Flying away: Foreign investment falls 59% in five months

Foreign investment in the country dropped 59 per cent to $305.4 million in the first five months (July-November) of fiscal year 2011-12 compared to investment of $748.7 million in the same period last year, State Bank of Pakistan (SBP) said on Friday.
According to breakdown, foreign portfolio investment fell significantly by 166 per cent to $114.5 million against $172.5 million in the previous year. On the other hand, foreign direct investment declined 27 per cent to $419.8 million compared to $576.2 million last year.
JS Global Capital Limited economist Muzammil Aslam said the decline in foreign direct investment (FDI) is certainly not good for the country. “What is disturbing is that there is no inflow of technology and knowledge that usually comes with FDI,” he said. “Similarly, it is also a bad sign for growth and employment opportunities.”
The decline in foreign investment from $5 billion in 2007 to the present level of $305 million is significant for a country that is now facing a current account deficit, he said.
Aslam said the government can overcome this challenge by reviving the privatisation programme and marketing viable sectors where foreign investment can come easily.
“The government has to move on and attract investors because the country’s image as an investment destination has been shattered. It can be achieved through continuous interaction with investors, which the government is not doing efficiently,” he added.
Though most analysts are attributing the continuous decline in foreign investment to the sluggish economy, some experts have divergent views as well.
AF Ferguson and Company partner SM Shabbar Zaidi said as far as FDI is concerned, the situation is not that bad as is being portrayed by some quarters.
It is a misperception that Pakistan got huge FDI in the good times of 2007 or before as around 70 per cent of foreign investment before 2007 comprised portfolio investment, which is usually considered “unreliable” in the world. Portfolio investment comes in stock markets and then quickly vanishes within months, he pointed out.
“As an investment adviser, I can tell you that huge investments, especially from South Korea and China, are coming. Most probably, the investments will come in 2013,” he said.
Compared to portfolio investment, investments are much more reliable in manufacturing, “but I do not see much investment in this area in the last two decades,” he noted.

Evading crisis or courting crisis?

Evading crisis

The current economic management team has been sitting relaxed taking no real initiative to move the country out of its deep rooted economic problems.

The budget deficit is out of control and the political leadership is unwilling/unable to take fiscal measures to raise revenue and reduce expenditure. As a result, the economic management team has found an easy way out to finance the rising budget deficit through bank borrowing, the only tactical change being a shift from direct borrowing from the SBP last year to borrowing from commercial banks. This round about method of budget financing by the SBP is equally inflationary, highly hurtful for the private sector and increasingly risky for commercial banks.

The public reaction to the rising rate of inflation may not be strong enough to compel the government to reduce its excessive bank borrowing, but there is no doubt that it will steadily put pressure on the balance of payment leading to fast depletion of foreign exchange reserves. The real question is not whether or not reserves will continue to go down, but rather how long the reserves can last before the emergence of a foreign exchange crisis.The existing level of foreign exchange reserves, built with repayable borrowed funds, is providing false comfort and a sense of complacency to the economic team misleading it to believe that they can weather the storm beyond the forthcoming elections without policy reforms/foreign exchange crisis. However, the approach to continue to finance the budget deficit by borrowing from the banking system and to rely on the drawdown of foreign exchange reserves to finance the widening balance of payment deficit is both unwise and unsustainable.

In addition to the severe harm that such an approach will inflict on an already fragile economy, there is a real possibility that the government may get trapped in a foreign exchange crisis before the end of its current tenure.

The government will never run out of rupees as long as the State Bank of Pakistan is willing to accommodate it. But neither the SBP nor the government has the ability to print dollars, and the threat of exhaustion of foreign exchange reserves needs to be taken seriously.

When foreign exchange reserves fall below a critical threshold, say, below $10 billion, increasing speculative demand for foreign exchange will accelerate the process of depletion of reserves.While we do not have access to all the necessary information for a precise forecast, our back-of-the-envelope calculations based on published data make it clear that in the absence of economic reforms the government may face a foreign exchange crisis before the end of 2012.The foreign exchange reserves of the SBP stood at $12.9 billion on December 2, 2011. In October, the last month for which data are available, the country recorded an overall deficit of $635 million in its balance of payment. If it is taken as the average deficit per month up to December 2012, the reserves will decline to $4-5 billion by end-December, 2012 on that basis. Additionally, the SBP will have to repay $2.4 billion to the IMF before December 2012, reducing reserves to an alarmingly low level. Speculative purchase of dollars for imports and capital flight may expedite the timing of the foreign exchange crisis.Looking at the situation in another way, we arrive at the same conclusion. The current account deficit stood at $1.6 billion during the first four months of the current fiscal year, the latest period for which data are available. If the same trend continues up to end-December, 2012, there will be an additional current account deficit of $5-6 billion during November, 2011-December, 2012. Its financing, combined with the IMF repayment of $2.4 billion, will bring down reserves to less than $5 billion by end-December, 2012.Additional drawdown of reserves will depend on the extent of deficit in the other capital account items, which will most likely be in a large deficit both because of reduced disbursement of foreign loans and increased amortisation payments excluding those to the IMF. There may easily be an additional drain on reserves in the range of $1 billion to $2 billion up to December 2012, depending on the level of disbursement of new long term loans. According to these calculations, and if nothing unusual happens, SBP reserves will decline to $2-3 billion by the end of December, 2012.

The writer is a former governor of the State Bank of Pakistan

Mercenary for hire

Unrest in the Arab world: Islamabad assures Riyadh of support
In the backdrop of the current political uprisings in the Arab world, Pakistan has decided to play a significant role in the region by supporting Saudi Arabia, sources told The Express Tribune.

The decision came following a string of meetings that Prince Bandar bin Sultan bin Abdulaziz, special emissary of the Saudi king, had with the Pakistani leadership over the weekend.
The Saudi royal family scion met the top political and military leaders, among them President Asif Ali Zardari, Prime Minister Yousaf Raza Gilani, Interior Minister Rehman Malik and Army chief General Ashfaq Parvez Kayani.

Prince Bandar’s whirlwind tour came as mass protests are sweeping across most of the Gulf and Middle
Eastern countries. Though there is no immediate threat of an uprising against the Saudi rulers, the situation in neighbouring Bahrain is a cause for serious concern.

In his interaction with Premier Gilani, the Saudi prince indicated that the oil-rich kingdom would extend meaningful support to Pakistan to improve its ailing  economy, sources told The Express Tribune on Sunday.
Cash-strapped Islamabad has been asking Riyadh for oil on deferred payment for quite some time now. Prince Bandar is said to have assured Islamabad of its help to address its immediate oil needs. He also reaffirmed that the kingdom would always stand by Pakistan to confront any challenge and support any initiative to expand bilateral ties.

