More rhetorical than real

PRESIDENT General Pervez Musharraf has called for optimal utilisation of resources for a visible improvement in the life of the common man by initiating development projects and creating jobs at the grassroots level. The sheer repetitiousness of such a call by the president during his nearly seven years of rule has started making it sound more rhetorical than earnest. There certainly has been a statistical reduction in the incidence of poverty in the last five years, but it is still at an unacceptably high level. The rate of unemployment has also continued to be around eight to nine per cent. Not only have there been serious shortfalls in the Public Sector Development Programme (PSDP) budgets year after year, even the cost-benefit ratio of such spending has been very low. Serious under-utilisation of annual allocations for the PSDP and the resulting high rates of unemployment and inflation are attributed to a lack of good governance, absence of sufficient skill development efforts on the part of implementation personnel and application of non-cost effective procedures. Also, Pakistan’s incremental capital output ratio (ICOR) has remained stagnant at 3-3.5.

The savings rates hover around nine to 13 per cent of the GDP while the investment rate remains at about 15 per cent. So, Pakistan has to spend more resources than India and China whose ICOR has risen in recent years to 1.5-2 and who show high saving and investment rates (50 per cent for China and 25 per cent for India of their respective GDPs) to get an equivalent amount of output. Because Pakistan spends more resources than needed for doing a job, it suffers from relatively higher rates of inflation as well. The theory that the trickle-down from high economic growth rates would take care of poverty and unemployment seems not to have worked because it has not been tempered to work in Pakistan’s peculiar economic environment.

Reducing poverty needs extra public spending. But if the country’s tax to GDP ratio does not go beyond nine per cent because taxes from incomes and wealth continue to be very low and the burden of taxation is disproportionately high on fixed income groups, then the poor and the pro-poor programmes will continue to suffer.

According to a recent paper ‘Understanding the Millennium Development Goals At Age Five’ by the UNDP resident representative in Pakistan, the record of financial liberalisation has been neither pro-poor nor pro-growth. It often widened the spread between deposit and lending rates, and led commercial banks to shift from investment lending to urban-based consumer lending, thereby undercutting job creation. The UNDP representative has also questioned premature trade liberalisation and said that this has often resulted in trade deficits, which create macroeconomic instability and undermine efforts to reduce poverty. Indeed, it is difficult not to agree with the argument that high inequality is not only harmful for the poor but also delays reforms and entrenches special interests. To curb the menace of inequality the UNDP representative has suggested distribution of productive assets such as land, water, roads, livestock, and micro-credit, fair competition for small holders and small-scale enterprises, progressive taxation and universal coverage of basic services. So, let us have high economic growth rates, but at the same time, let us also have a pro-poor policy framework aimed at equitable distribution of the fruits of growth.

Progress on Sir Creek

But however welcome the news about Sir Creek may be, it is overshadowed by the failure of the recent round of talks on the Siachen glacier. Notwithstanding the “cordial atmosphere” in which talks were held, the fact is that, apart from strengthening an existing ceasefire on the icy heights, there has been no forward movement on the issue. The Indians are sticking to their demand of verifying actual ground positions which Pakistan rejects. This means that a political dispute that had almost been resolved in 1989 is being held up once more by distrustful attitudes on both sides in spite of the heavy costs of keeping troops at that height. More soldiers have died of the cold in the glacial wasteland than in actual combat. Clearly, what is lacking on both sides is an element of trust that is crucial to overcoming tensions and paving the way for cooperation at all levels. This is the reality that has so far eluded the foreign policy establishments in Islamabad and New Delhi. Reposing greater faith in each other’s viewpoint is a prerequisite for evolving mutually acceptable solutions to the larger issues of the composite dialogue.

Does it have to be this bad?

LET’S face it: the power crisis gripping the country from Karachi to Peshawar is the severest in years. Whether or not it is the structural failure of the privatised KESC or the public-sector Wapda to deliver electricity more efficiently is of little consolation for the people, who are at the receiving end of the massive and all too frequent power breakdowns. Meanwhile, the utility servicing Lahore has come up with dubious reasons to explain its ineptness: power breakdowns lasting hours are termed ‘trippings’, and low voltage or fluctuations affecting the gadgets is being called ‘system overload’. The number of these outages on a given day is touching 100 in Lahore. The situation in Karachi is admittedly worse, with frustrated residents taking to the streets in recent days. All this, while the federal water and power minister gleefully says there is no shortage of power in the country and that breakdowns are something we will just have to be patient with. The question is: for how long?

Why is it that the electricity utilities are not able to plan ahead and increase the capacity of their transmission and distribution systems to cope with the rise in demand? Who else but the utilities have an exact idea of the growing load on their systems? A lack of proper planning is to blame for the dismal state of affairs. If the apathy shown towards the basic public need continues, this will be a traumatic, long summer. It is time the government took up the matter seriously and forced the utilities to do the needful to lessen the hardship being suffered by the citizens. If, technically, there is no shortage of power, then immediate steps must be taken to enhance the existing capacity of the system to deliver electricity more efficiently than is being done now.

Never in the debt trap again

PAKISTAN will never again get into a debt trap, says Prime minister Shaukat Aziz. He is, by making this assertion, voicing the views of people in general who are wary of the heavy internal indebtedness of the country, which goes down only to rise again.

After nearly $70 billion of external aid with varying conditionalities, some of which were humiliating, the people of Pakistan want their country stand on its own legs. They hope that the fiscal responsibility law adopted by the National Assembly will be helpful in that direction, although they have their doubts.

Now the Senate wants to adopt the same law and assert itself in the external financial sector. The Senate is restive or restless because of its restricted powers and exclusion from the fiscal sphere. It wants to figure in the fiscal sphere through the fiscal responsibility law.

