A semi-failed state

By Mir Adnan Aziz

When called a failed state we are irked and cry hoarse that we are not one. One step down follows the semi failed state defined as a country whose government maintains all the trappings and appearances of power, legitimacy, and control. Its army and police are integral and operative (not so in Karachi on that fateful and tragic May 12). Its institutions function. Its government and parliament promulgate laws and its courts enforce them. It is not challenged by any competing military structures within its recognised borders (unfortunately we are).

Yet, the semi--failed state -- while going through the motions -- is dead on its feet. It is a political and societal zombie. It doesn't function mainly due to inertia and lack of better or clear alternatives. Its population is disgruntled, hostile, and suspicious. Other countries regard it with derision, fear, and abhorrence. It is rotting from the inside and doomed to implode. In a semi--failed state, high crime rates and rampant venality, nepotism, and cronyism affect the government's ability to enforce laws and implement programmes. It reacts by adding layers of intransigent and opaque bureaucracy to an already unwieldy mammoth. The institutions of the semi--failed state are hopelessly politicised and, thus, biased, distrusted, and compromised. Its judiciary is in a state of decrepit decline.

The utter and insidious institutional failure that typifies the semi--failed state is usually exposed with the total disarray that follows, the latest being the quixotic foray against the judiciary and the tragic blood spattered May 12 in Karachi, conveniently forgetting what Augustine said: "Take away justice, and what are governments but great confederacies of robbers?" To deflect criticism and in a vain attempt to reunite its fracturing populace, the semi--failed state often embarks on grandiose claims and adventures cloaked as geopolitical necessities. In all honesty does all this not hold true of the imbroglio that Pakistan is in today?

We should look at different facets of this paradox that we have made Pakistan into, review noteworthy incidents and cases, and critique the apparent lack of effort to develop and strengthen national state institutions and responsibilities. Without being unduly pessimistic, we are foolishly heading towards a needless and serious risk of extinction as a country and nation. Social justice prevails when government acts and legislates in accordance with what people are and what they should be able to do, but all we see today is the powers to be renouncing all the principles of authority, and bent upon the destruction of all the securities of our lives and liberties.

The most important aspect of any government effort should be institution building, not just nation--building. This is where our ruling behemoths have failed so utterly in just about everything they have done. To build a nation without transfusing vital institutions is to build a house of cards ready to collapse. What we have today is gloom amongst the masses but trumpeting of utopian heroic optimism by the rulers. What stands in the way of most utopias is not pestilence and drought but human behaviour. So utopians have to think of ways to control behaviour, and when propaganda doesn't do the trick, more emphatic techniques as in vogue today are tried. Flashing a military salute generally doesn't work.

In Pakistan what we have today is a self appointed "enlightened" and so called "benevolent dictator", a more modern version of the classical "authoritarian despot". One who legitimised himself through an utterly dubious referendum and is "benevolent" enough to allow for some democratic decision making (of his liking) to exist. The democratic creed has become so universal that no dictator wishes to be seen as violating it. What typically happens is that a strong man gets into power. Sometimes or quite often as in Pakistan this is by an overt coup d'etat, but many times they are "elected". Once in office they use the legal trappings to cement their power. Frequent steps are, changing the laws on term limits, outlawing rival parties, or arresting opponents using newly crafted laws and when necessary, election fraud. Whatever techniques are used they go to great lengths to proclaim that their state is still democratic because it holds "free and fair elections".

Modern dictators always attempt to disguise their actions within a "democratic" framework. Voting is the backbone of this effort or rewriting the laws so that they can stay in office beyond their present term. The threat is not from an individual, but from a permanent shadow government which has arisen over the past sixty years. The names of the players change, but those pulling the strings continue to come from the same group. What we have now is the predominant assumption that with the opening of the economy to international investors and businesses, Pakistan as a whole will prosper. As such, the democratic opposition movement as well as its "exiled" leaders will be marginalised.

This role is also in conflict with the military's primary role, namely, professionalism. The greatest danger is that the self--seeking role could sow dissensions within the rank and file of the military establishment itself. The conflict of interests among themselves could lead to rift and instability. This discord could grow as the democratic opposition weakens or the threat of the contending forces subsides. Under the arrangement in which the military maintains total control over almost all spheres of state power it will and has participated or influenced all three branches of government. The decisive power resting with the military may provide "stability" and continuity but its side--effects will be, as is so obviously evident, disastrous.

Within this overall context, Pakistan has to carve out its distinctive economic role and national existence for the future. It will have to hitch on to the rising tide of growth in the region and make the best out of its comparative advantage based on its natural wealth, human resources and capabilities and its own unique geographic position.

In this new mission, national consensus, reconciliation, and an early agreement among all contending forces for the future course of action is a must for both national survival and renewal. All parties must be convinced that their interests can be served by working together, not against each other. Just as there is a need for a national leader who can marshal overwhelming support to carry out national reforms in a non--contentious way. Our military should strive to be professionally capable of defending our vital interests in the twenty--first century. What the ordinary Pakistani, tired of armed conflict, uncertain status, and impoverished conditions wants is the rule of law and a genuinely representative government with ultimate authority descending from the people and a dignified and definite place within this homeland of ours. This is the most opportune moment for national reconciliation and reconstruction and hence giving to the people the most elaborate social edifice ever. It is our duty to demand and work toward the restoration of a government: of, by, and for the people.



The writer is a freelance columnist. Email: mir_adnan_aziz@hotmail.com

India's new robber-baron capitalists

By Praful Bidwai (The writer, a former newspaper editor, is a researcher and peace and human-rights activist based in Delhi )

If growing income and regional disparities are one characteristic of the rapid economic growth that South Asia has recently seen, another is sleaze, especially in the corporate world. Both features are particularly pronounced in India, as are rising shares of salaries of directors' remuneration in corporate incomes and profits .

Thus, Prime Minister Manmohan Singh's admonition to the Confederation of Indian Industry against sky-high corporate salaries and the need to keep "profit maximisation within the bounds of decency" didn't come a day too soon. Nor did his warning that "vulgar display (of wealth) insults the less privileged" and causes despair and unrest.

Eleven Vidarbha farmers committed suicide the very week Singh said this, taking the number of suicides this year to an astounding 400. This sadly underscored the extreme polarity between the world of CEOs, with their multi-crore rupee incomes and glitzy lifestyles, and the peasant-farmer's grim debt-laden reality. This polarity is a terrible fact of India's post-1991 growth. It should shame the government into corrective action.

Singh told CII industrialists that the growing number of Indian billionaires, Indian companies buying multinationals, and soaring CEO compensation, all mean "you have benefited from growth…" But he exhorted them to "work in a harmonious environment." He quoted Keynes to extol austerity and thrift, and said the "better-off" must make growth "more inclusive".

This advice was based on a frank acknowledgement of the skewed nature of India's growth. Singh proposed a "Ten-Point Social Charter". He exhorted industry to develop "healthy respect for your workers", go beyond "tax planning" in defining "corporate social responsibility", "discourage conspicuous consumption", invest in R&D, employ the underprivileged, and adopt environment-friendly technologies, etc.

Some of the exhortations might sound naïve or "goody-goody". They ignore the Indian corporate sector's less-than-enlightened notion of self-interest. But the emphasis on obscenely high salaries is necessary in a country where 40 per cent of people survive on less than $ one a day. Today, there are some 1 lakh super-rich Indians with wealth of $1 million-plus (not counting immovable property). Some 100 corporate CEOs earn Rs 1 crore-plus. Several take away more than $1 million (Rs4 crores). CEO salaries have been annually growing at 30 to 40 per cent--as against 9 per cent GDP growth.