According to sources in the Foreign Office, the Saudi move to seek help from Pakistan had a tacit endorsement from the United States whose forces are stationed in Bahrain. The US 5th fleet is stationed in Bahrain under an agreement reached between the two countries 15 years ago.
“The United States does not consider Saudi security forces’ entry into Bahrain as an invasion,” the White House said on Monday. Riyadh sent about 1,000 troops into Bahrain to protect government facilities after protesters overran police and blocked roads.

Premier Gilani told Prince Bandar, who is also secretary-general of the Saudi National Security Council, that his country supports the Saudi stance in the Gulf and the Middle East and would stand by Riyadh for regional peace.

The prince briefed the prime minister on the Saudi perception of the situation in the Gulf and the Middle East.
Sources said that the main purpose of Prince Bandar’s visit was to evaluate Islamabad’s viewpoint on the rapidly changing political situation in the Arab world, particularly on the alarming situation in Bahrain, which borders Saudi Arabia.

In 1991, Riyadh was disappointed by Pakistan’s attitude towards the Gulf War when the then army chief Gen Aslam Beg had publicly opposed the then prime minister Nawaz Sharif’s decision of sending army and air force units to Saudi Arabia on the call of the kingdom.
Faced with the threat of a direct attack from Iraqi strongman Saddam Hussien’s forces, the Saudi authorities were further disappointed when Gen Beg agreed to send only 5,000 troops after a long delay and that too under strict conditions.
It took Islamabad several years to win back the trust of Riyadh. The Saudis kept referring to this ‘betrayal’ during their talks with Islamabad on all forums, a former diplomat, who has served in Riyadh, told The Express Tribune.

We are more concerned about Cricket!!

PAKISTAN: Struggling to cope amid rising food prices

LAHORE, 30 March 2011 (IRIN) - The price of wheat in Pakistan has almost tripled since 2008, making people in places like the poorer suburbs of Lahore, capital of Punjab Province, wonder how they will feed their families, local residents say.

“A few years ago we paid just a little over Rs 200 [US$2.35] for a 20kg bag of wheat flour,” Saleem Yousaf, a father of four who works as a cook said. “Today, we pay over Rs 550 [$6.47] for the same amount, which lasts us less than a month, while the prices of vegetables, lentils, spices and everything else have also soared.”

Yousaf’s wife also works as a domestic help in Lahore, and together they earn Rs 12,000 [$142] per month. “Other families earn less, but we struggle hard to manage because all our four children are in school, and I really believe an education is vital to their future,” he told IRIN.

The minimum wage for workers was increased by the government from Rs 4,000 ($47) to Rs 6,000 ($70) in March 2008, but groups working for labour rights say implementation is poor.

Yousaf’s family spends Rs 4,000 each month to pay fees and buy books and stationery. Another 1,000 goes on utility bills. “Sometimes we barely manage to feed the children,” Yousaf added.

Javed Saleem, his 11-year-old son, told IRIN “We only eat at dinner time and have a mug of tea at breakfast. My parents cannot afford more.”

Other families in the impoverished Shadra area of Lahore, where Yousaf lives, face a similar situation - as do tens of thousands of others across the country.

Ironically, fields of wheat stand all around the Shadra, on the outskirts of Lahore, but the grain, which is the staple food in Punjab, is largely inaccessible to many because most of the crop is sold for export.

According to the Famine Early Warning System (FEWS NET), a combination of inflation and chronic food insecurity means many in Pakistan are vulnerable to price increases. Poverty and high food prices threaten food security, and in turn fuel inflation.

Malnutrition

“The high food prices have impacted people's ability to obtain required calories to live a healthy life,” Amjad Jamal of the UN World Food Programme Public Information Unit told IRIN from Islamabad. “The majority of Pakistanis spend half of their income on buying essential food items and are left with very little for health care and children’s education.

“This also leads to malnutrition in the longer run, which has been seen especially in the wake of recent floods, where Sindh is facing malnutrition problems,” he added.

Ghulam Nabi, a doctor in Shadra, said: “I see children brought in all the time who suffer malnutrition. They are simply not getting the calories they need and the families cannot manage to give them better food.”

The 2008 global financial and economic crisis, the displacement of about three million people in 2009 by fighting between militant groups and the Pakistani army, and the catastrophic floods in 2010 worsened the situation, he added.

According to Pakistan’s federal bureau of statistics, the consumer price index rose in February by 17.72 percent compared to the same period last year.

“My father-in-law is sick with hepatitis, but if we try to get medical care we will not be able to feed our family,” said Razia Bibi, a mother of five. She earns around Rs 6,000 ($70) a month stitching clothes. Her husband is unemployed. Since he lost his job seven months ago, the three daughters have not attended school.

The missing taxpayers

The missing taxpayers 
They travel abroad regularly, live in palatial homes and drive luxury vehicles. They are 2.3-million strong – they are the affluent Pakistanis who are also distinguished because they do not pay any taxes. They don’t even have a tax number, which suggests that these 2.3 million affluent Pakistanis have never paid taxes in Pakistan.

This is about to change, if one were to believe Salman Siddiqui, Chairman of the Pakistan’s Federal Bureau of Revenue (FBR). The FBR has issued notices to the 700,000 wealthiest of the 2.3 million affluent Pakistanis to pony up withheld taxes. Mr. Siddiqui did not elaborate on the penalties for those who would continue  to evade taxes.

Tax evasion in Pakistan leaves the State with no option but to borrow money from lenders, such as the IMF. Consider this: in a nation of 180 million, fewer than two million are registered tax payers. Furthermore, tax revenue accounts for roughly 10 per cent of Pakistan’s GDP, which is extremely low even for Pakistan. The average among western European states is around 30-plus per cent. In neighbouring India, tax revenue accounts for 18 per cent of the GDP, which makes me wonder whether Indians have a better sense of citizenship than Pakistanis.

In the words of the famous Canadian-born economist, John K. Galbraith, this leads to the classic case of “private opulence and public squalor” where the desire and demand for private goods is enhanced while spending on public utilities such as schools and parks decreases. In fact, Pakistan’s society and economy epitomises private opulence and public squalor where the fortunes of the rich and wealthy keep growing, while the State of Pakistan gets buried deeper in domestic and international debt.

