State of the economy

THE Economic Survey, 2001-02, tells a story no different from the ones narrated by the last two such annual documents. It is the same old one of deepening economic recession and continuing stagnation except that in 1999-2000 the dismal situation was attributed to the so-called ‘lost decade’ of the 1990s, while in 2000-01 it was the drought which had upset all the good work of the official economic managers. As for the economy’s performance during 2001-02, the events of September 11 and December 13 further compounded the impact of the continuing drought and largely nullified all the reforms introduced on the advice of the multilateral donors to revive the economy. Economic growth has continued to stagnate during the three years of the military government as a result of lack of investments. This is apparent from the stagnant level of revenue income.

However, in marked contrast to this depressing economic situation, the country in this period has been able to build up a record six billion dollars of foreign exchange reserves, significantly improve its current account balance, shave a billion dollars off its huge debt burden and even enjoy after many years a significant appreciation in the exchange rate of the rupee. Though the government and the State Bank of Pakistan do deserve some credit for these positive points, this aspect of the performance cannot be attributed to any lasting improvement in the bleak economic fundamentals that determine these indicators.

The space created by the first debt rescheduling obtained by the previous government in 1999 was further expanded when the donors gave the country, faced with certain default, another ‘one-time’ bail-out the next year. This space was further enlarged when Pakistan got another — and a more generous one at that — debt relief in 2001 in return for its crucial role in the international war against terrorism. For the same reason, all the sanctions under which the country’s economy was groaning during the 1990s were lifted and concessional assistance to it was resumed. Because of lack of investments, imports also went down, reducing the import bill by a significant seven per cent which, together with a paltry 1.8 per cent growth in exports, led to an improvement in the trade balance. Meanwhile, overseas Pakistanis, fearing for the erosion of their life’s savings in the uncertain financial environment abroad in the post-9/11 period, diverted their money to Pakistan. This helped further improve the current account balance. This also added another two billion dollars to the foreign exchange reserves. That the developments on the external front did not flow from any positive changes occurring on the domestic economic front is apparent from the fact that, despite all the gains in the former sector, the investment climate in the country has continued to remain highly unfavourable. The Survey has identified lack of improvement in governance and the poor state of infrastructure as the two main reasons for investment not picking up despite what it believes to be an improved macroeconomic environment as characterized by low inflation, low budget and current account deficits and comfortable foreign exchange reserves. As for the governance factor, the Survey has identified bureaucratic hurdles, cumbersome labour laws, uncertain pattern of interaction with tax authorities, corruption associated with the enforcement of rules and regulations and the absence of rule of law. It also holds the lack of uninterrupted power supply at competitive rates, good roads, rail and telecommunication network, efficient port operations and quick customs clearance responsible for low investment.

While not disagreeing completely with this assessment, one is simply at a loss to understand why the all-powerful military government has failed to eliminate all these essentially bureaucratic and operational hurdles despite three years of its sternly focused attention to improving governance. The issue of infrastructure is directly related to investment. Lack of this naturally impacts on the level of infrastructure and the lack of it in turn discourages investment. This is an egg-and-chick equation. So, it is investment which is needed first — which the Survey believes is not forthcoming because of bad governance. Since the government at the moment appears to be up to its neck in a two-front situation — one of the world community’s war against terrorism and the other, a war-like situation created by India — there seems very little chance of it having enough time to improve governance.

In fact, if one looks over the last ten years, one finds that Pakistan, rather than focusing on governance, was getting deeper into two low-intensity wars — one on its eastern border and the other on its north-western frontier. This is hardly an environment for investment to flow in and remain uninterrupted. This explains why investment has virtually trickled off. Unless we get out of these two situations quickly and start focusing on governance and re-establishing the rule of law, there appears to be no hope of the country getting out of its low economic cycle. Meanwhile, the positive developments on the external front also disappear for one reason or the other, things are likely to become even worse.

Another suicide attack

THE horrifying suicide bomb attack outside the US consulate in Karachi yesterday was another grim reminder of the price Pakistan is paying for becoming a frontline state in the US-led war against terror. The daring attack — which killed eight people, including the bomber, a woman and several police and security personnel, incidentally all Pakistanis — and injured at least 40, took place in one of the most heavily guarded and fortified parts of the city. The incident took place when a vehicle was rammed into a guard-post outside the consulate, setting off a massive explosion that sent the car flying into the air and landing in the Frere Hall gardens opposite the consulate. Last month, there was a similar suicide attack in Karachi which killed 11 French naval engineers and three others. In March, a church in Islamabad patronized by foreign mission staff was targeted, leaving five persons dead. Karachi was also the scene of the kidnapping and subsequent killing of US journalist Daniel Pearl in January. All these incidents seem to be links in the same chain, and are aimed at creating an atmosphere in which foreign nationals feel highly insecure. The incidents have forced a number of western missions to evacuate many of their staff from Pakistan. Rather than abandoning Pakistan, however, it would be better if the US and other allies in the war against terror stood firmly behind this country to show that they are not cowed down by such acts of wanton killing and terror. By retreating from the scene, western governments send the wrong signals to the terrorists who seek to isolate Pakistan for supporting the anti-terror war. The latest incident also exposes, once again, the weakness of Pakistan’s intelligence agencies. While a suicide bombing is among the most difficult crimes to prevent, it is possible to gather information about the groups behind such attacks and try to pre-empt them.