At least 194 Indian corporate employees are sitting on stock options of Rs1 crore-plus. Some have options worth Rs100 crore--Tech Mahindra's Vineet Nayyar (Rs216 crores), L&T's A M Naik (Rs165 crores), and Infosys' Mohandas Pai (Rs134 crores). There's a gross disproportion between these figures and the subsistence-level incomes of most Indians. But Singh's ideas have been savaged by India's mainstream media. Many editorials have treated his warnings against growing inequalities as economic heresy. He's going "back to the past", and endangering "prosperity", they said. Capping CEO salaries will "shackle private enterprise" and kill the goose that lays the golden egg.

Some commentators trivialise Singh's warning about inequalities by saying that buying Mercedes-Benz cars doesn't cause backwardness in Bihar! Yet others say his concern about "conspicuous consumption" is a new-fangled obsession which sits ill with his earlier emphasis on "growth", "individual initiative and enterprise" which "will enable us to eradicate the ancient scourges of mass poverty, ignorance and disease."

Another writer tendentiously claims, with supreme arrogance, that the poor just "don't have the mind-space" to bother about how much the "haves" get. Such media reactions are inspired by a standpoint that's worse than ultra-conservative. It's explicitly, vulgarly libertarian: it holds that it's wrong in principle to limit the freedom of enterprise; it's absolute; the market is fundamentally democratic and must never be curbed.

Libertarianism celebrates greed and castigates all concerns with equity and justice as "the politics of material want, where poverty is ascribed a moral glow". Let's leave aside for a moment the unbridgeable moral chasm between this, and the Gandhian view of the poor as Daridra Narayan, or the respect many fine economists have for the ecologically sound, community-based "moral economy of the poor".

The point is, libertarianism totally misrepresents the market. The market equates unequal agents (e.g. starving workers and rich employers) despite their vastly asymmetrical bargaining power. Markets don't work spontaneously. They have to be organised and made to follow certain ground-rules. In classical capitalism, the state and society laid these down. They legislated the minimum wage and length of the working day, set taxation levels, regulated profits, and encouraged or banned certain activities. In neoliberal capitalism, that role is appropriated by private corporations. This undermines democratic decision-making and triggers a "race to the bottom" in working conditions.

Libertarians take a morally monstrous position by contending that those with vastly different starting-points (e.g. in access to property) will end up in equal places because the market is "free". This is complete nonsense. Markets are normally unfree, and competition is often imperfect. Unequal information is available to different actors, there's unfair pricing, poor demand-supply adjustment, and other distortions.

In India (and Pakistan), the argument for changing the direction of growth is overwhelmingly persuasive. India's post-1991 growth has produced disparities worse that those during the Victorian period of mass impoverishment that Charles Dickens so movingly described. Economists quantify inequality by a measure devised by Corrado Gini. If the Gini coefficient is 0, it means a society is totally equal. If it 1, it's completely unequal. India's Gini coefficient is estimated at between 0.32 and 0.48, but there is unanimity that it has sharply risen over the past decade. In China, an even smaller rise set off an alarm. India should be even more alert to distress signals: the suicide of 100,000 farmers in a decade, declining organised-sector employment, unbalanced growth, and growing social disaffection, public anger and restlessness.

There are three strong reasons for correction. First, regional disparities are becoming explosive. We have not one but at least three Indias: prosperous, rapidly growing pockets in the South and West; stagnation in much of the Centre, North and East; and regression in the BIMARU states (with Assam added to them). This will have disastrous political consequences.

Second, growing crime and lawlessness have come back to haunt the elite which alone benefits from neoliberalism. Crime is rooted in rising inequalities, absence of social opportunity, and collapse of the credibility of the powerful. High walls and barbed wire won't protect the rich against crime beyond a limit. The only long-term solution is justice and social cohesion.

Third, the disproportionate power wielded by the corporate elite has permeated politics, government and the media. It's distorting democracy. Democracy, India's greatest achievement, can only be rescued if the elite's power is tamed. This can only happen if the rich, especially corporate CEOs, are heavily taxed, and there is serious redistribution of the fruits of growth.

This can be best achieved through a comprehensive incomes policy, which doubles or triples minimum wages and imposes the same level of taxes (e.g. 80 per cent-plus) on the rich which they pay in Scandinavia or Japan (and until recently paid in most western countries.)

Singh said many sensible things. Will he now muster the courage to legislate them? He unleashed the neoliberal genie. He must put it back into the bottle--for democracy's sake.



Email: prafulbidwai1@yahoo.co.in

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Macroeconomic and financial policy framework: budget formulation for 2007/2008

DR SHAMSHAD AKHTAR

ARTICLE (June 02 2007): Being the text of key note address of the Governor, State Bank of Pakistan, Dr Shamshad Akhtar, delivered at a seminar on "Budget 2007-08 - A Milestone in continuation of Economic Reforms" organised by the Press Information Department, Government of Pakistan in Karachi on Friday.

Budget for this fiscal year is being crafted under a new economic paradigm. Pakistan has now for some years achieved:

(i) Sustained economic growth path as confirmed by the recently released National Income Accounts Committee results with FY05 being a record year where real GDP grew by 9% and FY07 will surpass the growth target of 7% as the numbers firm up.

(ii) A fair degree of macroeconomic stability and the emerging fiscal and external imbalances while higher than FY03-04 have been well contained with appropriate policy responses.

(iii) Both public and private sector have now managed to jolt the stagnating investment levels which have now risen over FY05-07 by an average of 30.0% which has helped to finally raise the investment/GDP ratios by few percentages points of GDP.

(iv) Gradual building up of investor confidence which has yielded positive outcomes both in terms of higher remittances and foreign inflows. The greater non-debt creating inflows have, for the fist time, helped finance our external account deficit while meeting our corporate and development requirements.

(v) Higher levels of employment generation and poverty alleviation programmes coupled with social spending of higher magnitudes is helping broadly improve the population welfare.

Building incrementally on a strong base and performance is always harder than lifting the economy from distressed strait. This challenge is further compounded by some of the other emerging economic and political realities which underscore the need for the budget to be well conceptualised and well balanced.

-- First, budget is being formulated in a way that it reinforces the macroeconomic stability which is critical to maintain economic growth track record.

-- Second, there is a recognition that public expectations are rising from the government both in terms of its leadership to rationalise the resource and incentives allocation mechanism while offering the right transfer of resources and blend of services.

-- Third, public resources constraints are a reality and will serve as an eventual binding constraint - ultimately budget making process is all about achieving the desired balance between the resources available and resources allocated.

-- Fourth, there is a continuity, consistency and coherency in economic and financial policies which have to be further broadened and deepened to allow for foreign and domestic private sector to further thrive in Pakistan while playing a yet more distinct role in diversifying Pakistan's industrial base and in delivering public services.

-- Finally, there is a recognition that public aspirations are rising partly because government has set a strong track record of economic performance in preceding years and partly because gaps in social and economic services continue to exist.

MACROECONOMIC POLICY FRAMEWORK AND ENVIRONMENT The National Economic Council in its meeting on 31 May 2006 has now approved the macroeconomic framework for FY08 while also in principle approving a long term Vision for 2030. Given the track record in recent years, the government is confident that the growth momentum will be maintained for FY08 and real GDP is projected to grow by 7.2%.

Growth is likely to be again broad based and will be stimulated by a further rise in both consumption and investment levels. While consumption expenditures have been undoubtedly a driver of economic growth in Pakistan as in a lot of other countries, growth in investment/GDP will also contribute significantly to economic growth.

