The Fund is said to have released the last tranche of $118 million (fourth since the agreement was signed) despite slippages in the performance criteria set for structural reforms. Therefore, along with the tranche have come waivers for non-observance of conditions on tax exemptions and regulatory import duties.
Also, in the first half of the current year, the government has failed to meet the expenditure target for pro-poor projects by a significant margin, with a reduction of almost Rs10 billion in the very first quarter. On the other hand despite the massive inflow of foreign exchange, investment and employment situation continues to remain a matter of concern. Therefore, the growth part of the PRGF programme too appears to have been tackled only nominally so far.
Of course, the welcome break in the lingering cycle of drought and the planned purchases of $2 billion worth of Boeing aircraft for the PIA with loan of equivalent amount from the EXIM Bank of the US would certainly window-dress the growth rate beyond 4 per cent this year from a measly 3 per on an average over the last three years of military rule. But past experience shows that such growth rates are not sustainable and neither are they capable of providing even a passing relief for the poorer sections.
Another failure which the government and the IMF both are guilty of not being able to redress even after so many reform packages implemented so far over the past several years. It is indeed a matter of concern that Wapda continues to be a drain on the budget despite the fact that in the attempt to improve its income, its tariffs have been pushed beyond the reach of at least about 70 per cent of the country’s population which have access to Wapda’s grids and at the same time putting Pakistan’s manufactured exports at a disadvantage in the world markets.
The privatization efforts being made by the government with the help of the multilateral aid agencies since the last several years too have yielded only skimpy results so far. In the case of Wapda itself, these efforts have so far yielded next to nothing. The PTCL privatization campaign appears to have been suddenly shelved perhaps because the Lebanese company interested in the corporation would like the war clouds clear before making any decisive move on this score. In the case of Habib Bank, the government seems to be making slow haste.
The rate of inflation, no doubt, has remained very low all these three years. But its continuous stability in the face of an extraordinary expansion in money supply (M2) in the first half of the current year to the tune of nearly 10 per cent against an annual target of nearly 11 per cent has been achieved by cutting down drastically on the SBP’s profits. Net foreign assets, which account for almost all the expansion in M2, showed an increase of 83.5 per cent during this period while net domestic assets shrank by 1.9 per cent.
The State Bank of Pakistan has purchased about $6.5 billion which has brought into the banking system as much as Rs390 billion in about 14 months ending December 2002. But about Rs238.6 billion of this was sterilized through auctioning of the government paper in order to keep both the exchange rate as well as the rate of inflation stable. But this has cost the SBP a loss of 5 per cent in interest it could have earned on T-bill holdings. And since it is supposed to have made a profit of 1.25 per cent on its foreign exchange purchases it has, therefore, suffered a net loss of about 3.75 per cent on interest on each dollar it has purchased.
The foreign exchange flows are likely to taper off by the end of the current calender year. This will relieve the SBP of the burden of mopping up the FE to keep its rate of exchange stable. But then, a time is likely to come soon when the government and the SBP will have to decide what to do with the accumulated foreign exchange. The idea of paying back costly debt is good. But so far there appears to be no progress on this front except a couple of tentative moves. However, even if we do repay all our costly debts, we would still be left with at least about $7-$8 billion in the kitty.
This amount needs to be invested and profits earned on it. It cannot be kept idle. As it is the dollar itself has become unpopular these days. So, would not it be wise to spread our risk by investing these dollars in other more stronger currencies as well as in avenues which guarantee reasonable profits for at least the next ten years? This exercise is going to be more complicated than the exercise of purchasing the dollars from the market.
If 9/11 had not happened these purchases would have increased our economic woes and sent us the Argentina way quickly. However, the financial space which we have been allowed by our donors in return for our services to the US in its war against terrorism, has given us an opportunity to make good use of the accumulated dollars and set them aside for the rainy days. A decision in this regard needs to be made soon. Otherwise, the accumulated FE would lose its worth in due course of time.
Meanwhile, the issues of pro-poor projects and Wapda should be given priority attention by the official managers of the economy. Clearly, the need of the hour is for the public sector to take in hand as many economically viable and large infrastructure projects as it can and that too urgently. This would not only add to the growth rate but would also to a large extent bring under control the rising rate of unemployment which in turn would be crucially instrumental in helping in the PRGF efforts to reduce poverty.
The environment for privatization is not there. So, for the time being, neither the PTCL nor the Habib Bank or Wapda are likely to be sold. Therefore, the government and the IMF need to come up with something highly innovative to make Habib Bank and Wapda at least self-sufficient in the meanwhile. In the case of PTCL, there is an urgent need to improve the efficiency of its various entities.
The multilateral aid agencies are pressing on with their reform agenda. The elected government on the other hand is trying to think up of some popular financial measures to appease the rising expectations of the masses without causinga setback to the principle of continuity. Both, however, seem to be failing. And as a result there is a possibility that very soon, things would take a turn for the worse on the economic front, despite the good weather, the seeming improvement in the overall economy and despite the accumulation of nearly $10 billion of foreign exchange reserves.
In order to avert the looming dificulties,the government needs to convince the multilateral aid agencies to allow it to cut a new deal with the nation under which the emphasis is shifted away from macroeconomic stability to job generating growth.