The FBR has to squeeze hard these bloated tax-evading lemons. I would argue that even the sovereignty of Pakistan rests on the unpaid taxes of these 2.3 million affluent citizens. Consider the following numbers: if the very rich tax evaders are charged a nominal annual tax of $2,500, and the remaining 1.6 million not-so-wealthy evaders are charged $1,500 annually, this would generate an additional $4.2 billion in tax revenue.
Remember that the US is offering Pakistan annually $1.5 billion (in aid) through the Kerry Lugar Bill, in exchange for drone attacks on its own people. The $4.2 billion from the wealthiest tax-evaders could buy Pakistan its freedom from the United States.

And what of the tax penalty for avoiding taxes in the past? May I recommend a one-time penalty, $5,000 for the very rich and $2,500 for the second-tier rich, which would generate a one-time revenue of $7.5 billion. This is exactly the amount that the Kerry-Lugar Bill has promised for Pakistan over 5 years. Again the very rich, by paying their back taxes as one-time penalty, can off-set Pakistan’s dependence on American assistance.

The amounts I have suggested in taxes are not excessive by any account. It was only last month when we learnt that renowned Pakistani singer, Rahat Fateh Ali Khan was caught with undeclared $124,000 in cash at the New Delhi airport. Rahat Fateh Ali Khan reportedly has no tax history in Pakistan. Would people like him find a few thousand dollars in taxes, burdensome?

Asking the very rich in Pakistan (who make several trips abroad for which the airfare of a single trip alone is around $1,500) to dole out $2,500 (or $1,500) in taxes is certainly not excessive. If you consider the equity they hold in their palatial homes or the luxury vehicles they drive, the amount I have suggested in taxes would appear insignificant for the very rich.

I live in a middle-class neighbourhood in Toronto, Canada, where I pay over $5,500 in property tax alone. My total tax bill (income and other consumption taxes) is an order of magnitude higher than my property tax bill. In fact, in Canada income taxes are the largest single line item in a household’s budget, followed by shelter and transport costs.

Canadians pay taxes even when they disagree with how the government spends their tax dollars. Consider the current right-wing government of Prime Minister Stephen Harper that has followed a more fear-laden agenda and has shifted towards spending on building prisons and buying fighter jets from the United States. Most Canadians abhor such spending decisions because Canada has experienced a significant decline in violent crime rate over the past decade and hence, does not need new prisons. Furthermore, Canada does not face any security threats from other countries for which it may need new fighter jets. Building prisons and buying fighter jets seems a huge waste of tax-payers’ dollars. Yet, I and other Canadians do not even for a second think of withholding taxes on the pretext that our tax dollars may be wasted on futile projects.

The relationship between the State and the citizen is defined by the citizen’s willingness to pay taxes. Withholding taxes weakens the State. A weakened State has no alternative but to compromise. In Pakistan’s case, it is not the politicians alone who have pushed the State to beg from the IMF or the United States. Instead, it is the citizens of Pakistan who refuse to buy a stake in the country’s future by paying taxes, have forced the State to borrow from IMF and other lenders.

All Pakistanis, irrespective of their political or religious persuasions, hate their country’s dependence on handouts from the United States, the IMF, the World Bank and other similar institutions. The easiest and surest way to break free of this economic dependency is for Pakistanis to pay their taxes.

Dil mange More!

Govt plans for new IMF loan 

ISLAMABAD: The federal government has decided in principle to enter into another International Monetary Fund (IMF) loan programme after concluding the fifth review of the $11.3 billion Standby Arrangement (SBA) in June 2011.
The negotiations for the next loan programme will start after announcement of the federal budget, said the sources.
Finance Minister Hafeez Shaikh would discuss the options for the new programme with IMF officials during his upcoming visit to Washington DC.
He is scheduled to visit the United States in April 2011.

WTF

Petrol and diesel prices may go up again

ISLAMABAD: Petrol and diesel prices are estimated to increase by Rs7 and 10 per litre respectively if the government decides to pass on the full impact of international oil prices to consumers on March 31.

Sources close to the chairman of Oil and Gas Regulatory Authority (Ogra) told Dawn on Monday that a report on the international oil price situation had been submitted to the ministry of finance but had not been deliberated upon because Finance Minister Dr Abdul Hafeez Shaikh and Secretary Finance Dr Waqar Masood Khan were not in town.

The report said the prices of petrol and diesel have increased by 10 per cent and 12.2 per cent respectively in the first 25 days of the current month as the benchmark crude prices hovered around $111.2 per barrel in the Gulf market.

The sources said the government would have to absorb an additional burden of Rs8 billion in case the prices were maintained at the present level but it was left with limited options to do so because of difficult financial position, although political pressure playing a role could not be ruled out.

The sources said the government was required under the finance bill 2010-11 to collect Rs10 and Rs8 per litre as petroleum levy on petrol and diesel respectively but it was charging only Rs3.16 and 44 paisa per litre respectively, following an agreement with the Muttahida Qaumi Movement.

Over the last five months, international oil prices have increased by up to 26 per cent but only 5 per cent impact was passed on to consumers.

The government is reported to have suffered a revenue loss of Rs25 billion during four months — December to March. Prime Minister Yousuf Raza Gilani who is holding the petroleum minister’s portfolio after the restructured federal cabinet, said these officials would take a decision about the price increase on Thursday, most probably after consulting the coalition partners and other political parties.

The sources said the government foresaw further rises in the international market because of expectations of fresh oil purchases by Japan and continued unrest in Libya and Bahrain.
Last month, the government initially increased petroleum prices by 9.9 per cent but had to reduce it to 5 per cent in line with the agreement with MQM.

More to come

4,000 gas schemes add to shortfall 

ISLAMABAD: With gas shortfalls extending first time into the summer months, about 4,000 new gas provision schemes on the instructions of the prime minister for party colleagues mostly in Punjab and Sindh are estimated to add another 10 per cent to the shortage.
Informed sources told Dawn that Prime Minister Yousuf Raza Gilani was told at a recent presentation that completion of gas connections schemes under his instructions would cause an additional gas shortage of 312 million cubic feet per day (mmcfd) in winter and 118 mmcfd in summer, from an existing gap of about 950 mmcfd.

The two Sui gas companies SNGPL and SSGCL and the ministry of petroleum had informed the prime minister that most of these schemes did not fit into the viable expansion plans of the two gas companies.
“This is not only forcing them (the gas companies) to borrow from the banks to fund such schemes but also depriving the government of dividends it had estimated to accrue from their profits”, a chief executive of the company said requesting not to be identified.

Already, the gas utilities are entangled in the chronic energy sector circular debt and struggling to clear their dues to the gas producers and other equipment suppliers. The Sui Northern Gas Pipelines Limited (SNGPL) has to recover about Rs8 billion from its consumers but was holding back payments of about Rs24 billion to its suppliers, further aggravating the circular debt position.