This is largely because we expect investment to rise from 21.9% of GDP in FY06 to about 23.8% in FY08 supported by a rise in national savings and more significantly a rise in domestic savings which are expected to increase from 15.4% in FY06 to about 17% in FY08.

Underlying this growth scenario, we need to recognise that Pakistan has and will continue to seek for a quantum jump in investments. On one hand, the government plans to further go for a substantially large Public Sector Development Program to the tune of Rs 724 billion - which includes budget supported development program of Rs 485 billion and another Rs 204 billion being financed outside budget by a number of public entities.

The development program is quite strategic and fast tracks the projects under implementation as well as launching the mega infrastructure projects, while allowing for adequate growth in social investments.

Concurrent to this, Pakistan has now for some years succeeded in starting to unleash potential of private sector. It is important to recognise that private investment in Pakistan has now for some years been very buoyant and robust. In FY05-07 private investment grew by more than 30 % and has accounted for almost three fourths of the overall investment levels.

At current market prices, private investment levels for FY08 are assumed to grow to Rs 1651 billion which translates into $27 billion and 16.5% as a proportion to GDP (one percent of GDP above FY05 level), 2.8 times of the level of public investment and once again three fourths the level of total investment.

While achieving public investment levels would require a more distinct growth in revenue/GDP ratio, growth in private investment will need to be supported by improved financial intermediation and continued reliance on foreign direct investments.

I will revert to these aspects later but would like to first highlight that FY08 will be another year where maintaining fiscal and external current account deficit will be critical. On fiscal side, the government has reiterated its resolve to hold fiscal deficit/GDP to 4% of GDP and balance of payment projections consistent with the growth scenario outlined above will be in the range of 5% of GDP close to FY07 level.

As in FY07 there will be need for the government to adhere to Fiscal Responsibility and Debt Limitation Act, 2005 to reduce its revenue deficit and debt/GDP ratios and for central bank to continue to strengthen monetary management to keep a check on the demand pressures stemming from fiscal and external accounts deficits.

On the former, the government expects to reduce total debt/GDP ratio to 51.1 % by end FY07 and to use the proceeds of privatisation for poverty reduction programmes.

The monetary policy framework, like in the past years will be forthcoming as a part of the Monetary Policy Statement released end July, which is worked out after the budget for FY08 has been finalised. However, there has been intensive consultation between SBP and the government regarding the need for more consistency between the budget and monetary policy framework.

In line with the SBP Act Section 9(A), central bank has now institutionalised the process of determination of level of government's recourse to bank borrowing and its approval by the Central Board of SBP. This is the first time that as a part of the budget making process, SBP worked out different scenario's to assess the monetary implications of budget's financing requirements. There is a good recognition that upfront fiscal and monetary coordination will augur well for managing the inflationary pressures for next year.

A few important understandings are being reached in this arena to introduce fiscal discipline in borrowings:

-- One, there is recognition of the need for formally imposing a ceiling on government's recourse to SBP borrowings.

-- Two, there is need to manage better the monthly and quarterly recourse to bank borrowings.

-- Three, the government and SBP will work towards reducing its stock of bank borrowing.

-- Four, the government will continue to change its mix of domestic borrowing by relying on public and commercial bank borrowings rather than SBP borrowing.

Finally, there will be better planning for resource raising from the market to sequence the domestic and foreign borrowings more effectively. While levels and degree of dependence on SBP borrowings will be reduced most likely in a phased manner, in FY08 we will be striving to set on course a better institutional framework and process for fiscal and monetary coordination.

These and other qualitative improvements in monetary management being brought out in-house by SBP will help it to work with the government to achieve inflation rate target of 6.5% contemplated in the macroeconomic policy framework.

Progress in reduction of inflation rate has been steady, albeit slower than original targets, but the decline in core inflation which is hovering below 6% is lending confidence that monetary policy will have the desired impact in bringing inflation down subject to, off course, improved supply management of food products as these items have contributed more significantly to inflationary pressures in FY07.

FINANCIAL MARKET'S STRATEGY Pakistan's financial markets have undergone a substantive transformation. Within financial sector, banking sector performance has been outstanding. Banking profitability now is likely to exceed $1 billion mark and the sector over the last few years has cumulatively attracted $2 billion with $1 billion raised in 2007. The ratio of NPLs to net loans is at all time low at below 2% and capital adequacy is on average around 13.5%.

Since a lot has been said earlier on this, in today's remarks I am going to confine myself to forward looking direction of financial markets. First and foremost, it is critical for Pakistan to further augment and diversify financial system.

Currently, while there is active secondary trading in stock markets, it is confined largely to fewer equity scrips and is supported in the last couple of years by exclusively banking companies and by the government privatisation program.

On debt market side, the government securities primary and secondary issuance of different tenors have helped evolve a yield curve but this has, as yet, not catalysed robust corporate debt market. Primary market both of equity and debt markets is still small and boosting this is essential to diversify the financial system risks.

The anticipated insurance sector and pension reforms, which would involve restructuring and strengthening state owned companies, enhancing the regulatory and risk management frameworks and move towards voluntary and contributory retirement schemes, would help enhance market liquidity.

Robust performance of the financial markets is essential to meet the growing requirements of private investment. Over the past few years banking sector has financed well the requirements of the corporate sector, households and economy at large.

However, there is a substantial growth envisaged in infrastructure financing requirements which over the medium term could be anywhere in the range of $40 billion and long term requirements could be close to $150 billion.

For the banking system to respond effectively it is critical that financial markets are diversified faster. Assuming 7% real GDP growth and the private sector credit/GDP ratio of 50%, banking sector would be at best be able to offer $100 billion credit to the system which, alone, would not be able to meet the overall infrastructure financing requirements of next five years.

To further augment banking sector roles and responsibility in economic development process, SBP has been working on multiple fronts:

Strengthening the banking sector consolidation through a gradual build up of the minimum capital requirements and M&As to further augment its robustness. By end of this year, most banks would have met the Rs 4 billion minimum capital requirements with 8 banks even meeting the December 2009 stipulated requirement of Rs 6 billion. Companies failing to comply with the capital requirements will be stripped off the scheduled banking license. Excluding Islamic and MFBs which have resulted in issuance of 12 new bank licenses; number of banks operating is now 27.

To Improve Financial Intermediation process by enhancing its coverage and lowering cost of intermediation. Holding consultation with the banks to explore how private sector credit/GDP ratio can be enhanced. This ratio currently is quite low in the range of 27% which is only one fourth of the prevailing ratio in regional comparators.

At the same time, there is need for banks to enhance outreach to increase the number of depositors and borrowers. SBP has now operationalized its Development Finance Group and it has developed Microfinance Strategy, SME financing Strategy, Agriculture and Household Credit study and another strategy on Islamic finance is also underway.

All these pieces of work will help strategize banking role in enhancing the coverage of financial services to provide adequate service to the population. With growing competition, it is anticipated that banks will be seeking scale rather than exploiting the existing client base.

This change will help in enhancing profitability by enhancing the coverage and supply of financial services rather than relying on interest rate increases. Strengthening the risk management framework for banks. Pakistani banks are now faced with new and different nature and type of risks - aside from standard corporate assets whose credit risks is changing with the size and complexities of businesses, banks are now engaging in diverse businesses and sectors and are now extending their exposure to household sector and growth in bank trading books has increased exposure to market risk - a recent phenomena in Pakistan.

Concurrently, banks' overall risk profile is also affected by the complex interdependencies now emerging because of cross ownership of financial institutions and corporate sector. By January 2008, commercial banks have been advised to position themselves for adoption of standardised approach to Basel II.

