bank, Dr Ishrat Hussain announced a basic saving scheme with no bank charges or needless penalties. But the banks are too slow to act on that and when they do they make the scheme far from attractive for the small savers. Banks now look for big depositors and not the small fry.

Following State Bank’s modest tight money policy, monetary growth in the first five and a half months of the financial year was only 4.5 per cent as against 6.5 per cent in the same period last year. But the private sector credit continued to expand at a rapid pace to Rs 216.7 billion compared to Rs 1.89.7 billion in the same year and that has sustained inflation along with other factors.

The ADB is coming with an assistance package of around four billion dollars to accelerate the development pace in the country, but it wants Pakistan to take certain steps to make effective utilization of its aid. It wants the government to ensure an efficient judicial system, improve law and order situation and allocate more funds for education, public health and poverty reduction. It has also urged the government to ensure good governance with a view to effectively meet the challenge of poverty and unemployment and mobilize the much needed additional resources.

The ADB has expressed the desire to improve the old and weak infrastructure in the country in order to attract foreign and local investment. That, along with the offer of two billion dollars by the World Bank for expanding logistics, should improve the infrastructure in a big way. The ADB is also ready to make further investment in energy, agriculture, transport, communication and social sector.

The fact is that the conditions stipulated for large aid, including law and order and good governance are essential for the country, whether foreign aid is forthcoming or not.

Having made such demands earlier while advancing loans and finding poverty reduction programme making small headway, the World Bank has called for the empowerment of the poor in the developing countries. That is easier said than done when the poor cannot even get drinking water and the middle classes have to pay a very high price for that.

Whether poverty has been reduced through the official steps taken by using foreign aid or not and the quality of the governance has improved or not, is often a debatable point with the government holding a positive view, and others a negative view. But the fact is that even if some improvement has taken place in a country like Pakistan where one third of the people are very poor, a lot more remains to be done and quickly.

The damage caused by the earthquake has been studied in detail by the ADB, which puts the total loss from the earthquake at Rs 169 billion — 94 billion in Azad Kashmir and 75 billion in the NWFP. The loss of private buildings is worth Rs 68.4 billion, educational buildings Rs 24.1 billion, of roads and bridges Rs 24.2 billion, damage to government buildings Rs 3.7 billion, agriculture and irrigation systems Rs 19.7 billion, industries and services Rs 17 billion and the total number of jobs lost is 324,000.

The issue is how soon the pledged money totalling $6.2 billion can be realized and put to the best use to the total satisfaction of the donors and the victims. But many of the donors are undertaking the construction under their own supervision, under the guidance of the expertise acquired from elsewhere in similar situations.