The federal government provides about 30 per cent of the cost of new connections while the remaining 70 per cent portion has to be funded by the gas utilities. The SNGPL had already started discussions with the banking sector to raise loans at an interest rate of more than 4 per cent.
The maximum political pressure was on SNGPL because of its network in Punjab mostly in Southern region, followed by SSGCL in Sindh and some parts of Khyber Pakhtunkhwa, the sources said.

Under the procedure, the prime minister approves different schemes on the recommendations of the parliamentarians and party workers and then sent these to the ministry of petroleum for cost estimation by the gas utilities.

On the basis of these estimates, the Prime Minister Secretariat issues directives to the finance ministry to release the amount to the cabinet division against federal government’s share for onward transfer to the gas companies through the Auditor General of Pakistan Revenue (AGPR).

An official said that an amount of Rs6 billion was set aside by the government in November 2010 asking various ministries and divisions to surrender their unspent allocations of last financial year.
Officials said the gas utilities were unwilling to fund most of these schemes because of their unviable returns to recover the cost of new pipelines as most of these projects were in far-flung areas.

The downside of the expansion is that the government will have to make additional cuts in gas supplies to fertilizer sector, CNG and commercial sectors in the coming years, the official said.
The overall share of CNG consumption has already dropped from about 7.2 per cent in overall supplies to about 6 per cent this year because of two-day weekly gas holiday while fertilizer sector has been unable to get its committed supplies almost throughout the just concluded winter.
As a result, the overall gas shortfall was expected to go beyond 1.6 bcfd (billion cubic feet per day) in next winter season. Currently, the two gas utilities supply about 4.2 bcfd of gas, with winter shortfall at about 950 mmcfd.

The gas shortfall has been estimated to remain throughout summer albeit with a lower impact.

Full of hot air

PSO faces $30m loss on FAL Oil non-performance 

ISLAMABAD: The cash-strapped Pakistan State Oil (PSO) management is seriously contemplating to encash the performance bond of M/S FAL Oil, which reportedly remained failed so far to sell cargoes of fuel oil to the company, TheNation learnt.

M/S FAL Oil has caused a huge loss to the national exchequer and PSO`s losses due to FAL non-performance of their contractual obligations has led to a loss of over $30 million, ?sources said adding that M/S FAL Oil contracted to sell PSO cargoes of fuel oil during Nov-Dec. 2010 and to date have not fulfilled their contractual obligations.

 

?According to PSO`s own tender if a supplier is over six days late in delivering the cargo they can cancel the cargo and encash their performance bond, however, M/S FAL Oil is five months late the performance bond of M/S FAL oil has not been encashed worth $7.8 million? they said adding that the amount of the performance bond held by PSO is expiring on March 31st, 2011.

Sources further informed that PSO wrote a letter to the Standard Chartered Bank in Karachi to en-cash M/S FAL Oil`s performance bond in March around the 18th of the month and then all of a sudden asked the bank not to do so. They also told that the Managing Director of PSO received a call from the government big wig warning him serious consequences for the PSO management if performance bond was encashed. They further added that MD PSO succumbed to the pressure and informed the Managing Committee of PSO which had approved the encashment of the performance bond that PSO would no longer go ahead with encashment

Jhootha hi sahi

IMF loan raised to $11.3 billion on false premise of tax reforms? 

ISLAMABAD: Pakistan?s former representative in the IMF?s Board, Dr Ehitsham Ahmad, has admitted that the augmentation of IMF loan from $7.6 bn to $11.3 bn was made on a false premise that the tax reforms in the country would be implemented by autumn 2009.

The email message of Dr Ehitsham has generated heated debate among the economists in which he reportedly regretted that he pleaded the case before the Fund?s executive board to raise the loan amount up to $11.3 billion from the earlier committed limit of $7.6 billion.

It is relevant to mention here that it was Dr Ashfaque Hassan Khan, who wrote on the opinion pages of this esteemed newspaper first under the title of ?Ten Blunders? of the PPP-led regime that also included augmentation of the IMF loan that was used to fill the gap of Tokyo pledges from Friends of Democratic Pakistan (FoDP).

 

Now in another message sent by Dr Ehitsham to explain his position, a copy of which is also available with our sources, states that the root of the crisis, as correctly identified by Sakib Sherani in one of his article, lay in the inaction during 2006 and 2007, the failed tax reforms, and in the credit expansion that preceded it for some years.

 

He stated that the argument then was that we needed the original program as a ?bridging loan? while we brought the stalled tax reforms back on track. In retrospect, a program that front-loads assistance, with back-loaded structural measures, may be more appropriate for countries in Latin America that have made considerable progress on structural reforms than for countries like ours.

 

On augmentation issue, he stated that it arose with the failure of the Tokyo FODP in April 2009 and expected inflows did not materialize - plus the Army action in Swat led to a large spending on the IDPs. Again, the outcome in the Board was not assured, and Pakistan had to lobby hard for the augmentation and the extraordinary permission from the IMF to use part of the tranche for budgetary purposes - a bridge to the FODP monies.

 

This would not have been possible without the personal credibility of Shaukat Tarin with IMF management, and especially the Board, and the assurances on my part that the tax reforms were on track.

Put bluntly, Dr Ehitsham says, the original programme itself is not credible without the tax reforms?the augmentation doubly so. ?The IMF staff are not fools, and will not allow us access to the augmentation given the unfavourable debt sustainability analysis and the absence of credible structural reforms,? he further stated.

So the argument about the augmentation issue is purely academic. ?We will not get funds that we have no chance of repaying,? he maintained.

 

The augmentation was made on a false premise?that the tax reforms would be implemented by autumn 2009. To give Shaukat Tarin (former finance minister) his due, Dr Ehitsham said, he thinks he really tried and it really does no good to blame others, who may be tempted to retaliate. The blame game is destructive and detracts from the issues and challenges that as we all agree, are dire.

He wrote to Dr Ashfaque Hassan Khan that he fully agreed with his viewpoint that we (Pakistan) should not seek to draw on the augmentation, and we will probably have to negotiate a debt restructuring agreement in short order to repay the amounts already drawn. As you pointed out in the article that I commended, the next IMF programme will not be a walk in Rock Creek Park, or Margallah Hills for that matter. On my part, he said, he had resigned IMF position in December 2009?there was no way that he was going to be able to face my friends on the Board, after the assurances that he had given in August. ?Concerted actions are needed in order to address the crisis. The politicians are confused and driven by short-term self interest?disastrous under the present circumstances,? he concluded.

The End is NEAR!!!

Digging a deeper hole: The risky strategy of borrowing to pay off loans 

The country is passing through one of its worst ever economic crises and the omens are not good as the government is seeking to borrow more from the internal and external resources to pay off foreign debts which have surged to $59 billion.

