Will we break the begging bowl?
By S.M. Naseem
IT was a measure of the degree of desperation and the extremely limited options for Pakistan’s economy that the redoubtable finance adviser had to announce his readiness to leapfrog to Plan C, that of approaching the IMF for help.
It was a shotgun marriage, with the unloaded gun being handed over to the party who is being forced to marry, with the IMF conditionalities camouflaged as part of a home-grown plan.
The State Bank governor had dutifully fulfilled a day earlier one of the conditions implicit in the deal with the IMF by raising the discount rate by two percentage points to 15 per cent, exactly double of what is prevailing in neighbouring India. The main rationale offered for the interest rate rise is that it would keep inflation at bay.
Even though inflation is at record high levels there are signs that as the recession engulfs the world economy the main threat will be deflation rather than inflation. Already oil prices are 60 per cent lower than their peak earlier this year and the government has reluctantly acknowledged this by passing on a fraction of this decline to the consumers. Other imported commodity prices, such as palm oil, are also on the decline.
The real purpose of raising interest rates is to administer a contractionary shock to the economy — in keeping with the IMF doctrine. As always the IMF is more concerned with the health of the financial rather than the real side of the economy since it wants to ensure the safety of its investment. The recent financial crisis in the US has brought out clearly the perils of overemphasis on financial sector growth.
It is ironic that while all the major economies of the world, including the US, China and India, are busy mounting fiscal stimulus packages, we are being asked to adopt a path of fiscal contraction. This will most likely affect not only our development expenditure, but also our social sector expenditures. The sop being offered in the name of social protection (a new cliché replacing ‘safety nets’) is unlikely to be adequate or reach the deserving poor.
While Pakistan ‘has been there before’, the fast-track ride to the precipice this time is largely political in origin. The macroeconomic management of Pakistan’s economy since it started drifting early this year in the wake of impending political changes after the assassination of Benazir Bhutto has been increasingly unpromising. The caretaker cabinet completely lost its grip over the economic situation, which worsened further as protests mounted and caused serious disruption of economic activity.
The rapid rise in inflation, the mismanagement of wheat supplies and the rapid increase in load-shedding following the steep rise in oil prices completely unhinged the management of the economy. It was hoped that the downward plunge in deteriorating economic fundamentals would be stemmed after the February elections and the crushing defeat they dealt on the Musharraf-Chaudhry regime.
Unfortunately, because of the deliberate foot-dragging by Musharraf with the tacit backing of the US, the transfer of power to the newly elected representatives was delayed until April. From then on the anti-Musharraf coalition was unable to put together a viable plan for economic revival because of their inability to agree on political issues, especially the restoration of the dismissed Supreme Court judges.
For a brief period the coalition government was able to function, with most of the economic and social sector portfolios allocated to the PML-N. The new finance minister, Ishaq Dar, who had held the same portfolio under Nawaz Sharif in the 1990s, seemed well prepared to change the course of the economy towards a more stable and resurgent path and bring about major changes in his economic management team. However, he had to resign after Nawaz Sharif made his participation conditional on the restoration of the judiciary.
Thereafter the PPP’s Naveed Qamar was assigned the finance portfolio which he had held in an earlier PPP government. However, the turmoil in the stock market, the steady decline in the value of the rupee and the haemorrhaging of foreign exchange reserves that accompanied the coalition’s attempt to oust Musharraf through impeachment or forced resignation brought things to a head and the business community was in panic about the fears of a possible default by Pakistan on its foreign debt.
After Musharraf’s ouster and Zardari’s installation as president, the threat of a default and the need for a bailout became increasingly urgent as the momentum for capital flight, contrived or otherwise, increased. Matters were further complicated by Pakistan’s role in the war on terror, which was linked to the military and economic aid it has received since 2001 and of which it hopes to receive more (through the Biden-Lugar initiative) in the future to overcome its deteriorating economic condition. The US withheld about $1bn of its compensatory aid to Pakistan for participation in war on terror for ‘audit reasons’.
In order to instil confidence in the market and among foreign investors and donors, as well as to revive the stock market, a new finance minister, Mr Shaukat Tarin, a banker-turned-businessman and ex-chairman of the Karachi Stock Exchange, was inducted into office. Meanwhile, the new president himself went on a tour of Pakistan’s trusted allies, including China, Saudi Arabia, UAE and the US, to mobilise the support of its friends. However, these efforts failed to bear any tangible results — except for $500m from China which had given the same amount when Pakistan faced a similar crisis in 1997 —in view of Pakistan’s poor credentials as a debtor, as well as due to the continuing global financial crisis which has made all potential donors extremely tight-fisted.
It is about time that not only Pakistan’s economic managers but also its political leaders as well as its people permanently renounce the habit of begging in times of crisis and explore more viable strategies for macroeconomic management and development. Instead of finding friends abroad who would take a stake in our economy our leadership should try to gain the confidence of its own people by pursuing policies which contribute to the welfare of the majority rather than that of the small elite whose extravagant lifestyles frequently land the country on the verge of bankruptcy. For this the country needs serious long-term planning rather than ad hoc crisis management which we have become accustomed to.
syed.naseem@aya.yale.edu


Bush feels nostalgic
By Ewen MacAskill
HE has sometimes appeared a reluctant traveller, and has not always made friends overseas. But the outgoing US president, George Bush, was in wistful, nostalgic mood at the weekend as he completed his last scheduled foreign trip.
Attending a summit of Pacific rim countries in Peru, he said his farewells to foreign leaders and made repeated references to his imminent retirement.
Bush “felt a little nostalgic”, the White House press secretary, Dana Perino, confessed, as the president gave in to public reflection on his time in office.
Bush told China’s president, Hu Jintao, he was unlikely to see him again, at least not as the US president. At a meeting with the Canadian prime minister, Stephen Harper, his pending departure again surfaced. Bush joked that his “forced retirement” would begin on January 20, with the handover to president-elect, Barack Obama, at noon that day.
Bush was in a conciliatory frame of mind at the summit, ready to put aside differences — albeit temporarily — with Russia over Georgia, missile defence and a host of other issues. After shaking hands with the Russian president, Dmitry Medvedev, Bush said: “We’ve had our agreements, we’ve had our disagreements.”
But he added: “When we disagree, we’re able to do so in a way that is respectful to our two nations.”
His summit speech was retrospective, recalling 9/11 and how US flags fluttered from fire engines in Canada, baseball players in Japan observed moments of silence, children knelt at the US embassy in South Korea, and a sign unfurled at a candlelight vigil in Beijing that read: “Freedom and justice will not be stopped.”
Mindful of criticism at home that Bush is failing to rise to the challenge of the economic crisis engulfing America and the world, administration officials insisted the trip to Peru was no farewell visit and that there was serious work to be done.
But although the US president may yet make one more, unscheduled foreign sortie, to Iraq, the sense of finality was hard to overcome.
“I’ve worked hard on a lot of fronts,” Bush said, adding later: “I have given it my all. And now I am very hopeful that the man who succeeds me as president of the United States succeeds in his job.”
— The Guardian, London