Changed perception and approaches to safety net for depositors and prompt corrective actions. With most banking system now in private hands, the government's implicit guarantee for deposit no longer exists and now the owners and the Board of Directors as wells as top management of a bank are liable for their actions. SBP has recently enhanced its corporate governance framework.

On one hand, recently new instructions have been issued to encourage banks to adopt a more well governed Board structure where there is a balance between family or sponsor members and the independent board members.

On the other hand, Boards have been advised to play a more substantive role in oversight of banks including by way of reviews of bank strategy, risk management and audit etc.

At the same time central banks surveillance system is being enhanced to play a key role in identification of the problems, eg threat to capital, liquidity crisis at the earliest stage, and execution of prompt corrective action - the objective being to curb the problem at the onset, and if required appointing official liquidators for settlement of depositors' claims in a timely manner, in cases where the corrective actions result in liquidation/restructuring of the bank.

SBP is in the process of developing a 'Banking Supervision Risk Assessment Model' (BSRA) which will help SBP to better quantify the credit and market risks of the individual banks in terms of "Value at Risk" and forecast banks' position under various stress scenarios on a quarterly basis.

BSRA model would use information from the Data warehouse (data received through Reporting Chart of Accounts (ROCA)) for market risk and electronic Credit Information Bureau (eCIB) for credit risk. For operational risk, key risk indicators (eg frauds, systems breakdown etc) would be identified and captured and processing would be carried out after a sufficient database is maintained.

Once fully implemented and live, the risk assessment model will help Banking Supervision Department to strengthen its surveillance system through monitoring and measuring the risk profiles of the individual banks, even under stressed scenarios. The model will also help BSD to understand and monitor the credit and market risk appetite of the individual banks and proactively take corrective measures, if required.

The SBP in collaboration with the ICAP and the commercial banks has facilitated adoption of International Accounting standards (IAS) by the banks. In 2006, SBP revised the reporting formats for banks to incorporate the significant regulatory developments as well as modifications in the International Financial Reporting Standards (IFRS). With these changes, the quality of disclosure in the Annual Accounts of Pakistani banks has become at par with international best practices.

Along with this, SBP plans to operationalize Real Time Gross Settlement Systems (RTGS) and to encourage faster connectivity of branches to headquarters and eventual proliferation of e- and mobile banking which will be key to enhancing coverage of financial services.

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

2006-07: another year of robust growth

By Aftab Ahmad

Like the three preceding years, the current fiscal (2006-07) also looks poised to be a year of robust growth. The GDP growth is expected to reach 7 per cent during the year, due to impressive performance of agriculture and services sectors. As a result, size of the GDP is expected to move up to $150 billion while the per capita income may go up to $950.

The agriculture sector is expected to grow by about 4.5 per cent during the year, due a record wheat crop of 23-24 million tons and increase in the production of nearly all the remaining crops except cotton. The Livestock sector is also likely to grow handsomely and according to an estimate its share in the agriculture sector is going to double from 25 per cent to 49 per cent. Besides, there has been a tremendous growth in the telecommunications and construction sectors in recent months, due to which the services sector is also expected to contribute significantly to the GDP growth. However, the growth of the manufacturing sector appears to have remained weak (although positive) during the year, which may be attributable to a host of problems such as shortage and higher prices of electricity, increase in the bank mark-up rates and the cost of doing business in general and stiff competition in the international exports markets etc.

Besides a strong GDP growth, fiscal 2006-07 may turn out to be a record-setting year in many other ways. The direct foreign investment (DFI) is expected to reach a record level of $6.00 to 6.5 billion by the end of the fiscal year. Home remittances may also go up to an all time high level of $5.25 billion by June 30, while the KSE 100 index had already touched the 12,500 mark – a level never reached before.

Revenue collection target of Rs835 billion is also likely to be achieved during the current fiscal year. During the last 7-8 years, tax collection by the CBR had gone up from Rs300 billion to above Rs800 billion, which is commendable. This fiscal it is expected to achieve the target set earlier. But, the World Bank and the Asian Development Bank have expressed the view that the tax collection has not gone up as a percentage of GDP. In Pakistan, the tax collection is presently 10.5 per cent of the GDP only, which is considerably lower than the average of about 14 per cent for all developing countries. However, the CBR is of the view that sectors like agriculture and services have significant contribution to economic growth but their contribution to tax revenue is relatively small. Therefore, in order to increase tax collection as a percentage of GDP, various sectors of the economy will have to share the tax burden in an equitable manner.

In some other areas, performance remained rather weak. For instance, exports lagged far behind the target of $18.6 billion fixed for fiscal 2006-07. On the other hand, imports were rising much faster and were sure to cross the target of $28 billion fixed for 2006-07. During July-April, 2006-07, exports and imports stood at $13.9 billion and $24.99 billion respectively, resulting in a trade deficit of over $11 billion in 10 months. On the basis of the aforesaid 10 months figures, the trade deficit should go up to more than $13 billion by the end of the fiscal year. Consequently, the current account deficit may also go up to $6 to 6.5 billion.

Independent analysts have been of the view that it may not be difficult to reduce the import bill by $2 to 3 billion without touching sensitive items such as oil, machinery and raw material and food products.

At the same time, instead of focusing all its attention on textile exports, the Government should try to resolve the problems facing the small and medium enterprises (SME’S) in order to promote their exports. In addition, now that foreign investment has started picking up, Government may try to attract foreign investment to export-related sectors, in order to provide a boost to exports. Over and above all that, Government may examine if the public sector can also enter the export market in a more meaningful way. The public sector has already been exporting defence material, training aircrafts etc, but its exports have remained limited so far.

Another grey area of the economy during the year was inflation. The target of 6.5 per cent fixed for 2006-07 is not likely to be achieved. There is no doubt that by tightening its monetary policy, the State Bank of Pakistan (SBP) was able to reduce the non-oil/non-food inflation to 5-6 per cent. However, the policy had little impact on food inflation because of the highly inelastic nature of demand for food items. Since food inflation is the main culprit behind the higher overall inflation, prompt and effective action needs to be taken to deal with speculative hoarding and profiteering which have been pushing up the prices of food items. The objective can be achieved inter-alia by substantially increasing the number of utility stores and improving supervision and governance at the federal, provincial and district levels.

The Government had succeeded in bringing down fiscal deficit from 6 per cent to 3.5 per cent a couple of years ago. However, last year, the fiscal deficit once again went up to 4.2 per cent. During the current year, the fiscal deficit is expected to go up to 4.5 per cent. The country’s estimated GDP being $150 billion, the 4.5 per cent fiscal deficit works out to over Rs400 billion. Government borrowing of such a massive amount, besides being inflationary, will reduce the availability of credit for the agriculture, SME and large-scale manufacturing sectors. In addition, higher fiscal deficit also increases the country’s dependence on internal and external debt. The Government should, therefore, make all possible efforts to keep its fiscal deficit at the minimum possible level.

Other problems facing the economy during the year were electricity shortage leading to country-wide load-shedding, widening gap between the rich and the poor, increase in terrorist activities and bomb blasts in the country and an upsurge in political activities due to 2007 being an election year.

However, it must be appreciated that the economy showed remarkable resilience and continued to grow during the year in spite of the aforesaid problems.

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Strengths of the economy and some of its weaknesses

By M. Sharif

Third quarterly report of the SBP was issued on 26th May 2007. Contents of the report focus on strengths of the economy and some of its weak areas that need attention during the next financial year. Will the budget, to be presented in a week’s time, address them or not; we have to wait and see.

