Avoid the debt trap, please

PAKISTAN is the only country outside Europe to have gone to the IMF for a bailout. While the western financial meltdown hit the US and Europe hard, no country in Asia, Latin America, the Middle East or even Africa has so far needed the IMF’s help.

But Pakistan’s fragile economy and the inability of its leadership to secure the confidence of even its best friends have forced it to seek a $7.6bn aid package.

The IMF’s assistance opens doors to aid from the World Bank and donor countries. But Pakistan’s official foreign exchange reserves may still not hold above the $8bn level (equivalent to four months of imports) for long because the IMF will only disburse $4bn during this fiscal year and the current account deficit continues to be under pressure.

Still, the country has got some breathing space. In the near term, the IMF aid should help stabilise the reserves, currency value and inflation and prevent capital flight. However, economic development is likely to slow down and hurt employment. It would be a mistake to relax, talk vaguely about the so-called home-grown economic plan and practically do little to raise tax revenues and cut criminal waste in government expenditure.

If the past is any guide, the government may not perform on its commitment to reduce the fiscal deficit to a manageable level, a failure which may lead Pakistan to sink deeper into the debt trap. It should not wait till 2012 to repay the IMF loan. It must come up with a viable strategy to repay the $4bn within the next 18 months and resume economic growth.

Pakistan must achieve a minimum growth rate of seven per cent to reduce poverty which has climbed sharply. The mantra of economic stabilisation to reduce inflation will not be enough to achieve this. The government must work hard to restore confidence in its policies and competence. Credibility has emerged as a major issue in both domestic and foreign affairs, be it the government’s relationship with the other political parties or its dealings with old friends like China and Saudi Arabia.

The government claims it negotiated the IMF loan on its own conditions. This is just technically correct. The World Bank had advised the government to remove most subsidies as far back as March this year, and the government followed its advice.

Mr Praful Patel, then a vice-president at the World Bank, met Mr Zardari, Mr Gilani and the government’s finance managers on March 26 and 27, 2008 and warned that “Pakistan will need the international community’s support over the coming months”. Mr Patel added: “If action is not taken, the economy will start to falter.”

Despite the warnings, the government failed to mobilise the necessary amount of financial assistance for almost seven months and had to seek IMF’s help. This reflects poorly on its competence and credibility. But that is one aspect of the story.

The politics of the Pakistan-US relationship is equally if not more important. Highly placed sources draw attention to a series of apparently unrelated but simultaneous developments. The US was not happy with the PPP’s decision to form an alliance with Nawaz Sharif. The World Bank decided to suspend its planned aid (about $550m) for Pakistan for 2008 as far back as March this year. This was part of the Bank’s three-year $6.5bn aid programme announced in April 2006. The size of the actual disbursements was to be determined by “the strength of the government’s policy performance and macroeconomic management” as per the programme’s terms.

Apparently the Bank was not comfortable with the PPP government’s economic plan, or its lack thereof. But why did it decide to suspend disbursements even before the cabinet was formed? It should resume its aid now but this year’s assistance will not be more than $1bn, and not $1.4bn as was claimed by the government’s finance adviser.

It became clear during informal consultations with the IMF officials in Islamabad and Dubai, in September and October respectively, that the IMF wanted an interest rate rise. The State Bank governor claims that the Nov 12 decision to increase the central bank’s policy rate by two percentage points was independent and aimed at controlling inflation but the reality is that the IMF wanted a slowdown in growth through tightening of fiscal and monetary policies.The monetary expansion by itself was not responsible for a surge in inflation. In Pakistan, diesel and furnace oil are such major components of transport and fuel energy (out of line with Asian averages because we have not developed hydel and coal energy) that there is a high correlation between inflation and oil prices. Yearly inflation was 11.9 per cent in Jan 2008 and jumped to 24.3 per cent in July; during the same period, the price of light diesel oil went from Rs32 to Rs56 per litre. During these months fuel prices were revised frequently to adjust to market levels as well as to play catch-up since previous increases in the international price of oil had not been passed on to consumers.

The solution is an automatic price adjustment mechanism for oil prices so that price signals are transmitted quickly and circular debts do not accumulate. The new pricing formula should remove the subsidy for oil refineries and do away with formulas that favour the oil marketing companies. $55-a-barrel oil translates into about Rs28 per litre. Even a 50 per cent mark-up and 20 per cent tax would not imply a price of more than Rs50 per litre.