And sources in the finance ministry accept the fact that the economy is caught in the vicious cycle of having to borrow externally to pay off existing foreign debt.

Fast increasing public debts clearly indicate that the financial managers should look at the option of falling back on the internal resources for debt-servicing. The country’s total foreign and domestic debt at the beginning of 2011 has touched the dangerous mark of almost Rs 11 trillion. The debt-to-GDP ratio has gone up to 74 per cent from 64 per cent in January 2010. The government is continuously borrowing heavily to meet its burgeoning budgetary deficit. According to the State Bank of Pakistan, domestic debt increased to Rs4.958 trillion by September 2010, from 4.018 trillion in September 2009.

The external debt of the government increased to Rs3.864 trillion in September 2010 from Rs3.656 trillion in September 2009. By September 2010, the foreign debt was $58.41 billion as against $55.62 billion in June 2010, showing an increase of $2.79 billion in three months.

And this trend was echoed by domestic debt growth as well. By the end of 2010, our domestic debt went up to Rs5.50 trillion as a result of the government’s insatiable borrowing quest. In September 2010, domestic debt and liabilities were of Rs 5.191 trillion, which registered an increase of Rs306 billion in just three months. During 2009 to 2010, domestic debt showed an alarming growth of Rs1.05 trillion. In December 2009, domestic debt/liabilities stood at Rs4.447 trillion rupees, which increased to Rs5.5 trillion by December 2010.

In the first quarter of 2010-11, debt servicing amounted to 1.2 billion US dollars as per State Bank of Pakistan figures. Since then, the size of debt servicing has increased by about 49 per cent as compared to the same period last year. Pakistan had to pay 5.641 billion US dollars as debt servicing in fiscal 2009-10, which accounts for more than 33 per cent of the country’s total foreign exchange reserves. The total foreign debt and liabilities of Pakistan reached 58.512 billion US dollars, up from 47 billion US dollars two years ago.

‘PIA suffered Rs 32bn loss due to rupee devaluation’

‘PIA suffered Rs 32bn loss due to rupee devaluation’ 

ISLAMABAD: The National Assembly was informed on Wednesday that the Pakistan International Airlines (PIA) has suffered a Rs 32 billion loss due to the devaluation of the Pakistan rupee against the US dollar in the last two years.

To a question, Federal Minister for Defence, Chaudhry Ahmad Mukhtar told the NA that the PIA had suffered a Rs 32 billion loss due to the rupee’s devaluation alone, while other losses of the airline were caused by additional factors. He added that an inquiry had been ordered against those PIA employees who had been receiving double salaries from the organisation.

The minister said that in order to make the national airline a profit-earning entity, a PIA business plan had been approved by its board of directors. “Measures have been suggested for revenue enhancement as well as route rationalisation in a way that would ensure optimal utilisation of resources,” he stated.

Mukhtar added that a study had been conducted for laying the groundwork of the PIA business plan and to identify causes for the airline’s losses.

To another question, he said that currently PIA was operating on 40 routes to European countries “which would increase to 140 after signing an agreement with the Turkish Airlines”. Talking about the aircraft Boeing 777, Mukhtar said the aircrafts were not only fuel-efficient but were also suitable for long-distance journeys.

To another question, the House was informed that Pakistan had set a new Guinness World Record by planting the maximum number of trees during 24 hours in Keti Bundar on July 15, 2009, a feat undertaken by the Sindh Forest Department. A total of 300 local fishermen planted 541,176 plants of mangrove on 796 acres in the Indus Delta. The event was organised by the Ministry of Environment in collaboration with the Sindh Forest Department and the National Bank of Pakistan.

Conference on doing business in Pakistan to be held on February 10

Conference on doing business in Pakistan to be held on February 10

LONDON, Feb 3 (APP): A conference to identify opportunities for doing business in Pakistan is being jointly organised here on February 10 by the UK Trade and Investment and Pakistan High Commission. The event will take place at the Lancaster House where Pakistan’s Minister for Investment Saleem Mandiwala and British Minister for Trade and Investment Lord Green will be the key note speakers. High Commissioner for Pakistan to the UK Wajid Shamsul Hasan and his British counterpart in Islamabad Adam Thomson will also address the conference.

The event will highlight business opportunities in Pakistan for the UK companies. Over 100 UK companies are already operating successfully in Pakistan and the bilateral trade between the UK and Pakistan is worth over 1 billion pounds annually.

PHC spokesperson said Thursday the event aims to identify opportunities for business in Pakistan besides hearing views from the market of both government and business leaders.

“It will also help in creating understanding of the procurement process and aid funded business and infrastructure opportunities in Pakistan as well as support available to the UK companies seeking to do business in Pakistan,” the spokesperson added.

The event is significant in the context of Pakistan’s privatization programme. Other prominent speakers who will share their views from the market include Asian Development Bank’s Director General for Central and West Asia, Juan Miranda ,Chief Executive, Hubco Power Pakistan, Vince Harris and Chief Executive HSBC in Pakistan Lloyd Maddock.
A large number of British companies will also be participating in the day long event.

We have culture of corruption: Hafeez

We have culture of corruption: Hafeez

Islamabad—Federal Minister for Finance and Revenues, Dr.Abdul Hafeez Sheikh has said Pakistan needs reforms in taxation system by replacing the weak taxation machinery with efficient and vibrant tax collecting machinery for the economic prosperity of the country.

“We have a weak tax collection machinery; we have a culture of corruption; we have limited incentives; we don’t have the technology; so it is a combination of things,” he told a private TV Channel in an interview.

The Finance Minister said that the country needs reforms in the tax collecting mechanism, adding in the coming budget people would see many proposals aimed at reforms in FBR in this regard.

He said the government is very serious in reforms in FBR, because ratio of taxes to GDP of our country is just 10 per cent that is not sustainable. He added that in order to overcome the issue the government is holding political dialogue with various political parties aimed at taking every body on board and steps should be taken to enhance that tax to GDP ratio for the benefit of the country.

Dr.Hafeez Sheikh said that the main aim and objective behind the introduction of Reformed General Sales Tax (RGST) was the documentation of the national economy and bring the tax evaders into tax net. “It is often argued that we are relying on indirect taxes, but in an economy both direct and indirect taxes are levied. For levying direct taxes the government needs complete data, which can be made available from documentation of the economy,” he said.

He said there isn’t any right estimate as to how much wealth or tax able amount remained out of tax net, adding that indeed big enough amount remains out of the tax net.