Highlights of the report

The report confirms official viewpoint that the real GDP growth will exceed projected target of 7.0 per cent fixed for current fiscal year. It will be fourth consecutive year of high economic growth that should be satisfying to the government. The target of reducing inflation to 6.5 per cent by the end of current fiscal will not be met. The Report observes that tight monetary policy has maintained intricate balance of containing inflation on one hand and maintaining growth momentum on the other by “removing excessive monetary stimulus from the economy.” But, “unfortunately the impact in reducing inflationary pressures has been offset partially by the rise in food inflation and supply side pressures.” The Bank has revised its earlier forecast of inflation from 6.7-705 per cent to 7.5-7.8 per cent.

Reference to supply side pressures is quite important to understand as to why inflation has persisted despite tight monetary policy that has played important role in curtailing unnecessary imports to some extent during current fiscal year. Supply side pressures are multiple. Consumption of petrol and petroleum products, food items and electric and non-electric durables is on increase because 30 million strong middle class supported by high inflow of remittances by the expatriates is making our society a highly consumer oriented society. In addition to it, high PSDP expenditure, loopholes in country’s tax levying system, non-taxation of money earned in real estate business, agriculture, and practically no tax on windfall profits earned in stocks and high corporate earnings are fuelling inflation. The report does not foresee any immediate relief to the people from the clutches of inflation as the economy is poised to enter in the new fiscal year.

Has tight monetary policy really worked? Perhaps not, to the extent it has been talked about or was desirable and expected by the SBP. Some of the measures taken by the government and the SBP to keep growth momentum going significantly contributed towards making growth of reserve and broad money stronger than anticipated. The contributory factors are concessional credit provided by the Bank to the textile industry, refinancing for exports and substantial increase in government’s borrowings from the banking system. Consequently, because of strong resurgence in broad money its growth is likely to, “exceed the original 13.5 per cent target, to fall in the range of 14.5-15.5 per cent.” The report has termed monetary growth a “key challenge” that the Bank could not meet to its own satisfaction because it struggled “to maintain a balance between sustaining strong economic growth and low stable inflation.”

The Report focuses on growth of fiscal deficit in recent years that has stood in the way of containing inflation and made tight monetary policy less effective. According to it, it is “important that fiscal policy be aligned with the monetary policy in months to come” for effectively containing inflation. The fear expressed by the SBP is not unfounded. In fact, a profound analysis of fiscal and monetary policies explicitly highlights a mismatch between the two moving in different directions.

The government is under pressure to spend more and more funds in public sector to resolve power crisis facing the country, develop badly neglected infrastructure, create employment, strengthen social sector and alleviate poverty. It has to depend on bank and non-bank borrowings, that is, from central bank and scheduled banks, PIB issuances and NSS to meet fiscal needs. The government borrowed Rs195.7 billion from scheduled banks from Feb-Apr 07 and retired Rs58.4 billion of the central bank. The Report has categorised the government’s borrowings “a worrying dependence” on various instruments that adds to fiscal deficit that the government has capped to stay at 4.2 per cent of GDP by the end of current fiscal year. This is happening because of low tax revenue collection that stands around 10.5 per cent of GDP. CBR is confident to over shoot the target of Rs835 billion. It is reported to have collected Rs656.48 during July-April 2006-7 against the target of Rs645.1 billion with a surplus of Rs11.38 billion.

Trade and current deficit have been on the increase during the current fiscal year compared to their absolute figures in previous years. The report is of the view that current account deficit, “has decelerated sharply as FY07 progressed (mainly because of sharp compression in import growth),” but, “in absolute terms it has grown to $6.0 billion by March 2007.” Nevertheless the Report comforts itself by observing, “while this was comfortably financed by even larger surpluses in the financial and capital account (with substantial non-debt components), the country’s success in attracting international capital has led to a large jump in the NFA of the banking system adding to liquidity in the domestic market,” which is not without adverse effects on economy.

The report also observed that large surpluses were recorded at $373 million during first nine months of current fiscal year in the capital and financial account. They comfortably offset the current account deficit. It is to be appreciated that the large surpluses to which the Report has referred to accrued because of foreign inflows from the US financial assistance under different heads amounting to around $2.0 billion a year, proceeds of privatisation, borrowed money from international financial market and multilateral organisations and remittances. These resources are welcome for any developing economy but it cannot sustain itself on exogenous resources alone.

It has to generate indigenous financial resources through domestic savings, tax revenue generation according to its fiscal needs and trade surplus. Pakistan economy is short on many accounts and nothing substantial has been done to improve upon them during current fiscal year. In fact quite a few fiscal indicators have shown downward trends. The Report has been quite explicit about them. It has not taken into account development of social sector which is of great importance for a country like ours whose economy is sailing into two boats: one of free market economy and the other where state is to play an important role for the well being of a large number of the people who are caught in between the wages of free market economy and a state that is in the process of abandoning its people at the mercy of free market but still claims to be standing with them.

Budget-2008: what should the focus be?

Budget for FY08 is being prepared under quite pressing circumstances conspicuous among them are ongoing judicial and political crisis. It is being anticipated that the former is likely to last at least 3-4 weeks till full Supreme Court bench decides about the CJ of Pakistan case. The case is not without political overtones. It could influence country’s political landscape even after its decision. The political crisis is likely to persist because year 2007 is an election year. Political stakes for contenders of power are so high that they can go to any extent to retain or gain political power. In addition to these subtle factors, ground realities of the economy are hard for the common man despite some green patches like substantial increase in FDI, tremendous increase in capitalisation of stocks, stable dollar-rupee parity, high GDP growth, comfortable foreign flows, quantum increase in foreign exchange reserves and a booming stock market that is attracting portfolio investment from domestic and foreign investors because of high returns.

The government’s posture on budget preparation is upbeat. It is showing no signs of discomfort because of somewhat high inflation in food items like edible oil, rice and wheat at a time when new crop has landed in market and government has stopped its export. The push in price is primarily because of profiteering and hoarding by market manipulators.

The SBP has already indicated that in order to reduce inflation to 6.7 per cent during next fiscal year, it will keep pursuing tight monetary policy but exact contours of the policy would be clear when the SBP will announce monetary policy for July-December 2007 somewhere in July. The government has announced to strengthen supply side of economy to reduce inflationary pressure. Import bill of food items during first ten months of current fiscal year has touched $2.36 billion mark and if demand kept on soaring during next fiscal year also that is quite possible, food import bill could be still higher. The government cannot help it.

Press reports indicate that government is to present a mega budget for forthcoming fiscal year. One of the major reasons is that FY2007-08 is an election year. The other important factor is realisation that it could not take national economy on road to self-reliance for not addressing serious problems of power crisis, infrastructural inadequacies, human resource and social sector development, good governance, higher competitiveness and productivity of industrial and agriculture sector. In fact, it should have started much earlier when it had got enough fiscal space to launch development programme.

Press reports also indicate that volume of forthcoming budget is likely to be around Rs1.5 trillion; up from outgoing fiscal year’s budgetary lay out of Rs1.02 trillion. PSDP is planned at Rs520.0 billion: Rs485 for public sector inclusive of provinces share of Rs115 billion and Rs35 billion for rehabilitation of earthquake hit areas. The allocation is 19.5 per cent higher than current fiscal year’s allocation of Rs435.0 billion. PSDP as percentage of GDP will increase from current fiscal year’s level of 4.2 per cent to 4.8 per cent. The government is confident that by increasing PSDP, it would not only be catering for a number of infrastructural inadequacies that the economy faces. It will be generating more employment, sustaining economic growth and alleviating poverty also. The government has also jacked up revenue collection to more than Rs1.0 trillion for next fiscal year against the target of Rs835.0 billion for current FY that CBR is sure to over shoot.

