Ten economic blunders
Dr Ashfaque H Khan
Pakistan's economy has never been in such dire straits in decades. Until three years ago, the same economy was growing robustly: poverty, inequality and unemployment were on the decline; the private sector was buoyant and industry, exports and imports were growing at higher double digit; debt burden was declining sharply; foreign exchange reserves were growing and providing stability to exchange rate; foreign investment was pouring in; country had exited from the IMF programme; credit ratings were improving; and Pakistan was floating sovereign bonds regularly in international markets.
What went wrong? The present government took charge of the state of affairs on March 31, 2008. They inherited a sound economy as well as the challenges of rising food and fuel prices globally. The government inherited foreign exchange reserves of $13.3 billion; rupee-dollar parity at Rs 62.7; Karachi Stock Exchange Index at 15,125, market capitalisation at $74 billion; and an overall inflation at 14.1 per cent.
The first and foremost mistake of the government was to misguide its own people about the health of the economy it had inherited. While it praised profusely the economic achievements of the Musharraf government in the document submitted to the IMF, the same was never revealed to the people of Pakistan. In other words, the government started its innings with deception.
Irresponsible statements issued by then finance minister about the health of the economy as well as the credibility of the data was the second mistake. This statement not only shattered the confidence of both domestic and foreign investors but also insulted the professional skills of the staffs at the International Financial Institutions (IFIs), the rating agencies, and thousands of global bond and equity market investors.
Cancellation of transactions worth $4 billion involving GDRs and convertible bonds of public sector companies was the third mistake. Such cancellation not only precipitated a balance-of-payment crisis but also forced the government to borrow heavily from the SBP, thus fueling inflationary pressures.
Not appointing ministers for finance, commerce, petroleum, natural resources and health for six months after the exit of PML-N from the coalition was the fourth mistake. The government lost six precious months and gave an impression of being a rudderless ship with no sense of direction and purpose. Such impression eroded investors' confidence, the stock market nosedived, flight of capital set in; the country started losing on average a billion dollars' foreign exchange reserves per month; and the exchange rate came under severe pressure.
By November 2008, Pakistan had no option but to seek balance-of-payment support from the IMF. Seeking $11.3 billion resources from the IMF was the fifth mistake. Pakistan could have achieved the same objective by seeking $3.5-4.0 billion (or 250-300 per cent of quota) from the IMF. Large external borrowing along with 30 per cent depreciation of exchange rate have played havoc with the budget. Pakistan added $15.3 billion in external debt and Rs.4099 billion in public debt in the last three years as a result of which interest payment surged from Rs 387 billion in 2006-07 to Rs 771 billion, thus eroding fiscal space to the tune of Rs 384 billion.
Criminal increase in support price of wheat in two years has been the sixth mistake. The government increased the price from Rs 425/40 kg in 2006-07 to Rs 950 in 2008-09 -- an increase by 124 per cent. The average price of flour increased by 120 per cent during the period. This unjustified increase in wheat prices totally devastated the poor and fixed income groups. The persistence of higher double-digit inflation can be traced largely to this increase in price of wheat.
Generous transfer of resources to provincial governments through the new NFC Award is the seventh mistake. Lack of capacity to spend prudently with no concept of financial discipline on the part of provincial governments, and obliviousness to the costs of war on terror and the rising debt servicing on the part of the federal government have been serious mistakes. The new NFC Award has thus sowed the seeds of perpetual macroeconomic crisis in the country.
The government had made certain commitments to the IMF, the prominent amongst which include the imposition of VAT by July 1, 2010 and power-sector reform. Pakistan has failed so far in delivering on these commitments which have led to the delay in completion of the 5th Review of the Programme and non-realisation of the remaining tranches. Failure to deliver on the commitments is the eighth mistake. The IMF has not released the remaining tranches so does the other IFIs. Financing of fiscal deficit from external sources is in jeopardy with serious consequences for the economy in the short-run . The longer Pakistan delays the nearer will be bankruptcy.
Lack of wide-ranging consultation with stakeholders on implementation of VAT has been the ninth mistake. The government had more than one year to dispel the misperception about the VAT, but made no concerted efforts to educate tax payers and training the tax collectors.
Not putting together a credible economic team in more than two and a half years is the tenth mistake. The current finance minister is a well qualified person but lacks the capacity to lead his ministry from the front. He spends more time abroad, avoids talking to the media and the private sector; his team consists largely of 'strangers in town' with no knowledge of ground realities. And he has failed to enforce discipline in his own ministry.
The list of mistakes may not be exhaustive; however, ignoring the economy all along, allegations of wide-spread corruption, and bad governance of the highest order are the greatest sins committed by the government which have damaged the economy beyond recognition. Pakistan cannot afford such mismanagement of the economy any more.
The writer is director general and dean at NUST Business School, Islamabad. Email:
ahkhan@nbs.edu.pk
Ten economic blunders
Ten economic blunders
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