Examining data from other Asian countries reveals a more gradual increase in inflation cushioned by higher levels of subsidies even though most Asian countries are also large oil importers. Reason: their rich pay more tax and their governments can afford more subsidies. The rich and the ruling elites in Pakistan would rather borrow, beg or steal and mortgage Pakistan’s future than pay more taxes.

Pakistan’s consumers have been paying more than their fair share of taxes due to a convoluted oil pricing mechanism while governments and oil companies have been earning super-normal profits. The subsidies increased above the cost levels only between July 2007 and Oct 2008. Before this, taxes and duties on petroleum products were one of the top contributors to total government revenues. The oil pricing policy and low taxes — not the government’s borrowings per se — are the principal reasons for the current budgetary imbalances.

Wrong economic policies that favour vested interests together with the Pakistani establishment’s dependence on Washington as the main source of power are responsible for the country’s fundamental economic and political imbalances. Both issues must be addressed if the country is to avoid the debt trap and make progress that benefits its people.

Industry and the energy sector

AGAINST the backdrop of the prevalent energy crisis in Pakistan, the industrial sector of the country has a very important role to play.

The performance of the industrial sector with regards to the field of energy has not been enviable in any respect. Local industry has traditionally fallen short of making any noteworthy contribution towards efforts to tackle the country’s energy problems.

Although there have been some phenomenal success stories and examples of absolutely world-class projects, the overall outlook of the industrial base of the country is pretty grim. Among the major issues conventionally plaguing the sector are built-in passiveness and short sightedness. Often, small and medium enterprises (SMEs) count on technicians and foremen to lead their technical teams — the wider approach is that it would be a lot cheaper to hire a foreman than a qualified engineer.

Such a strategy has wider ramifications. A large section of the industrial base, lacking vision and understanding of contemporary challenges and prospects, has been relying on a copycat approach. In many crucial areas, such as metals and alloys, coatings and surface treatments, chemicals and synthetic materials, industry relies solely on conjecture. Concepts like innovative solutions, precision engineering, quality control and standardisation are unheard of. In an age of globalisation and a free economy, local industry is sharply losing the competitive edge.

It is time for the industrial sector to rise to the occasion. In order to address the country’s energy problems industry has a crucial role to play. It should take the energy sector on board as a prioritised business area. As of the last quarter of 2008, Pakistan is experiencing a shortfall of over 5000 MW of electricity. With demand consistently rising and taking $1.5m per megawatt as the benchmark figure, the country would require an investment of well over $15bn before 2015.

It is also worth noting that energy is one of the most lucrative businesses on the planet — power plants usually have a small payback period and earn enormous sums on the investment made. For local industrialists and investors, the time is ripe for stepping into the energy sector. It calls for wholehearted dynamism.

One of the major drawbacks of the energy sector is the fact that local industry does not have any expertise whatsoever in the area of energy technologies. It does not have a clue of how to produce fundamental energy components, i.e. turbines, engines and generators. The situation with secondary components such as compressors, heat exchangers and electronic circuitry is also far from being enviable.

Obviously in order to tap the immediate business opportunities, procurement of power plants from abroad is the only option — industrialists can make a fortune only through investment as well as through manufacturing. Amid numerous emerging new technologies, such as renewable energy systems, in the medium-term to long-term scenario the energy sector is going to experience a fast-changing and expanding business environment.

In order to be well positioned to tap future business opportunities, local industry will need to overcome its complacency. Emphasis should be placed upon technology transfer and reverse engineering so that a few years down the line the country is capable of locally producing the desired level of energy systems. In the wake of the falling Pakistani rupee, rising freight charges and higher prices of materials, imports are becoming costlier. Options like technology transfer and reverse engineering thus require to be prioritised.

Here it is worth pointing out that India, having realised the importance of renewable energy, took timely initiatives a couple of decades ago and now has become a major exporter of renewable technologies, such as wind turbines and solar photovoltaic. Reports suggest that even Pakistan is in the process of purchasing some of these technologies. Interestingly, there is hardly any disparity between the two countries, especially in terms of per capita socio-economics and human resources calibre.

The only noticeable difference we find between the two is in the vision and commitment of their leadership. For example, Suzlon, the fifth-largest wind turbine manufacturing company in the world was established in 1995 by a textile businessman. The company is now worth nearly $2.2bn. India has managed to attract a number of leading solar photovoltaic manufacturers in the world and has set up a number of production facilities. Pakistan has once again been left behind and will be taking another late start as it did in the case of the IT industry.