Conclusion

SBP report is an objective analysis of the economy. It states facts that give quite a clear picture of the economy and its fiscal health. Figures about some of the allocations and targets to be achieved sound quite satisfying but, more important and crucial questions relating to fiscal management will come to limelight when budget proposals will be implemented. Right now, the important question that needs attention is: how would the government bridge huge gap between financial resources and expenditure to meet a number of fiscal commitments? We may have to wait till announcement of the budget to find answers to these questions and many more like them.

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Positive economic trends and some concerns

By Mehmood-ul-hassan Khan

The State Bank of Pakistan has announced its 3rd quarterly report for 2007. It reflects positive trends and potential concerns, and emerging financial problems in the ongoing fiscal year. Main indications: (1) Stable macro-economic growth for the fourth successive year, with real GDP growth now expected to exceed the 7 per cent annual target in FY07.

(2) Strong out turn by agriculture following a record wheat crop and upward revision in key kharif corps means that agricultural growth is forecast to exceed the annual 4.5 per cent growth target.

(3) Industrial growth is also expected to be stronger than that in the previous year, though it may not reach the FY07 target.

(4) Services sector, backbone of our national economy is expected to continue with its growth momentum for yet another year.

(5) Growth in the wholesale and retail trade sub-sector is likely to slow down, reflecting the deceleration in imports; the remaining services sub-sectors are expected to continue to record high growth.

Tight monetary policy

The State Bank of Pakistan has once again, stressed the need for the continuation of tight monetary policy in the country. But thing is that tight monetary policy has not succeeded to curb or control the high levels of inflation ratios in the country. Although non-food inflation weakened, overall CPI inflation declined considerably, falling from 11.1 per cent in April 2005 to 6.9 per cent by April 2007 however, still above the 6.5 per cent target for FY07.

Change in credit growth profile

(i) The credit growth to some sectors remained low in the nine months of 2007. Consumer credit, the business loans (mixed) with many businesses witnessing a strong increase in credit demand (including telecommunications, food processing industries, and apparel industries); (ii) Due to better internal restructuring, risk management, and credit extension services, and above all mergers and acquisitions decelerated the credit growth and (iii) Delay in power projects, low volumes in textile and other sectors were the main factors of slowing of credit growth in the country.

Important suggestions

(a) Not to heavily rely on the inflows of international capital investments because these can be volatile, and are sensitive; (b) Lower sustainable current account deficit; (c) Rise in the domestic savings rate; (d) Gradual reduction in the fiscal deficit; (e) Growth in the tax receipts and base; (f) Geo-political stability; (g) Social justice; (h) Timely completion of mega water reservoirs projects and (i) Managing increasing energy deficits.

Performance of different sectors

Agriculture

The SBP is hopeful that the targets of agriculture would be achieved. The record wheat harvest, and upward revision in the production figures for key kharif FY07 crops has raised the prospects of a strong recovery by the agriculture sector in FY07.

__________________________________________________ _____________

Agriculture (sub-sector) FY05 FY06 FY07 FY07

Agriculture 6.7 2.5 4.5 5.0

Major corps 17.8 -3.6 4.3 5.8

Livestock 2.3 8.0 5.2 5.2

Fishing 2.2 1.9 4.0 4.0

Minor corps 2.3 1.6 2.3 2.3

Forestry -33.2 -5.7 3.2 3.2

__________________________________________________ _____________

Estimation

It is estimated that growth for major crops could reach as high as 5.8 per cent in FY07, significantly higher than the target growth of 4.3 per cent for the year. The 23 million tons wheat harvest is not only well above the target of 22.5 million tons, it is the largest ever recorded in Pakistan.

Agriculture loans

According to the SBP 3rd Quarterly Report the banking system provided enough loans to agriculture sector to fulfill its diversified requirements. Agriculture credit disbursement increased to Rs111.2 billion during Jul-Mar FY07, up by 22 per cent relative to the corresponding period of FY06. This growth is well above the 16.4 per cent annual target, though 1.5 percentage points lower than seen in Jul-Mar FY06. The pace of agri-credit disbursement suggests that Rs160 billion annual targets for FY07 would be met comfortably.

Large-scale manufacturing (LSM)

It is estimated that LSM growth may be higher during Jul-Mar FY07 as compared with the corresponding period of FY06, but suggests that the 13.0 per cent growth target of LSM sector for FY07 may not be achieved.

Main reasons

(i) Saga of load-shading especially in the city of lights i.e. Karachi; (ii) Cost of production increased; (iii) Deteriorating law & order situation and (iv) Energy crisis.

Signs of recovery

(i) Textiles (but due to tough regional and global competition and above all higher cost of production the chances of brighter textile exports are weakened); (ii) Suga; (iii) Cement (running at the capacity of 70-80 per cent and brighter chances of exports to Iraq, Afghanistan and Gulf States) and (iv) Basic metals.

Domestic industries

The domestic automobile industry, registered a slowdown in growth during Jul-March FY07 relative to the corresponding period of FY06. Industries such as fertiliser, paper & board and engineering saw a decline in production during this period mainly due to weakness in demand and temporary shut down for maintenance as well as expansion.

Prices

The sector of prices is directly with the general masses and they are the easy prey of the onslaught of high inflationary pressures. Strong increases in food inflation remained in high zones. The influence of food inflation is also evident in the WPI; although the WPI inflation has seen a year-on-year drop this is simply because a surge in its food component was largely offset by a sharper decline in its non-food elements.

Money and banking

The M2 growth which has been showing gradual slowdown relative to the corresponding period till February 2007, enhanced sharply afterwards to reach 12.1 per cent during Jul-Apr FY07 compared to 10.8 per cent rise during Jul-Apr FY06.

Main causes

(i) Strong government borrowings (ii) Rise in net foreign assets

Growth in credit to private sector slowed from 20.2 per cent during Jul-Apr FY06 to 13.0 per cent during Jul-Apr FY07, suggesting that the monetary policy has been

Conclusion

The disparities (income, regional and sectoral) are on the rise mere announcements of Vision 2030 may not be enough to put an end on the widening engulfs of common and poor people. Being the central bank of the country, SBP has once again warned the government on the serious issues of high levels of trade and current account deficits.

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

The economy Uneasy mix of gains and losses

By Dr Mushtaq Ahmad

The economy has continued its growth tempo initiated a couple of years ago but it is accompanied by resurgence of macroeconomic instability, posing tough challenges to the economic policy makers. Over the last many years, vast economic policy reforms have been implemented to promote global integration and export led growth strategy. The world economy has expanded smoothly in recent years and many emerging economies have reaped the gains through expansion in their exports and resultant productivity gains, and massive foreign direct investment inflows. In our region China and India have demonstrated around double digit GDP growth, coupled with parallel achievements in exports, foreign exchange reserves, price stability and productivity level. While planning for the current year, not only high GDP growth was envisaged but substantial improvements were targeted in all areas of macroeconomic stability in our plan and budget. At about close of the year, the profile of the prime aggregates now displays many targets have gone astray.

The GDP growth has been estimated at 7 percent and is predicated on record production of wheat and sugarcane, higher estimated growth of livestock and services sector. The growth of the large scale manufactures slipped from the last year level as well as from the target. Many other aggregates like investment, exports, tax revenues, poverty reduction and inflation are mutually interlinked with GDP growth. The developments realized in them are incongruent to their behavioural relationship with GDP.

Giving the growing global economy, the meagre export growth of 3.4 percent, reflecting surplus for sale in the global market lends no support to high growth. While State Bank claims the continuation of a tight monetary policy to stifle excess aggregate demand, the question arises why enhanced domestic production had not tamed inflation. The general public perception is that poverty is on the increase in the country.