He said former finance minister Shaukat Tareen had put the figure at Rs.500 billion; but even if it is Rs.300 billion or so, it is a big enough amount”, he remarked.

Federal Minister for Finance and Revenues, Dr.Abdul Hafeez Sheikh also said that the recently entire bureaucracy in the Federal Board of Revenue (FBR) has been reshuffled and competent officers been placed on the key posts.

However, he said due to prudent economic policies of the government the foreign exchange reserves have increased to over $ 16 billion; fiscal deficit was reduced to 5.3 from 7.6 per cent. He said new programmes were initiated for the under privileged masses adding that important and unprecedented steps like introduction of capital gain tax were levied on the most affluent class of the country.

Similarly the minimum taxable income was increased from one hundred thousand to three hundred thousand rupees per annum. “So an effort was made to reduce the burden of tax on the lower middle class people and five million people are being given targeted subsidy.”, he remarked.

The Minister said, one should know that tussle between two major parties in the country in the 90’s gave rise to the corruption in the state run bodies. He said corruption is the problem of other countries too but we should be aggressive enough in checking this menace. He said for the first time in the history of the country the Public Accounts Committee is being headed by the Leader of the Opposition in the National Assembly.

He said the biggest critic of the government is heading the biggest body to counter corruption; this is also the first time that many news channels are freely criticizing the government and highlighting the corruption; so there are emerging forces which are countering corruption. “Did we witness in the past the way Supreme Court is taking cognizance of the corrupt practices,” he questioned.

Hafeez said in any civilized society all institutions including judiciary and media go hand in hand. He said it was the decision of the cabinet to freeze the level of expenditures to the level of last year adding that it is planning to reduce the expenses of the state bodies to 30 per cent. Dr.Hafeez Sheikh said that the government has to give Rs.160 billion to the flood victims and Rs.300 billion are to be given to the provinces; so an environment of social security is getting emerged.

State of the economy: SBP revises inflation forecast to 16%

State of the economy: SBP revises inflation forecast to 16%

The State Bank of Pakistan (SBP) chided the government for “excessive budgetary borrowing, particularly from the central bank” because it is increasing overall demand and also diluting the effect of the measures to contain inflation, while revising its inflation estimate for the current fiscal year from 13.5-14.5 per cent to between 15 and 16 per cent.

The estimate, contained in the central bank’s State of the Economy report for the first quarter of the current fiscal, was released here on Wednesday.

High government expenses financed through borrowing from the central bank, a proposed reduction in energy subsidies and rising international prices of commodities have been cited as the reasons behind the higher rate of expected inflation.

All indices used for measuring price levels in the economy have registered increases in recent months. “Headline consumer price index (CPI) rose to a 17-month high of 15.7 per cent in September,” highlighted the report, adding: “Inflation measured by wholesale price index (WPI) and sensitive price index (SPI) also surged during the first four months of FY11.”

Major contributors to rising inflationary pressures in recent months include supply shortages of many perishable food commodities in the wake of recent floods, higher food and fuel prices and the reduction in energy subsidies.

Analysts have interpreted the report as a harbinger of further increases in the discount rate in the coming months.

Earlier on January 29, the central bank announced that the policy rate will remain at 14 per cent until the next review due in March. At that time, SBP Governor Shahid Kardar had warned that “the next policy decision will depend on the progress the government makes to cope with all the problems”.
The report said that in the context of rising inflation, “it becomes even more important for policy to ensure that demand-pull inflationary pressures are kept to a minimum”, hinting at a hike in policy rate in the upcoming policy announcement.

Pinning hopes on wheat harvest
Growth of gross domestic product (GDP) is expected to remain between two and three per cent in the current fiscal. However this, too, appears largely dependent on the upcoming wheat harvest.
The report also highlighted that of the total sown area of 9.7 million hectares, where Kharif crops were planted, 2.4 million hectares had been damaged by heavy rains and floods. “Expectations of a recovery in agriculture will depend crucially on the wheat harvest and the livestock sector”. While the overall economy will remain hostage to power outages and expensive fuel, increased water availability is expected to help the economy’s mainstay, agriculture, the report went on to say.

Current account deficit is expected to worsen in the second half of the current fiscal, it said.
The central bank also forecast a strong growth in imports “will more than offset increases in exports and worker remittances”.

The SBP encouraged the government to follow structural adjustment programme prescribed by the International Monetary Fund (IMF), warning that while economic imbalances “are still quite manageable, further delays in implementing critical structural changes will significantly increase long-term risks to the economy”.

Every Pakistani owes over Rs57,000 in debt

Every Pakistani owes over Rs57,000 in debt

ISLAMABAD: Every Pakistani man, woman and child owes over Rs57,000 to foreign and domestic lenders, which is approximately Rs22,000 more than the per head level when the current government took over.

Only this year, almost Rs900 billion will be consumed to service the huge debt stock, which is five times more than the revised federal development budget.

According to the Debt Policy Statement, for the first time in Pakistan’s history, the country’s total debt and liabilities touched the Rs10 trillion-mark in September 2010. The federal government has borrowed over Rs5 trillion from domestic sources and approximately the same amount from international lenders. According to the Federal Bureau of Statistics’ “population clock” as of February 1, the country’s total registered population was 175 million, which means each individual owes up to Rs57,057.

“High public debt can adversely affect capital accumulation and growth via higher long-term interest rates, higher future distortionary taxation,  inflation, and greater uncertainty about prospects and policies,” cautions the debt office.

As of June 30, 2008, Pakistan’s total public debt stood slightly over Rs6 trillion that amounted to Rs34,500 per Pakistani (at present population). But, during its two-and-a-half-year tenure, the Pakistan Peoples Party-led government has added Rs3.5 trillion (excluding liabilities) to the total debt stock. Including liabilities, the difference comes to Rs4 trillion, which is much more than this year’s total national budget, according to official papers.

“Sharp rupee depreciation and large budget deficits massively added to the debt stock,” said former debt director-general Dr Ashfaque H Khan.

In the last financial year, the current government has added another Rs1.3 trillion to the debt stock, excluding liabilities. As of June 2010, total public debt (excluding liabilities) stood at Rs8.9 trillion. The debt statement shows that the government borrowed Rs798 billion from domestic sources and Rs189 billion from external sources to finance fiscal operations in just one year. Additionally, the government borrowed Rs271 billion from the International Monetary Fund for balance of payments support and, because of the rupee-to-dollar depreciation, Rs200 billion were added to the debt stock without borrowing a dollar.

The Debt Office warns that inappropriate debt structure could become a source of vulnerability to the real economy and financial system of Pakistan. It cautions that low-cost foreign currency denominated debt is the biggest risk due to an unexpected currency shock. On the other hand, heavy reliance on domestic debt may crowd out private sector credit demand besides pumping inflationary expectations.

