CAUTIOUS optimism prevails in the business community about the future of the country’s fragile economy. Hopes are pinned on Pakistan’s support to the US against the Talibans bringing windfall gains that would more than compensate for the damages suffered as a result of the war in Afghanistan.

From a country strapped by multi-layer US sanctions, Pakistan, to quote an eminent economist, has turned into a “darling” of the United States. It’s needs would be taken care of, he adds. The economist represents the consensus in the business community.

And a former governor of the State Bank, Mr. S. U. Durrani, now an investor banker, says that, “Pakistan needs a massive injection of funds” to kickstart the national economy.

There are differing views on the nature of the anticipated US and European assistance. Some expect that the principal relief may come in the form of debts of $12 billion being written off, partially or fully, after the PRGF arrangement with the IMF is finalized.In 1991, 50 per cent Egyptian debts were written off for its support to the United States in the Gulf war. A massive debt relief could provide Pakistan the fiscal space for increasing the much needed development spending. If Pakistan is permitted duty-free imports and quota-free access to the US markets,the country’s exports could be directed towards the largest world market.

Some reseervations are being expressed about fresh loans and credits that could further mortgage the economy that is carrying an unsustainable level of debt.

In the face of global economic environment,Pakistan’s strategic role in the Afghan war and the security threats flowing from it, the flow of sizeable foreign investment appears to be a remote possibility.

To kick-start the economy and revive business acivity, massive development spending apears to be the only option. The portfolio investment by US fund managers last week in low priced shares raises a ray of hope that low level private capital inflows cannot be completely ruled out.

So far grants announced by the US, Japan and other donors total just over $ 100 million dollars. These amounts have been announced but not yet disbursed. Prior to September 11 attack on USA, an IFIs’ package of about $6 billion was stipulated. In post-September scenario, the quantum and nature of assistance is being discussed by a Pakistan team led by Finance Minister Shaukat Aziz with the IMF and the US administration. Indepedent economists who see the threat of social instability emerging from rising unemployment and unprecedented poverty levels, caution that the benefits of the fresh assistance should not be monopolized by a few. The development programme should be so designed as to reduce poverty.

Yet another group of economists at the Social Policy and Development Centre(SPDC) led by acting managing director Dr. Kaiser Bengali, is seeking a review and a change of the IMF- induced policy with focus on stabilization.

A fundamental shift in policy has been proposed, with growth as the principle objective and stablization as a secondary goal.It calls for relaxation of the tight monetary policy with a shift from revenue mobilization to cut in current expenditure. Development spending to be enhanced further to create crowd-in effect for investment, for growth in employment, income, purchasing power and for poverty to be reduced in absolute terms.

There is need to review the policy of curtailing fiscal deficits.Fiscal deficits can be positively employed if the amounts thus generated, are spent on investment in productivity enhancing infrastructure and in employment generating projects.

Stabilization vs Growth “ is the title of a 26-page review of the economy, fiscal and monetary policy since 1988 and the federal budget 2001-2002 prepared in a record period of 12 days with the SPDC research team working round the clock. The research report has just been printed.

“ The fundamental question” which, in view of the economists has arisen from the structural adjustment programme of the IMF since 1988, “is of the relative efficacy of stabilization- oriented versus growth-oriented policies on development and welfare.”

Admitting that stablization and growth are not mutually exclusive and any policy package has to incorporate both the elements, the SPDC report reveals that “the manner in which the policy has been implemented in Pakistan tended to pursue stabilization at the expense of growth.”

Stabilization has dominated all macro-economic policies during 1988-2001 at the cost of growth, dictated by interests of international creditors.The current account gap to GDP ratio has declined from an average of 4-5 per cent in the decade of 1980s and 1990s to 1.9 per cent in 1999-2000 and further to 1.1 per cent in 2000-2001.

Likewise, the budget deficit to GDP ratio has declined from an average of 6.7 per cent in the 1980s to 6.1 per cent in the 1990s and further to 5.4 per cent in 2000-01.

On the other hand, the GDP growth rate and fixed investment to GDP ratio have plummeted contrary to the objectives dictated by the needs of the people. The GDP growth rate has fallen from an average 6.1 per cent in the 1980s to 4.4 per cent in the 1990s.It came down to 3.9 per cent in 1999-2000 and further to 2.6 per cent in 2001-02.

Simultaneously, the fixed investment to GDP ratio has declined from an average 16-17 per cent to 1980s and 1990s to 13-14 per cent in the last two years.

The policy framework has increased unemployment and rising poverty. Unemployment has swelled from an average of 3.5 per cent in the 1980s to 5.7 per cent in 1990s, 6.2 per cent in 1999-2000 and further to 6.7 per cent in the following year.

Similiarly, poverty has soared from an average of 23 per cent in the 1980s to 26 per cent in 1990s, to 35.9 per cent in 1990 and further to 40.1 per cent in 2000-2001.

The economists at the SPDC have also questioned the the contractionary fiscal policy pursued by the successive governments despite the rise of recessionary tendencies since the early 1990s.

The policy has been counter-productive. It has dampened investment,curtailed purchasing power and led to recessionary situation.The policy is now being pursued with greater vigour, as indicated by the budget for current fiscal.

The standard textbook prescription that an expansionary fiscal policy is required to pull an economy falling into recession, has been ignored. The US is now adopting an expansionary fiscal policy to fight investment-led recession.

Pakistan could also opt for such a policy either through reduction in the amount of taxes on the domestic producers/ consumers and/ or through an increase in development and welfare related government expenditure.

The SPDC research report has been devoted to two other major aspects of official policies. It cautions against the policy to open up the economy more than is required by WTO standards. A new trade regime is emerging where the imports are beginning to enjoy an unfair advantage to the country’s industry and economy.

The government is reducing its dependence on domestic debt and raising its foreign debt. The economists at the SPDC believe that the policy of substituting domestic debt by external debt is inherently dangerous, with serious implications for the national economic and political sovereignty. They assert that it is possible to undertake cut in current expenditure without affecting the efficacy of the sectors concerned.

The issues raised by SPDC need to be considered by policy makers at the time of new policy directions about to be set by the IMF, under the PRGF arrangement. The opportunities offered by the war against the Russian occupation of Afghanistan were frittered away by Zia-led military regime. Once again,the US attack on Aghanistan, is bringing opportunities and challenges. It would be wise to learn from past mistakes.