Foreign direct investment has substantially increased over the last year. Its credit goes to the government policies. This is in fact coming into rent seeking activities and where the profit and producer prices are guaranteed. It may be having implications in some future years in terms of profit remittance outflow and some time repatriation of the investment as the national policies accommodate it. These days there is excess international liquidity. For example Japan has 0.5 percent interest and such situation fostered ‘carry’ trades. Home remittances have also shown good increase over the last year. This is partly attributed to relatively higher interest rate in Pakistan.

Budgetary deficit has already equalled the annual target during the first nine months of the year, and by the end of the year it is certainly to be breached. There was appreciable growth in tax revenues but it has been outpaced by the government expenditures. The tax policy is totally driven by revenues maximization and this has also been reckoned by the commerce minister who referred to it in explaining the fall in exports. Its obsession with only revenues maximization has made it oblivious to the fallout of the neglect of its other goals e.g. income distributional equity, price stability, investment and export promotion. It is completely devoid of efficiency principle. For example extraordinarily high protection provided to goods like cars inflects loss on the economy of welfare as reduction in consumer surplus. Keeping the budgetary expenditure much above the revenues level while keeping it on increase every once in a while continuously nurtures the aggregate demand. This fosters the inflationary forces. I find this phenomenon holds sway in recent years in our economy.

The government has also been driven to borrowing both from within the country and abroad. Within the country its resort to the State Bank has directly led to creation of money and that is inflationary and alternatively or simultaneously tapping the open financial market has led to the increase in the interest rate through its crowding out. Budgetary borrowings this year are twice that of last year and are far higher than the target. Rising interest rates have prompted cost push inflation. The protracted overall fiscal deficit has increased the debt liabilities.

The fiscal policy domain is intimately interfaced with that of monetary policy. Development on one side instantly permeates into the other. Breaching the budgetary borrowings targets has constrained credit for the private sector and its pace has slowed down from 20 percent to 13 percent during July –April 2007 and is far below the target. External borrowing by the government has increased the net foreign assets. Thus both these are largely factored in augmenting the aggregate money supply (M2) which has so far surpassed the last year level as well as the target. It is likely to touch a mark of 15.5 percent by year end. Given the past monetary over hang this will reinforce the existing strong underlying inflationary forces.

Expansion in net foreign assets is a healthy symbol of balance of payments but it is problematic for central monetary authorities. They often try to sterilize its impact while they are to ‘err on the side of the tight monetary policy’. In Pakistan the authorities have recognized its need but not much to show on the score board. This is indeed a difficult task to achieve, needing great skill and precision. In our case the policy tools like operation market operations, required reserves ratio etc when pressed into operation are likely to further increase interest rate and crowding out of the private sector, a tasteless and counterproductive alternative.

The government had undertaken a massive overhaul of tax and trade policy to foster global integration. The industry has heavily suffered form its fallout. The moral of the story is that the end has failed to justify the means. Our exports could increase only by 3.4 percent, a sharp dip in the trend and far less than the target. The trade deficit has already reached $ 9.5 billion in the first ten months of the year which would further rise by the time the year comes to close. Similarly the current account deficit estimate of 4.8 percent exceeds the last year’s level of 3.9 percent of GDP and 4.3 percent target. The real effective exchange rate has continued to experience creeping appreciation. This coupled with lack of any improvement in productivity has eroded the competitiveness of exports. The foreign exchange reserves at $13.7 billion, better than last year, have lost its relative parity with increased trade deficit, sometimes termed as safe limit.

There is excess liquidity in the global market and interest rates are relatively low in the developed countries. Any developing country disciplined under the World Bank and IMF charter realizes oversubscription of its sovereign bonds. The key thing to ensure is that the borrowing is kept within the some safe limits and does not impair the intergeneration equity.

Inflation has continued as a cause of concern both for the authorities and the consumer alike. Despite all official efforts including tight monetary stance it has not gone down to indicate a definite trend. The food inflation has touched double digit. This aggravates poverty and has also some implications in areas of the economy.

The continuing twin gaps in the budget and balance of payments are the basic reflection of the shortage of national resources. One fourth to one fifth of national investment, already at a low level, is financed through foreign loans. No significant developments in this area have recently been witnessed, and in casually addressing the issue, the foreign exchange reserves are being construed as obverse of the national resources and savings for investment. Progress in human capital development is ‘business as usual’ because of limited resources and long shopping list.

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

Will it be a businessman or common man budget!

By Javed Mahmood

As the new budget is being unveiled this week for which the preparations are in the full swing, a half-hearted debate is going on in the business circles whether the FY-08 budget would be pro-business or pro-common man. Unlike past this time the debate and discussions concerning the upcoming budget entirely lack the eagerness and gusto as the businessmen and common people are more interested in the political and judicial scenario and very little in the forthcoming budget.
Although various business circles, chambers of commerce and trade associations have forwarded their demands for the new budget, the common man appears perfectly indifferent to the new budget and the promises and rhetoric of relief.
In fact, the present government has reduced the ambit of the budget merely to the fixation of economic targets, revenue mobilisation and detached the key items from the budget like petrol prices, electricity, gas tariffs and essential food items. The tariffs of energy sector are frequently being revised on different pretexts while the prices of essential consumer items have been left at the will of the market forces.
History of budget makings shows that till the regimes of Nawaz Sharif and Benazir Bhutto, the prices of petrol, electricity, gas, cement, cigarettes, sugar and some essential items were adjusted only in the budget. And frequent increase in the prices of key items through budget and mini-budgets often leads to a flurry of criticism against the government that used to be deterrence for the government for further premature change in the budget.
However, modification in the mechanism of budget making by the present regime has not only changed the pattern of mini-budgets, but also made common people indifferent to this annual exercise.
Before this crucial change in the framework of the budget making, the business community and common people used to sit before their TV sets in groups to eagerly listen to the developments in the budget. But this ecstasy has ended from the day the government has cramped the budget making to the fixation of the fiscal targets, including revenue mobilisation.
However, in the new budget the federal government faces the key challenges of containing deficits – fiscal deficit, trade deficit and current account deficit within the prescribed percentage of the GDP. Inflation is another area where the government would have to go extra mile to curb escalation in the food prices in FY08.
In FY07 the current account imbalance, fiscal and trade deficits would set a history by surging to the record high mark and this trend is expected to be noticed in the next financial year. The current account deficit has slightly exceeded $6 billion in 10 months (from July 2006 to April 2007) and it is expected to settle above $7b in this fiscal, as against $5.015b in previous financial year. The budgetary deficit in nine months of this fiscal has reached 272 billion rupees ($4.48b when calculated at Rs 60.71 dollar-rupee parity). The trade deficit in FY07 is also being estimated above $13 billion, from $12.20b in FY06.
It is yet to be seen as to what measures or strategies the federal government puts in place to minimize the burden of the deficits on the country.
Meanwhile, there are moments of rejoicing for the government. Because the inflow of foreign investment and remittances that are beyond the official projection and expectation in the current financial year that have enabled the government to bear the burden of trade deficit and maintain foreign exchange reserves near $14 billion.
In 10 months of FY07 remittances amounted to 4.477 billion dollars (from $3.618b in 10 months of FY06), showing strong signs of reaching close to six billion dollars or above this level that would be the highest-ever in a financial year.
Similarly, the foreign investment inflow has been estimated at 5.98 billion dollars in 10 months, July 2006 to April 2007, from 4.048 billion dollars, while the total inflow of foreign investment might surpass the mark of seven billion dollars for the first time.
It is expected that the government would make efforts to maintain the inflow of a hefty amount of remittances and foreign investment in the new budget.
Meanwhile, as the government officials are claiming relief for the common man in the new budget, one can hope that the three major problems of the people – rising food inflation; the worst-ever load-shedding and non-availability of potable water in big cities like Karachi and Islamabad would be given key attention.
So far despite billions of rupees expenditures, these three areas have badly exposed the competency of the policy makers. It is really pitiable that the countless inhabitants of Pakistan (that has shown impressive economic growth during the past three years) were grumbling about clean water, round-the-clock electricity and essential consumer items at affordable prices.
The shortage of electricity and potable water are two chronic issues being faced by a vast majority of the countrymen because of the poor planning and mishandled of these crucial issues.
In the coming budget the federal government has projected 520 billion rupees outlay for the Public Sector Development Programme. But will this bulky PSDP would resolve the basic problems being faced by the common man in the country is a question that strikes the mind of the common people.
Interestingly, Prime Minister Shaukat Aziz and his team have proudly pointed out repeatedly that per capita income of the country has increased to 845 dollars, but this drastic improvement in the per capita income is yet to change the fate of millions of countrymen who are looking for water, uninterrupted power supply and other social amenities.
Analysts say that instead of focusing mainly on revenue mobilisation the federal government should strive in real manner to bring a real change in the social life of the countrymen, especially those who lack access to basic amenities.

