August 28, 2006	Monday	Sha'aban 3, 1427

DUE to the accumulation of heavy debts, followed by intermittent external and internal shocks in the 1990s, economic mangers were urged by international lending agencies to undertake reforms on a priority basis in order to remove social and economic imbalances.

Since then, successive governments have been focusing on liberalising the financial sector, dismantling foreign exchange controls and deregulating markets to achieve an open and competitive economy for foreign investment and trade. More importantly, they have privatised public sector enterprises in order to enhance the private sector’s role in the development process.

Despite initial efforts in the last decade to restructure state-owned commercial banks and the State Bank of Pakistan (SBP) and privatise a few financial institutions and certain loss-incurring public sector state entities, the country has remained in the grips of high inflation, low GDP growth rates, rising fiscal and trade deficits and a worsening of the poverty and unemployment situation.

However, 9/11 proved to be a blessing for the external sector of the economy due to a spurt in the inflows of remittances and a rescheduling of external loans. This resulted in a sharp rise in the country’s forex reserves, improvements in its balance of payment position and stability in its exchange rate against leading currencies.

Deregulation ,in the real sense, started from 1999 onwards with the purpose of promoting a more open and competitive economy, by eliminating or reducing subsidies, deregulating prices and trading in some areas particularly oil and gas prices.

The present practice of fortnightly fixing of fuel prices is directly linked to the international oil price level. Pricing distortions with regard to natural gas have also been removed. Similarly in the agriculture sector, particularly in compliance with WTO dictates, subsidies allowed to farmers relating to the pricing of their crops have been brought down to minimum and the concept of market based prices has been strengthened.

But due to a lack of good governance, the opening of food items procurement to the private sector has led to speculative trading in agriculture commodities, particularly wheat and sugar items, and the creation of cartels by the suppliers of these commodities. This has negated the concept of competitive markets.

The recent sale of PTCL and KESC to foreign buyers did not bring any improvement in the operational efficiency of these organisations; instead KESC’s new management proved itself incapable of handling its affairs.

The sale of United Bank and Habib Bank brought a quick turn around in the performance of these two major institutions, helped by the injection of billions of rupees by the government to prepare them for privatisation. But the imprudent approach towards the privatisation of the Pakistan Steel Mills has evoked a lot of criticism from all quarters.

The overall results of the deregulation and privatisation policies have not been very fruitful for the economy. Privatisation has in fact aggravated the unemployment situation and enhanced economic inequalities.

In fact, in a democratic set-up, reforms require consensus- building. There should be a general awareness that the process of reforms result in creating losers and gainers. As such, policy makers must have concern for equity. They must develop mechanisms to compensate losers and must search out ways for distributing the benefits of reforms to all stake holders.

Financial sector reforms have improved the financial health of banks. Restructuring and privatisation of the four big state-owned banks, where huge amounts of non-performing loans (NPLs) had concentrated, have improved their operational efficiency. Settlement of their NPLs issue is being undertaken through the creation of the Industrial Restructuring Corporation (IRC). The IRC acquired NPLs from banks in order to pass the related liability and assets to third parties for ultimate recovery from borrowers.

Furthermore, regulated processes like selling treasury bills and other securities like Pakistan Investment Bonds, in vogue until early nineties, was made market oriented through the introduction of the sale of government papers through open auction.

Prudential regulations enforced since early nineties for all categories of banks / financial institutions and compulsion on the part of all banks to obtain credit and operational efficiency ratings from rating agencies placed on the panel of SBP are effective measures for ensuring risk management, transparency and self-discipline.

Despite a turnaround achieved in the financial sector, the recent spurt in consumer financing and banks quest for maximising loan spread are potential risks to the viability of the financial sector as well as the economy.

The SBP must tighten its control and monitoring on these counts through a credit policy in order to ensure deployment of bank financing for productive ventures and entailing less reliance on the import of consumer items which adversely affect the trade balance.

Recent efforts to make institutional credit accessible to small and medium enterprises, particularly exclusively through micro finance banks and SME bank and regulating financing to this sector, are steps in the right direction for inducting financially disadvantaged segments of the population in the formal economic process.

However, in order to make these specialised institutions really accessible to potential entrepreneurs, the procedure for obtaining loans need to be further simplified and made cost effective for the client.

