Comment: report””s footnotes tell the real story

The footnotes published by the State Bank of Pakistan in its Annual Report 2011-2012, tell the real story of country””s economy and not the heavily vetted analysis that was issued on Thursday. Obviously the Central Board of Directors of SBP has tried not to be too critical as the country is now in an election phase. And, SBP does not want to be equated with the Supreme Court, by supporters of the present government for casting a shadow with political implications on the forthcoming elections.

In order to overcome this difficulty, the constitution envisages a neutral caretaker setup for transition from one civilian to the other elected government. Unfortunately, however, this has not happened in the past. And, both our politicians as well as the ””establishment”” are expected to learn from past mistakes. Ghulam Mustafa Jatoi and Mairaj Khalid””s caretaker setups were not neutral; these were a mere civilian facade. Moin Qureshi””s name was suggested by Sartaj Aziz and accepted by Benazir Bhutto to which Ghulam Ishaq Khan agreed. Nawaz Sharif was more interested in GIK stepping down with him and less bothered about the caretaker setup as a result of that deadly impasse threatening country””s stability. Qureshi did try to undertake reforms for the good of the economy such as: giving autonomy to SBP and have a forward looking exploration policy for the oil and gas sector. He also selected a better team of technocrat ministers but was ignorant of the ground realities as he was an ””implant”” and not fully familiar with how this country ticks. On the other hand, General Pervez Musharraf””s caretaker setup – headed by Mohammadmian Soomro – was partisan to the hilt towards PML(Q). Every right economic advice was viewed through a prism of consequence of its impact on PML(Q)””s electoral prospects.

Country””s economic slide started in February 2007 when Prime Minister Shaukat Aziz stopped the international oil price pass-through-mechanism and did not allow POL retail prices and electricity tariff to be adjusted; so that Musharraf””s re-election chances as well as PML(Q) are not endangered. In FY08 – subsidies for the first time were twice the size of Public Investment ie Rs 400 billion versus Rs 200 billion.

Subsidies expenditure in FY09 got reduced by nearly 45 percent because Pakistan entered into an IFM programme in November, 2009 but subsidies were still above nominal public investment. So, in reality the slide started at the tail-end of Aziz””s government. Since FY07, Pakistan has been running a revenue deficit and also a primary deficit which means that the tax plus non-tax revenues do not even fully cover non-interest expenses. This forces the government to borrow more to meet its debt service obligations.

With a caretaker setup due anytime soon and elections before mid-year, a million dollar question is whether the caretakers need to start the reform agenda or just hold elections and let the new government tackle the mess it inherits. There are no simple answers. However, it is crystal clear that the present economic slide if not properly addressed would just strength forces which feel that solutions are not available with the politicians and if last five years are taken as a guide – lives of citizens under democratic dispensation is increasingly becoming unlivable.

Unfortunately, however, bad governance has become synonymous with political dispensation. People tend to forget that economy improved under military rule not because they undertook economic reforms but because of high external inflows. Without reforms – maintaining above six percent growth has not been sustainable. The starting point for real reforms has to be the civil service. Why should the President/Prime Minister/Chief Minister have exclusive power to transfer or post persons in the civil service cadre or even promote them.

In this day of specialisation; why professionals and experts cannot be hired in government to improve the delivery system quality of governance and policy formulation as done in all developed countries. Fault for ills adversely impacting the economy lies with not running the public utilities or other public sector enterprises on commercial lines. Which in effect means placing professional management at the helm; empowering them to make business plans to make these enterprises commercially viable and then politically back the management to reduce staff and rationalise operations. There is no rocket science involved in all this. Pakistan has done it quite successfully in its own banking sector.

However, it would be wrong to ignore the failure of privatised banks as well as the State Bank of Pakistan, playing a due role in promotion of development finance. No business is allowed to leverage themselves like banks ie 121/2 times its capital. SBP does act as a protector for deposits in banks under its supervision while allowing shareholders to reap profit. This amounts to privatising profits and nationalising losses. After all, SBP profits are part of the federal budget as non-tax revenue.

Similarly, public utilities cannot be allowed to just work for their shareholders. They too have a public obligation and need to be somewhat development oriented. SBP””s clarion call to “embark on structural reforms in the energy sector, PSEs and public finance … together with a more balanced deficit financing mix;” are interlinked and have to go hand in hand.

HOWEVER, WHAT NEEDS TO BE RECOGNISED ABOVE ALL ELSE IS:

a) Businesses in Pakistan are barely managing to maintain output and the demand-supply gap is increasing. This will lead to higher imports placing immense pressure on forex reserves – in the future – if the dismal 12.5 percent investment to GDP ratio is not reversed; and

b) Lower domestic production would lead to higher imports. This would put pressure on price line which in turn will lead to depreciation of the rupee to keep exports competitive and attract savers towards dollarization.

Monetary authorities have slashed interest rates by 400 bps but investors have not responded because the government has failed to manage market sentiments. Investors are like partridges. They tend to fly-off together but need to be collared one by one to come back. This government appears to have given up on investors. Naveed Qamar was designated to lead the Pakistan delegation to Davos to meet investors gathered at the World Economic Forum. He failed to show up and make a case. Instead there was Imran Khan in Davos trying to sell his election programme to non-voters. The world is disinterested not because there are no profit opportunities in Pakistan. But due to flip-flops (remember Reko Diq) and poor treatment given to both domestic as well as foreign investors with possible change of governments the investor class is sitting on the sideline while the southward journey of the economy continues.