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.

PML-N asks govt how and where $63bn was spent

www.dawn.com

By Our Reporter


ISLAMABAD, June 3: The Pakistan Muslim League (Nawaz) has sought details about how and where the hefty amount of $63 billion injected into Pakistan’s economy after the 9/11 has been spent.

Speaking at a press conference at the party’s central secretariat, PML-N information secretary and former Planning Commission deputy chairman Ahsan Iqbal challenged government’s claims of improvement in economic sphere and accused the Musharraf-led government of “squandering millions of rupees on publishing misleading advertisements in the media to make false claims of economic performance”.

He said the nation wanted to know where and how over $63 billion had been spent? “Before the 9/11, the average growth rate in the first three years of the Musharraf regime was only 2.5 per cent. The macroeconomic indicators of the country improved because of massive inflow of this money after the 9/11 which had nothing to do with the policies of the government. Any sitting government would have benefited from this change,” he claimed.

Mr Iqbal said that over $25 billion had been remitted by overseas Pakistanis because of insecurity abroad; over $15 billion had been purchased by State Bank due to weakening of the dollar; $10 billion had been given by the US in aid; over $10 billion came in loans and foreign assistance and more than $3 billion had been earned by privatising national strategic assets.

“The test of any government is how it utilises the funds. Has Pakistani infrastructure improved? Has quality of life for common man improved? Has delivery of education and health services through the public sector improved? Have real productive sectors become more robust and competitive? Have unemployment and inequality come down? Have Pakistani exports grown faster than imports? Unfortunately, the answer to all these questions is a ‘big negative’.

He said the Musharraf government had not introduced a single new economic reform over the last eight years. There are only two economic reforms introduced in Pakistan. The first reform was introduced in 1990-91 by the first Nawaz government which had liberalised and deregulated Pakistani economy. The second reform, he pointed out, was introduced in 19978-98 by the second Nawaz government which had professionalised public sector banks, granted an autonomy to the State Bank and reformed capital markets.

“Democratic governments in the late 90s worked under economic sanctions imposed by the US in 1989. The Musharraf regime has been in the office for eight years but has no single mega project to its credit,” Mr Iqbal said.

He pointed out that two PML-N governments which remained in the office for four and half years had initiated a number of mega projects, including motorways, new Karachi and Lahore airports, highways, modern digital telecommunication infrastructure, Ghazi Bharotha hydel power project, Chashma nuclear power project, Gwadar port, Makran coastal highway and Kohat tunnel.

He said that over the last eight years, the Musharraf government had failed to commission any new power generation projects, and as a result the country was facing severe power shortage.

He said that due to ‘elitist’ economic policies of the Musharraf regime, only defence societies had flourished in the country while the life in poor colonies became miserable. “The government is selling valuable national assets to meet the mounting trade gap caused by the liberal import policy. Now it is eying the PSO, PIA, and OGDCL.”

The PML-N leader sought a national committee to monitor transparency of the privatisation process.

__________________
~It is possible to fail in many ways...while to succeed is possible only in one way.~

More expenditure on development

By TANVIR ZAHID

Wednesday, JUNE 06, 2007

It is indeed heartening to note that considerable allocations have been made towards financing of the Public Sector Development Programme (PSDP) of the Federal government for financial year 2007-08.
Addressing a pre-Budget seminar in Lahore the other day, Advisor to the Prime Minister on Finance, Dr Salman Shah made the total allocations for funding the developmental activities during the next financial year to Rs 724 billion. This included Rs 520 billion for PSDP and another 204 billion, which the public sector corporations would be incurring on their development programmes during the next financial year. It will be in addition to the huge PSDP outlay.
Mega water sector projects including Kalabagh Dam have been allocated Rs 40 billion in the development programme. President/Chief of Army Staff (COAS) General Musharraf has repeatedly stated that five major dams including the much delayed, Kalabagh Dam will be on ground by year 2015, as the country no longer can afford to waste its precious water resources due to absence of the additional water storage facilities.
The Advisor on Finance also gave a happy tiding that funding of the mega water sector projects will be no problem as the donor agencies are quite willing to do so. He said while giving the outlines of the new federal budget that the public-private partnership concept will be further encouraged.
Coming back to PSDP and its allocations, which indicate the good intentions of the government to accelerate the pace of development in all sectors of national economy, the pertinent question which arises in the minds is: how about the utilisation capacity of executing machinery of the Federal government ie ministries, divisions and their attached departments and organisations down the line.
In all fairness, the utilisation capacity of the allocated development funds by the executing machinery leaves much to be desired. The PM’s advisor no doubt gave encouraging figures as regards to the PSDP but what he grossly missed on the occasion was the utilisation of the funds reserved for the PSDP of the outgoing financial year.
The total size for the financial year 2006-07 was placed at Rs 470 billion and additionally organisations/corporations, government managed or private sector managed having more than 51 per cent government share, were expected to spend Rs 145 billion on their development programmes’ implementation.
Such a huge allocation even during outgoing fiscal as compared to Rs 272 billion allocated for PSDP 2005-06 was also quite appreciable and encouraging.
Utilisation of allocated development funds during the outgoing financial year also leaves much to be desired. Though no utilisation figures are available officially but there are reports that hardly about 36 per cent of the Rs 470 billion had been utilised by the executing agencies down the line during first 10 months i.e July 2006 to April 2007 which cannot be termed as appreciable and encouraging at all.
The federal and provincial governments would do well if they make it sure that the executing agencies would timely utilise the development funds. If more than 60 per cent of allocated development funds are reportedly have not been utilised then in actual, little development has taken place. Those responsible for prolonging the utilisation of the PSDP allocated resources should be identified and taken to task quite. The pace of development projects should be accelerated, so that people at large benefit from it at the earliest.
Such lethargic executing agencies’ personnel give way to criticism. Every single penny out of the public exchequer allocated for PSDP should be properly and sincerely utilised, to achieve their purpose. A monitoring system should be devised by the government to check that the allocated funds become a means to an end. Otherwise the government’s development efforts would go down the drain.

http://www.nation.com.pk/daily/jun-2007/6/columns2.php

__________________
Time is like a river.
You cannot touch the same water twice,
because the flow that has passed will never pass again.
Enjoy every moment of life.

I have learnt silence from the talkative, toleration from the intolerant, and kindness from the unkind; yet strange, I am ungrateful to these teachers.