Whether the government agrees to expand the scope of the Senate in the manner it seeks remains to be seen.

There is nothing wrong in raising external and internal loans. What matters is the political cost of the external loans, the financial terms on which they were secured, the purpose for which the loans were used and how well they were actually used.

In terms of the total external indebtedness, the US is the most indebted country in the world today, but the richest country in the world is also licensed to print the world’s currency, so it has little to fear.

Whether the areas where the loans were spent raised enough resources to service and repay the loans should not be a matter of concern for the country. Of course if the money was spent on education or public health, the return from them to repay the loans cannot be direct. But if the aid funds were mis-spent or wasted as through social action programme I and II, the loss to the country will be two fold and inexcusable. If the aid funds were wasted on raising ghost schools and ghost hospitals for example the repayment capacity will be very small. So the borrowed funds should be used with due care and the best obtained out of them.

It is also wrong to take for granted the aid funds will always be available. That in fact happened for many of the last 50 years and we had become an aid addict.

That should be guarded against, if we want to be a self-respecting nation and have an independent foreign policy. We saw in 1998 how all-western aid was stopped and various sanctions applied to us, when Pakistan exploded a nuclear device and it is only now that many of the sanctions are coming to an end.

But today we are running the risk of getting into a debt trap because of the large double deficits we are having. The first relates to the balance of payments deficit and the second to the budget deficit in a good financial year.

The external accounts deficit is partly a result of the high world oil price, which rose to $76 a barrel and has come down only marginally since then. Another factor is the heavy import of machinery and substantial import of food items including sugar.

Import of automobiles for more than a billion dollars has inflated the import bill.

The World Bank vice-president for South Asia Praful Patel has warned the country against the double deficits and overheating of the economy with imports running far in excess of the exports.

For the moment the large home remittances of overseas Pakistanis are running in over $4 billion a year or covering up the external deficit.

At the same time at a donors conference in Islamabad he has cautioned the government against frittering away the remittances on non-productive items and in speculative transactions.

The World Bank has also cautioned the government against the increase in budget deficit which this year may touch 4.2 per cent of the GDP against the targeted 3.8 per cent. But the government is hopeful the deficit will be contained at four per cent of the GDP. Prime minister Shaukat Aziz says the budget proposals will reflect the demands of the general elections and make concessions to the masses. There is talk of increasing the minimum wage of workers and fixing it at Rs 4,000 a month, instead of the current Rs 3,000.

Meanwhile the Prime minister has spoken to the central executive members of the Pakistan Muslim League about the basic features of the budget and said it will be a people and investor friendly budget with major focus on reducing inflation and bringing down prices of essential goods.

The high sugar prices figured in the discussions in which members accused some ministers of playing an unfair game and of higher prices of essential goods as a whole.

We are told that inflation has come down from 8.5 per cent to 6.5 per cent, but Karachiites would not agree with that, but we are told the inflation index covers over 300 items all over the country including the mufasil areas.

That means we need a separate index to cover the metropolitan centres, which accommodates 30 per cent of the people. Meanwhile the export duty of 15 percent has been slapped on sugar to discourage the export of sugar, the price of which has doubled. Meanwhile among the welter of speculative reports is one that says the government may reduce GST and corporate tax. How could it be possible to reduce taxes all round and increase the benefits to the poor under various heads without increasing the budget deficit against which the IMF has warned. The Annual plan coordination committee has approved an annual plan outlay of Rs 345 billion for next year, despite the fact the current year’s outlay has been utilised only up to 50 per cent for the first nine months of this year.

Any way the utilisation of funds is far better now than ever before and the improvement has been steady.

The committee made a large allocation to accommodate the needs of the provinces. The provinces have got Rs 100 billion as their share of the PSDP but want far more and there is country wide support for that demand as they are in charge of law and order, education and the various social services.

The provinces want the federal loans at a lower rate of interest than 17-18 per cent. They also do not like the centre trading on the loans while relending the money they got at far lower rates of interest.

The provinces instead want to be allowed to borrow from commercial banks at the prevailing rates of 11 to 12 per cent.

The provinces also want the centre to write off a substantial part of their debt to the centre totalling Rs 200 billion instead of forcing them to borrow at high rates of interest to repay the federal loans. The centre does not agree to that either.

And now the provinces do not want the centre to increase the pay of the provincial employees in the Frontier and Balochistan, as they cannot afford that. If the centre insists on that, the two provinces want the centre to foot the additional pay bill.

When it comes to the finances, the provinces are too dependent on the centre. While the centre enjoys exercising that power, it does not want to be generous to the provinces. And if it is good to one province, it has to be good to all which can be pretty costly.

Meanwhile the demand on the centre is increasing for larger finances. The military establishment wants the budgetary allocation for it to be raised by Rs 50 billion to Rs 273 billion from the current 223.5 billion. The military wants that as India has increased its defence spending by 25 per cent in its recent budget.

Now the Pakistan military has to finance its procurement programme of $9 billion spread over five years.

But former finance minister Sartaj Aziz is not only opposed to the increase, but also wants a cut in the current military spending and the savings to be diverted to development, the social sector and poverty alleviation.

But the former finance minister’s counsel is not likely to be accepted by the government. But when it comes to presenting the military budget to the national assembly, it may be in more than one line as usual. The new presentation may have three lines showing the allocation for each of the three services, as has been done in India. If that happens now, it has taken 59 years to break out of the one-line budget.

But the parliament in Pakistan and our own people may not know the details of the military spending, but our adversaries do. Military procurement news spread by the suppliers to all their clients and the defence journals report them regularly.

With the military ruling the country for most of the time, the civilians in the country are not in a position to press for more details of military spending, but be content with whatever they are told.