The government has also violated an act of the parliament while aggressively borrowing to meet its expenditures. The Fiscal Responsibility and Debt Limitation Act 2005 requires the federal government to reduce public debt and maintain it within prudent limits. But, the government has violated the act on various accounts. The legislation bounds the government to reduce revenue deficit to nil-zero gap between revenues and current expenditure and maintain it in surplus. However, according to the debt statement, instead of maintaining surplus, revenue deficit was approximately 2.1 per cent of the total size of the economy.

The government also violated the act on account of reducing the debt stock by 2.5 per cent of the total size of the economy and instead added almost another one per cent to the debt stock during the last financial year.

The third breach occurred on account of issuing sovereign guarantees. The act restricts the government from issuing new guarantees of more than two per cent of the total size of the economy in any given year. But, the statement reflects that the government issued total guarantees of 2.7 per cent of the Gross Domestic Product.

Also read http://pkr101.blogspot.com/2010/11/stop-smiling-each-of-us-owes-600-old.html

IMF sets terms for headway on $11.3bn loan

IMF sets terms for headway on $11.3bn loan

ISLAMABAD: Welcoming wider political engagements on economic policies, the International Monetary Fund (IMF) has set three pre-conditions for tangible progress on its $11.3 billion standby programme with Pakistan that practically stands suspended since May 2010.

The IMF wants the authorities to move forward with a better macroeconomic framework and sustainable budget deficit, focus on structural items like introduction of reformed general sales tax within the current fiscal year coupled with addressing losses in the energy sector and strengthening central bank role in limiting government borrowing to start with. Mainly because of these issues, according to visiting IMF mission, the fiscal deficit remains very large more likely to be six per cent of GDP or even more than that as against 4.7 per cent agreed to by the two sides after devastating floods.

To overcome this challenge, the IMF has asked Pakistan leadership “to move quickly on both sides of the budget to increase revenues and contain expenditures”.

The government had started on introduction of the broad- based general sales tax or value added tax two years ago and had done a lot of preparations. The IMF believed it was a good tax measure proposed by the government, which should be implemented without further delay.

And given the additional role of the provinces in the aftermath of 18th constitutional amendment, the IMF wants provincial governments to show more fiscal responsibility. In this regard, the IMF delegation would hold a meeting with Chief Minister Punjab Shahbaz Sharif and former finance minister Ishaq Dar on Tuesday to touch the base on their support for the overall economic reforms and provincial finances.

“The efforts that have already started to build a cross-party consensus on fiscal and economic reforms are very positive and we would be happy to support authorities (in that process) and share our analysis with all stakeholders, Masood Ahmed, IMF`s director for Middle East and Central Asia told Dawn in an exclusive discussion.

After daylong interactions with President Asif Ali Zardari, Prime Minister Yousuf Raza Gilani and the government`s economic team led by Finance Minister Dr Hafeez Shaikh, Mr Ahmed said it was not for the first time or something new in Pakistan that IMF was contacting the political parties.

The IMF has appreciated challenging times across the world as well as in Pakistan because of big external shocks like floods that affected revenue and expenditures but has expressed its concern that measures projected on the revenue side `have not borne fruit`.

The IMF is also worried about rising expenditure, particularly subsidies and commodity expenditures that are eating up public finances.

The financing of a large fiscal deficit was leading the government to rely on local banks and the State Bank a move triggering inflation and squeezing both the public and private sector and raising rate of interest, according to the IMF.

Asked about the prospects of disbursement of IMF loan in the near future, the sources said the key to such discussions was not to have economic and fiscal measures in two months or so but for two years and a half from now, which should provide the basis for sustainable public finance and higher growth rates.
“The disbursements would depend on how quickly these measures come about”. Also, the IMF wants that the authorities to take steps for long-term tax measures like RGST to increase tax base supported by temporary taxes like flood tax and better coverage of income tax.

The Fund believed that Pakistan should take steps to increase economic growth rate and contain rising rate of inflation as the two factors were really hurting the common man.

In its initial round of discussions, the political leadership is reported to have shown their willingness to move ahead with economic reforms but the IMF believed the `recognition (for economic reforms) could not be substitute to real action on ground.

Good intentions alone are not enough to meet requirements of the economy and the Fund would like to see budget framework for the next year which should provide sustainable roadmap to reduce fiscal gap and a set of actions to address structural weaknesses.

The IMF mission is reported to have told the authorities that delaying or reversing a trend to pass on oil and electricity prices to consumers was adding to the size of the fiscal deficit. In the process, these subsidies were benefiting only the rich, seen by the IMF as a wasteful use of public money.

The IMF, said these sources, was strongly opposed to an upward revision in fiscal deficit target as the original target was enhanced from 4 per cent to 4.7 per cent of GDP because of additional pressure of floods but there has been no such external shock since then.

The IMF mission would stay in Islamabad until Wednesday to get a clear feedback from Pakistan authorities.


Pakistan seeks IMF’s economic support

Islamabad : Pakistani president and prime minister Tuesday urged the International Monitory Fund (IMF) to continue its economic support for the war ravaged and flood stricken economy of Pakistan.
The IMF team is in Pakistan for talks for a fifth review of Pakistan’s economic performance for provision of an instalment of $1.7 billion under the standby arrangement.

President Asif Ali Zardari while talking to Director, Middle East and Central Asia Department IMF, Masood Ahmed, said that due to war against terror and the worst-ever floods in the history, the country’s economy had to suffer major blows and it needed international assistance by way of creating economic opportunities for the people.

The IMF team will also review progress on its conditions which include a monthly increase in electricity tariffs, reduction in government borrowings from the State Bank of Pakistan and implementation of a 10 per cent income tax surcharge and the reformed general sales tax.

The IMF officials will hold formal talks with Finance Minister Dr Abdul Hafeez Shaikh and political leaders to convince them to stop opposition to the proposed Reformed General Sales Tax (RGST).
The visit of the delegation was originally scheduled for January 25 but the government’s inability to comply with IMF’s terms led to a change of plan. The government delayed decision on the RGST after allies and opposition parties strongly opposed it.

Pakistan's real GDP may grow up to 3pc in FY11: State Bank

Pakistan's real GDP may grow up to 3pc in FY11: State Bank

Pakistan's real Gross Domestic Product (GDP) is likely to grow up to 3 percent in the current Fiscal Year (FY11) according to the First Quarterly Report of the state Bank on the state of the Pakistan's economy which was released on Wednesday.

