I HAVE a reasonably long list of positives on the basis of which I could build a reasonable scenario for Pakistan’s future. That, as I wrote last week, was the challenge I accepted from a senior member of the development community who is responsible for his institution’s operations in a bunch of countries including Pakistan. I agreed to identify a number of positive features of the Pakistani economy in the early 2000s which could become the basis for the design of public policy that would help the country join, some time in the future, the ranks of the Asian economies that are among the world’s most notable performers.

The list of ‘positives’ includes a financial sector that is more advanced and vibrant than that of the Asian elephants; an agricultural sector that has begun to move in the direction that should have been taken a long time ago; a young population that has begun to be trained and educated to be able to participate in a modernising economy; an evolving system of governance that has already transferred a significant amount of economic decision-making to the provinces; and an economy more under the influence of the private sector than that of the government.

Also included in the positives list should be a well-endowed diaspora of some five to six million people that has begun to invest in the country’s development and the growing interest of Middle Eastern companies and entrepreneurs in investing in the country. A vigorous programme of privatisation, admittedly begun in the 1990s before the advent of the recent military period, was followed by the government of President Pervez Musharraf with energy and determination.

The setback delivered to the privatisation programme by the judgment of the Supreme Court on the Pakistan Steel Mills case notwithstanding, the policy has resulted in a palpable increase in the private sector’s role in the economy. It has also brought large doses of Middle Eastern capital into the country with the promise and the indication that much more will follow in the future.

The list of positives could be extended to include Pakistan’s geographical position that may turn the country into an axis of international commerce; an industrial sector that has the skills to support the development of consumer electronics and become a vendor for the Asian automobile industry; underdeveloped or semi-developed sites that have the physical beauty or history or a combination of the two to attract a large number of foreign tourists; and a fashion industry that has begun to serve a growing domestic demand for its products.

The second list of positives is more in the nature of ‘potentials’; the first list identifies the features that are already present. It is the first set of lists that will be the focus of these articles. Today I will begin with the financial sector, in particular the rapidly changing banking industry, and then follow up with a brief discussion of the changing agricultural sector.

The transformation of Pakistan’s banking sector is indeed a remarkable story that needs to be written in greater detail than what is possible in the space provided in one newspaper column. In the 1990s, when Islamabad began to reform banking, the industry was in total disarray. Most of the assets were owned by the public sector; banks lent without doing serious due diligence; they had built large portfolios of non-performing loans; foreign banks, that normally bring in sound management and good practices to the countries in which they are operating, had left Pakistan. A well-functioning banking sector is vital for the health of the economy and Pakistan did not possess one in the 1990s. The institutions that made up the business were serving mostly the political masters and not the real sectors of the economy.

In the 1990s, policymakers in Islamabad took a series of decisions in an effort to change the banking sector and reform it. The first of these was privatisation, handing back to the private sector the assets that were acquired by the state during the misguided nationalisation spree carried out in the early 1970s by the government headed by President Zulfikar Ali Bhutto. He used the immense powers he had under martial law to institute deep structural changes in the economy. It was only later that he became prime minister. Bhutto expanded the sector by creating two institutions that catered to the financial needs of the nationalised industries.

Over time, politicians learned to use the banks to reward their families, friends and political supporters. Much of the corruption that inflicted the country in the 1990s was supported by the banks. By the end of the decade of the 1990s, and the beginning of another period of military rule, it cannot be said that Pakistan had a banking sector that could support a growing economy.

To be fair to some of the politicians, it should be recognised that they had began to appreciate that they needed a better financial sector than the one the country possessed. They also came to realise that change would take place only by re-inducting the private sector into the business of finance. The process of privatisation was begun by the political governments that were in office before the advent of the Musharraf era. The military government accelerated the process by putting two large banks — United Bank and Habib Bank — on the auctioneer’s bock and completing the process with the re-privatisation of Allied Bank.

The second part of the reform in the banking industry was to professionalise the regulatory and supervisory responsibilities of the State Bank, the country’s central bank. For almost a quarter-century, from 1974 to 1996, the State Bank had applied only a light regulatory touch, allowing the commercial banks to operate without much oversight.

The bank’s management had also become politicised in the 1990s, prepared to bend to the wishes of those moving in the corridors of power in Islamabad. That began to change in the late 1990s with the adoption of new laws and in late 1999 with the induction, under General Pervez Musharraf, of a truly professional management. The new central bank governor brought new professionals to the institution and set into motion a programme for training those who were already within the system.