One of the basic aims of introducing reforms was to bring macro economic stability. In the period, 1999-2003, efforts were stepped up to achieve fiscal discipline. A sizable reduction in debt – GDP and fiscal deficit – GDP ratios was achieved.

The government’s efforts towards evolving fiscal discipline are visible from the CBR’s embarking on a programme for widening its tax net accompanied by a significant reduction in allocations for debt servicing after rescheduling of external debts reduced the fiscal deficit ratio to GDP to the internationally bench marked level( three per cent).

However, thereafter speculative trading in essential food items, cement etc and a continuous rise in oil prices forced the government not only to import these items, but also to offer these commodities / goods to the general public at subsidised prices. Thus not only the balance of trade and the balance of payment position were adversely impacted, but also the fiscal deficit increased substantially in recent years.

Second, for the development of infrastructure through the current Public Sector Development Programme (PSDP) of Rs415 billion and also for the rehabilitation programme of earth quake affected areas, the government resorted to borrowings from the IMF and other funding agencies, raising external debt.

Reform related policy should ensure debt sustainability over the medium term. In conformity with internationally recognised strategy, policy makers must focus on sustainability of debt rather than on reducing the fiscal deficit ratio to GDP through temporary measures.

External borrowings in particular need to be utilised prudently for development projects, with the sole aim of making each project viable enough to service a portion of its debt from its own generated funds, and for accelerating the over-all economic growth rate to achieve a budget surplus.

Pakistan, falling under the category of low income developing countries, needs restructuring and reform to reduce poverty. Apart from focusing on enhancing the economic growth rate, direct poverty eradication measures are needed. Steps taken to strengthen SME and the micro business sector (which can generate large number of employment and self- employment opportunities) through specialised financial institutions and relief in taxation and tariff rates to small and medium-size businesses, are moves in the right direction.

However, the non-availability of necessary infrastructure, particularly utility services is impeding the expansion of this sector. Infrastructure development programme needs to be vigorously pursued as envisaged in the PSDP programme.

Structural reforms need to be directed to both the formal and informal sector for achieving sustained economic growth and removing inequalities. Economic activities must have a favourable impact on the informal sector as well. There are severe social and economic imbalances particularly between urban formal and rural informal sectors. Poverty and unemployment levels are much higher in the rural sector. The lack of employment opportunities reduces household incomes.

Merely providing social safety nets and low cost services for the poor is not a sustained approach towards alleviation of poverty of a magnitude that exists today. Focus should be on the development of human capital through informal and formal employment and exposing the informal sector to new technologies.

Pakistan’s overall poor performance with regard to the education and health sectors has been the main contributor towards aggravating the poverty situation. Education sector reforms aiming at providing education for all, improving the quality of education with emphasis on higher and technical education need to be implemented and monitored vigorously. The country has failed to improve even the enrolment rate at the primary level; the only exception is Punjab where offers of cash incentives have rapidly improved the enrolment rate.

Improvements in the education and health sectors need to be evaluated on the basis of their impact on the development of human capital which is a necessity for achieving sustained high economic growth rates. Social sector reforms in education and health must aim at formulating policies to produce a highly skilled and energetic work force capable of making use of new technologies. Vocational and higher education needs to be promoted on priority basis.

Spending on the health sector has no doubt been enhanced, but still a majority of areas do not have access to health facilities. Despite a significant increase in the number of doctors and paramedical staff, hospitals and dispensaries in rural areas are understaffed and do not have the necessary equipment and apparatus. Due to a lack of effective supervision and monitoring at all levels, the funds allocated for the health sector are widely misused. Reform agenda, in the health sector in particular, must be directed towards improving delivery of services.

The second generation reforms contained in the agenda relate to the restructuring and capacity building of institutions and improving governance at all levels to sustain the process of change.

Restructuring of the financial sector has shown positive results, but restructuring process in certain entities like the Central Board of Revenue have failed to give desired results because their regulatory authorities are dysfunctional.

Revenue mobilisation efforts of CBR are much below the mark. Tax – GDP ratio, instead of showing improvement has fallen back to just over nine per cent. Conflict ridden political environment also impedes the government’s sincere efforts to introduce new measures to remove economic and social imbalances.

However the solution lies with the government itself. Good governance is the pre-condition; it must enforce rules of conduct to achieve harmony in all aspects of national life.