According to the Report, performance of the commodity producing sectors of the economy is expected to improve in months ahead due to expected better contribution by the services sector, and improvement in the performance by the commodity producing sectors.

However, expectations of a recovery in agriculture will depend crucially on the wheat harvest (including increased production from the rain-fed - "barani"- areas), and the livestock sector. Similarly, large-scale manufacturing growth is expected to turn positive again in the months ahead, as strong agri-prices support demand, and with the additional capacities coming on-line in some industries including fertilizer, cement and steel, the Report added.

The SBP Report said that growing macroeconomic imbalances in the economy are still quite manageable but further delay in implementing critical structural adjustments risks significantly increasing the future costs to the economy.
The Report pointed out that inflationary pressures have strengthened more than anticipated during the first half of FY11.

The Report said that strong prices encourage farmers to invest in higher yields and support domestic demand.

`Therefore, the only sustainable way to protect low income groups from inflation is by targeted subsidies and the creation of ample employment opportunities', the Report added.

`In contrast to inflation, the Current Account Deficit (CAD) is likely to deteriorate in H2-FY11.

A significantly strong growth in imports is expected to more than offset the gains from rise in exports and workers' remittances. The financing of the CAD will be challenging as inflows under financial accounts are likely to be significantly lower.

In this perspective, the continuation of the structural adjustment program of IMF would be helpful in softening the external financial constraints, as well as to enhance the resilience and robustness of the economy', the Report added.

The SBP Report pointed out that the one bright spot in the economy, ironically helped somewhat by the floods, was the strength of the external sector.

"A jump in remittances and aid flows for flood relief, helped by robust growth in exports largely due to sharp increase in the prices of cotton overshadowed the growth in imports, turning the current account for July-December FY11 to a surplus," it added.

However, SBP Report said that uncertainty over the extent of damage to private and public infrastructure and the policy response to floods, direct and indirect impacts of supply disruptions, energy shortages and weak consumer & business confidence, took its toll on the domestic economy during the initial months of the fiscal year FY11.

The SBP Report opined that the fiscal performance remains a source of concern, given the outstanding issues with expenditure management as well as revenue shortfalls.

"The implementation of fiscal reforms and elimination of subsidies in the power sector are likely to broaden the tax net and reduce distortions in the economy.

While, these reforms will induce cost-push inflationary pressures in the economy, in the short run, but these will help sustain high growth in the long run," the Report added.

Widening budget deficit key challenge for Pakistan -IMF

Widening budget deficit key challenge for Pakistan -IMF

Budget deficit likely to exceed 7 pct of GDP
* Tax reforms delayed due to political pressure
* Government tries to find consensus to implement reforms


ISLAMABAD, Feb 1 (Reuters) - Pakistan should act swiftly to reduce its widening budget deficit, a senior IMF official said on Tuesday, as the government struggles to hammer out a political consensus to revive an economy battered by militancy and floods.

Analysts say Pakistan's fiscal deficit is likely to exceed 7 percent of economic output -- as against the 4.7 percent target for fiscal 2010/11 -- partly due to delays in implementing key tax reforms encouraged by the International Monetary Fund.

"The challenges that the economy is now facing are essentially around the impact on the economy of the large budget deficit," the official told Reuters on condition of anonymity.

"At the moment the urgent task is to try and move forward on controlling both spending and also to take action to raise revenues (to reduce the deficit)."

The official said the IMF had not yet come up with its own estimate of the budget deficit.
In 2008, Pakistan agreed to crucial reforms, including an elimination of fuel subsidies and implementation of a Reformed General Sales Tax (RGST), under the terms of an $11 billion IMF bailout package to avert a balance of payments crisis.

But Prime Minister Yusuf Raza Gilani's government last month deferred plans to implement reforms and reversed an increase in fuel prices to appease opposition parties and defuse a political crisis.

A senior IMF official said the Fund supported the government's efforts to win political support for economic reforms.

But he said the government needed to take "urgent" measures to check rising inflation -- which hit 15.46 percent in December -- by cutting its budget deficit.
The government should cut subsidies to reduce spending and raise revenues by implementing tax reforms, he added.

The seven-tranche IMF programme has kept the U.S. ally's fragile economy afloat. Islamabad in December asked the IMF for a nine-month extension, ending in September, to give it more time to implement reforms.
International financial support is crucial for Pakistan, especially after devastating summer floods which inflicted $10 billion in losses. Pakistan is also waging a costly war against Taliban insurgents and needs to invest heavily in the energy industry to ease frustrations over power cuts.

The government is now holding talks with the main opposition party led by former prime minister Nawaz Sharif in an effort to strike a consensus to implement reforms.

The IMF official said the government had assured the Fund that it was committed to the reforms and that it was confident of reaching a political consensus before September.

"We support this step (of political dialogue) because we do believe that the kinds of economic decisions Pakistan has to make, of which fiscal tax policy is one, are decisions that can be best implemented when there is a broad national consensus," he added.

Pakistan - South Asia's sick man

Pakistan - South Asia's sick man

Today, Pakistan is South Asia’s sick man. This year – the financial year ending on June 30 – if the Pakistani economy grows at all, the rate of increase will be no more than the rate of growth in population. This means that there will be no increase in average income and, for most of the population, income per head will decline. This will add another 10 million to the pool of poverty, bringing the total to over 70 million. In the immediate future, the national output is likely to increase at a rate less than one-half of that expected for Bangladesh and one-third of that projected for India.

I pointed this out to Pakistan’s President Asif Ali Zardari in a recent meeting. He responded by saying that by comparing the performances of India, Bangladesh and Pakistan I was comparing apples and oranges. India had had a democratic system of government for more than 60 years and Bangladesh had been under democratic rule for a longer period than Pakistan. He said he had inherited a damaged economy and a dysfunctional political system from a military dictator. His government’s first priority was to provide the country with a political system that was fully representative of the wishes of the citizenry.

My purpose for bringing to the attention of the Pakistani president the divergent tracks being followed by the major economies of mainland South Asia was to suggest that there were public policy lessons to be learnt from the development experiences of India and Bangladesh. However, upon reflection I thought that the president was raising a valid point: the importance of a democratic system for sustained economic development. One thing that stood out in India’s case – and to some extent also in the case of Bangladesh – was the continuity in the making of economic policy. In a democratic system policy makers would not be allowed to make sudden changes in the direction of policy unless it was warranted. The Indian electorate punished Indira Gandhi when she put the country under an emergency. It rewarded the Congress party when it gave up, during a period of deep financial crisis, the discredited “license raj” in favour of a more open economy. In Pakistan, however, the roller coaster political ride – alternating between civilian and military rules – had also resulted in wide swings in the economic priorities pursued by those in power.