The result of all this was that Pakistan in the early 2000s had one of the better banking sectors compared to those in other large and populous countries of Asia. China’s banking industry had a significant number of non-performing loans on its books. The state, at some time in the future, will have to take cognisance of them. In spite of a high rate of domestic savings, diversion of significant amounts of public resources that will be needed to clean the balance sheets of the banks will have a depressing impact on the rate of economic growth.

India also had a large state presence in the banking sector and the industry continued to suffer from some of the usual problems state ownership usually brings. In Pakistan, on the other hand, by 2004 more than four-fifths of banking assets were in the hands of the private sector, the banks were professionally managed with no political interference, the proportion of non-performing loans in these assets had been significantly reduced, stiff competition had pushed the institutions towards innovation and development of new product lines, and foreign banks were returning to the country. In the summer of 2006, the large UK-based Standard Chartered Bank began the process of acquiring a local privately-owned bank, thereby increasing its presence in the market. It was reported that other western banks were prepared to re-enter the country.

In an earlier article published in this space in March of this year, I had expressed some worries about the possible deterioration in the health of the banking sector, given the aggressive resort to consumer financing to which many of them had resorted to beat back competition and to increase market share. Those worries remain but the State Bank has invested in developing a regulatory and supervisory capacity that should help it spot the problems well in advance and take remedial action. What the numerous financial crises in the developing world over the last decade have demonstrated is that the regulators and supervisors must never lower their guard.

If constraints on trade between Pakistan and India are eased and the service sector is included within the framework of the recently inaugurated South Asia Free Trade Area (SAFTA), I have no doubt that banking will be one of the products Pakistan could export to its neighbours. Pakistani banks could easily and successfully compete with Indian institutions, and in doing so create space in India’s large economy for other Pakistani businesses as well. The banking sector could help Pakistans real sectors to break into the large and rapidly expanding Indian economy.

Let me now turn to agriculture, a long-neglected sector of the Pakistani economy. One of the themes I have highlighted in my writings on Pakistan is that the structure of the economy as we find it today does not reflect its inherent strengths. We should see more of agriculture in all aspects of our economic life. There should be more processed agricultural products on people’s tables; agriculture should employ more skilled people and also create opportunities for those who are well educated and trained; there should be a stronger link between research and development in agriculture; and agricultural products should figure more prominently in the country’s exports.

Given some of the advances being made in turning sugar into ethanol — an area in which Brazil has made some important advances — Pakistan could also use agriculture to tackle its deepening energy problem. In doing so, it could justify the devotion of valuable land to sugarcane, a crop in which Pakistan does not have a comparative advantage at this time.

There should be greater attention given to the maintenance and upgrading of the vast irrigation network the country inherited from the British. There is a movement in all these areas which indicates that the enormous potential of the sector has begun to be recognised. Packaged masalas are being used in homes in Pakistan and they have also appeared on the shelves in grocery stores in Britain and the United States. The dairy industry is rapidly moving into such higher value-added products as milk in cartons, packaged yogurt, ice cream and candies. I know of some large farmers who are breeding exotic birds for both domestic and foreign markets, and the recent emphasis on higher education has opened opportunities for research and development in agriculture.

Finance and agriculture are, therefore, two of the several positive features of the Pakistani economy on which a better future could be constructed. There are several other ‘positives’, some of which I listed at the beginning of this article. I will continue this discussion by bringing them into the picture next week and the week after.

DURING the last fiscal year, Pakistan forked out six billion dollars on energy imports, when oil averaged around $40 a barrel. Oil has been seesawing between $60 and $70 per barrel and with a 10 per cent annual increase in energy consumption; we could be looking at the energy import bill of about nine billion dollars this year.

On top of that, another two to three billion dollars go out of the economy for debt servicing. Thus, between energy imports and debt servicing alone, some two-thirds of our meager export earnings of $17 billion would be eaten away. And if US-Iran relations take the feared plunge, all bets are off on oil prices.

The UNDP Report on Asia-Pacific 2006 tells us that the business model we have been following for years doesn’t have enough elasticity to raise our export earnings. Even our principal industrial sector of textiles has been losing market share in textile and clothing in open competition with regional countries, including Bangladesh which does not even grow cotton.

Last year’s trade deficit of $12 billion, the highest in the country’s history, is already being overtaken by the magnitude of deficit incurred in the first two months of the current fiscal year.