Industrialists in Pakistan so far do not appear to be aware of the true potential of the energy sector. Consequently, a major chunk of the energy business, yielding gigantic sums of profit, is going overseas every year. The hallmark example to quote here is that of the IPPs. It is never too late. All it requires is a visionary and a resolute start.

Here the government also needs to support the industry by making conducive policies not only in letter but also in spirit. The policies then also need to be truly implemented. For instance, one should not have to pay a heavy duty on imported renewable energy equipment if one refuses to meet the unjustified demands of relevant quarters since the recent renewable energy policy promised to exempt such equipment from import duties.

The writer is a lecturer in renewable energy at the Glasgow Caledonian University, UK.

Iraq: dramatic drop in deaths

FOR 18 months Baghdad’s chief mortician could not walk across his laboratory for the bodies piled in front of him. He left work through a side door to avoid the relentless chaos outside - and became convinced that the city’s slide towards hell would never stop.

Every day from mid-2006 until late last year, around 120 corpses arrived at Baghdad’s main morgue. Nearly all had been killed in the savage sectarian fighting that was sweeping the capital. Many showed signs of torture. Others barely looked human. The remains of killers and their victims lay cast together in a foul soup, waiting for family members to collect them. The screaming seemed never-ending. And so did Iraq’s plunge into the abyss.

“They were the worst of days, weeks and months,” said Dr Ali Taher, a forensic medicine specialist at Baghdad’s Medical Legal Institute morgue, the biggest mortuary in the capital.

“After the bombing of the Shia shrine in Samarra, the number of bodies we were seeing here jumped from 10 to 120 per day at least. And they stayed at those levels. I have lived in Iraq for all my life and I never thought I would see the type of misery and suffering we all lived through then. In 2006 I could not bear standing here,” said Dr Ali as he introduced eight young workers, all of whom had spent their working lives as morticians. “Back then we were dealing with numbers we could not fathom and grief that we don’t want to remember.”

On a cool, grey day earlier this month, Dr Taher walked me through the main morgue area, which bore little resemblance to its recent past.

The horrors, however, did not seem far away. Across the clinical calm of the freshly bleached orange tiles, the rank odour of death and formaldehyde remained pervasive. But only five corpses were inside the morgue’s stainless steel fridges and only one of them had died a violent death.

The dramatic drop in deaths has been hailed by some Iraqi officials as a litmus test of how far Baghdad has come. “We are down to about 10 deaths a day now,” said the morgue’s chief administrator, Munjid Rezali. “This is within a normal range for us and the best thing about this is that signs of torture and mutilation have dropped right away.”

Morgue staff, including Rezali, can now take lunch breaks. Some eat meals at nearby cafes and few have a need to claim overtime. “It is true that things have stabilised, thank God,” he said. “We all want normal lives and no one here wants to go through that period again.”

But ghosts were never far away. The low wailing of family members on the street outside set an eerie tone as the young morticians continually scrubbed empty stainless steel tables and hosed the orange floor.

Up a short flight of stairs nearby, families sat in a small room transfixed to a plasma screen TV on which hundreds of images of dead men flashed up every eight seconds. All had been killed during 2006-07 and none had been claimed by their families. Some were chopped to pieces, others burned beyond recognition.

The library had at least 2,000 images on file. All of those depicted had been buried in unmarked graves in cemeteries on the outskirts of Najaf and Karbala. If any family member recognised them, they could tell staff, who would then arrange for the remains to be exhumed and transferred to them.

Sabeha Ashoor Haseen had sat with her husband looking for their son Nehmi for more than a week. He had vanished on September 14, 2006 from the Baghdad neighbourhood of Adamiyeh, an infamous sectarian flashpoint area.

“He had worked with the Americans in the International Zone and his friend called us to say he had been killed in an explosion in our area,” Haseen said. “We knew he was dead but five days later a man kept calling us from [our son’s] mobile phone and saying he was alive and would be freed if we paid him a ransom.”

Morgue workers, who did not want to be named, said such stories were commonplace and were mostly cruel hoaxes carried out by killers, or opportunists, who scoured the pockets of victims and tried to blackmail their families for money.

“This has not happened for some time now,” Rezali said. “The only worrying trend we are seeing is the number of women that are being presented with signs of torture. “It is only a small rise, but the numbers are up by around 5 per cent.”

Perhaps more disturbing are the levels of violence in the capital, with an increase in bombings during each of the past four weeks.

“We have seen the worst before,” said one morgue worker on Sunday. “It can’t be that bad again, God willing.”

— The Guardian, London