So, where is the hard currency going to come from to pay for all our other essential needs such as food, medicine, plant equipment and machinery, defence and several other requirements, including non-debt liabilities and reserves to keep the rupee from sliding down?

Our continuous use of privatization proceeds and home remittances to finance the current consumption is self-defeating. The ‘feel-good factor’ thus created would start evaporating as the few remaining state-owned enterprises are sold off and a reverse flow of dividend income gathers momentum. The real estate market has heated up beyond the reach of many industrial and residential buyers. In the meantime, Pakistan is losing opportunities of creating new assets that would have become cash cows for the country, earning it badly needed hard currencies and reducing its vulnerabilities.

This should give sleepless nights to any policymaker and call for change of course in favour of production and productivity and away from high consumption and speculative economy. As if that was not worrying enough, reports indicate that we still want to add to our external vulnerabilities by now opting for imported oil and coal-fired power plants while continuing to turn a blind eye to the development of our indigenous coal reserves.

Coal-based power is essential because it brings three major benefits. Since we are fortunate in having large coal deposits, it saves us from using hard currency on importing oil. And because coal-based power is labour-intensive, it creates employment and business opportunities for our people. Thirdly, it provides energy security and protection from a wide range of external risks. All these benefits, however, are lost to the nation because of flawed policies and options.

Our approach to energy development is clear from one simple fact: while 1.5 million MWs of coal-based power plants are under various stages of development around the world, we do not have even a single MW plant under construction. About 90 per cent of the current coal production in the world is utilised within the very same countries where coal is available. It is only countries that do not have coal deposits of their own like Japan that generally import coal for their power generation.

For Pakistan, sitting on 185 billion tons of coal estimated to be second largest reserves in the world, importing coal for power generation is tantamount to Iraq having the second largest oil reserves in the world importing oil for its power production.

Our dependence on renting solutions to our problems remains so deep-seated in our culture of governance that we refuse to believe in our national capabilities of producing wealth and value from our human and natural resources. But Pakistan is not one of those oil- and gas-rich Gulf countries that can go on importing solutions for almost anything. Its salvation lies in learning to create values and wealth from its own resources. But this has largely remained a pipedream because our public pronouncements are not backed up with policies and action that are needed to provide incentives for investments in the needed areas.

Investment in an indigenous integrated coal mining and power generating project is a measure of long-term commitment by investors. It is different from investment in the franchise of a fast food chain or from importing ready-made solutions.

These integrated projects are heavily capital- and technology-intensive and no small investor or a fly-by-night operator can mobilise the required resources and skill. And once big, reputed and experienced investors have finally committed to undertake such projects, it is important to stay the course and not turn the tables on investors without rhyme or reason.

That is why indigenous coal-based power production in Pakistan has still not recovered from the damage inflicted on it in 1997 by abrupt and arbitrary cancellation of the first pioneering project of 5,200 MWs of power generation based on Thar coal.

The present government has been in power for about seven years. This is long enough time to have won back investor confidence. But despite several promises made and trips to China, Europe and elsewhere, we have yet to see any MOUs for indigenous energy development translated into action.

If we had taken a national decision of making indigenous energy resources the principal plank of the country’s power generation programme, it would then not be difficult to get our act together on the two fundamental issues: winning back investor confidence with public policy that promotes long term and sustained investment in indigenous energy development and resolving internal turf battles that have often subverted progress on coal-fired power generation ideas and proposals.

Continued indecision on this has made Pakistan’s energy policy directionless. As a consequence of this absence of priorities and direction that none of the regional gas pipelines projects we have been talking about for over ten years, have yet reached the level where serious project financing exploration could be conducted.

In the meantime the energy problems have kept worsening. Their solution lies in giving indigenous coal-based power generation a major role in the country’s energy portfolio and creating a policy framework that would sustain investments in its development. Delay will only keep pushing back the opportunity for Pakistan to develop its abundant coal resources at Thar.

Email: smshah@alum.mit.edu

LAST WEEK, one of Washington’s favourite spectator sports — the secrecy game — reached new heights of absurdity. Americans were treated to the spectacle of an administration obsessed with secrecy turning around and declassifying parts of one of the most highly secret documents produced by the CIA and other US intelligence agencies.

President Bush ordered what might be termed selective leaks of the National Intelligence Estimate on global terrorism because newspapers reported last Sunday that the estimate concluded that the war in Iraq had, in effect, created more terrorists and made the US and the world less safe.

This is the exact opposite of what the White House has been telling the public for months. In his televised address from the Oval Office on Sept. 11, for example, Bush said “the regime of Saddam Hussein was a clear threat... The world is safer because Saddam Hussein is no longer in power.”

So, it is hardly surprising that the president felt compelled to counter-leak, as it were. He ordered the report’s “key judgments” released. Sure enough, the document said that the war was “shaping a new generation of terrorist leaders ... breeding a deep resentment of US involvement in the Muslim world and cultivating supporters for the global jihadist movement.”

The estimate also said that the government’s counter-terror efforts had “seriously damaged” Al Qaeda, and that if the terrorists failed in Iraq, “fewer fighters will be inspired to carry on the fight.” That was language the White House badly wanted out there to counter the stark conclusion that the war had spawned more terrorists.

In his last Tuesday news conference, Bush noted that the story about the National Intelligence Estimate landed “on the front page of your newspapers” as the country was “coming down the stretch in an election campaign.” He added: “Somebody has taken it upon themselves to leak classified information for political purposes.”

Whoever leaked the story about the report may indeed have been motivated by politics and a desire to undermine the administration before the midterm elections. It is equally possible that one or more persons inside the intelligence agencies or elsewhere in the government decided to go public because they were dismayed by the administration’s mantra that the US is safer because of the war in Iraq, knowing that the evidence did not support that view. But regardless of the motives behind the leaking of the document’s contents, what’s clear is that the president ordered up a declassified release to score political points. This is the same president who has consistently denounced leaks and whose administration has even threatened to prosecute journalists who reported the leaks.

When New York Times reporter James Risen disclosed the administration’s warrantless wiretapping programme, the Justice Department opened a criminal investigation. After Dana Priest of the Washington Post reported that the CIA was interrogating terrorist suspects in secret prisons in Eastern Europe, Republican leaders in Congress called for a congressional investigation into the leak, and the House Intelligence Committee opened one. The CIA fired senior analyst Mary McCarthy, letting stand the implication that she had leaked the story to the Post, which McCarthy strongly denied.

Yet, earlier this month, when it suited the administration’s political purposes — to keep the congressional elections focused on terrorism and national security — Bush revealed that 14 suspected terrorists were being transferred from secret CIA prisons overseas to the detention facility at Guantanamo Bay, Cuba. Not only that, John Negroponte, director of national intelligence, released biographies and photographs of the suspects, including Khalid Shaikh Mohammed, the mastermind of the 9/11 attacks.

Bush’s disclosure about the transfer, and his release last week of portions of the NIE, was not the first time the White House has revealed secrets when it was politically expedient. In July 2003, the administration released the “key judgments” of the notorious National Intelligence Estimate on Iraq to try to justify the decision to invade the country. But none of the weapons of mass destruction that the document said Hussein possessed were found.

Of course, presidents can declassify whatever they please, and other chief executives have done the same. In April 1986, when President Reagan addressed the nation to announce the US bombing of Libya, he paraphrased three sensitive communications intercepts to buttress his case that Libya was responsible for the bombing of La Belle discotheque in Berlin that killed three people, including two US servicemen, and wounded more than 200 others.

President Lyndon B. Johnson once declassified a secret document dealing with the war in Vietnam as Walter Cronkite of CBS News was interviewing him. It happened Feb. 6, 1970, when Cronkite asked about the role of Defence Secretary Clark Clifford in handling a request from the military two years earlier for 206,000 more troops. Johnson held up a document, flipped through the pages and said: “That’s totally inaccurate... Now, if you would like to, Walter, I’ll declassify them for a moment... I can read you a portion.” Johnson proceeded to do just that on national television.

Johnson and other presidents have freely quoted classified documents in their memoirs, selling secrets to the public between hard covers. That might suggest that secrets are a commodity, rather like pork bellies, to be sold or traded for political advantage but cloaked in an aura of “national security” when an administration finds it useful to protect them.

When Valerie Plame was identified as a CIA operative in a newspaper column in 2003, Bush pledged to fire anyone involved in the leak. Two years later, when it was disclosed that presidential advisor Karl Rove had talked to the media about Plame, Bush softened the pledge to say that “if someone committed a crime, they will no longer work in my administration.”

In his news conference Tuesday, Bush may have summed matters up pretty well when he said that in Washington, “there’s no such thing as classification anymore, hardly.” By going public with part of the NIE, he proved his point. —Dawn/Los Angeles Times Service