Unhappy New Year

By Amir Zia
Money Matters
The News
January 2, 2012

The government’s economic team has yet to come up with any plausible explanation for their criminal inaction. The story-line of blaming natural disasters, the war against terrorism and global recession for the economic troubles won’t sell now. They have certainly had an impact on the economy, but the bigger damage has been done by the government itself as it failed to carry out reforms and ensure good governance.

We do not need a crystal ball to predict that Pakistan's economy is all set to brace another tough year in 2012 – much tougher than the previous four years under this democratic dispensation. The vicious cycle of low growth and double digit inflation will continue to grip the country, bringing more misery to the lives of ordinary Pakistanis, increasing poverty and unemployment and reducing the purchasing power of low and middle income groups in real terms.
In fact, the Pakistan Peoples’ Party (PPP)-led government has ensured that there is no other possible economic scenario for the country in 2012 as it has failed to bring in the crucial reforms aimed at expanding the tax base, introducing fiscal discipline and restructuring the loss-making public sector enterprises.
The PPP’s economic team also miserably failed to inspire confidence among local and foreign investors, who turned their backs on Pakistan at a time when other regional countries continue to lure new investment and businesses, taking advantage of their vast domestic markets, availability of cheap labour and the huge size of an English-speaking pool of educated professionals.
Finance Minister Abdul Hafeez Shaikh and his team appear without a strategy and plan to pull the country out of its current state of stagflation. Rather than taking tough decisions to trigger growth and put the economy back on the track, they are engaged in a losing exercise of fire-fighting on a day-to-day basis. But trickery seldom works and proves more lethal and disastrous for the country in the long-run. Even if the economic gurus know the prescription for our economic ills, their political bosses remain in no mood to give them a free hand. For the embattled PPP government, setting the right priorities has always been a problem. Narrow political interests supersede the vital national interest as President Asif Ali Zardari and company try to perpetuate their rule.
The foremost failure of the PPP in managing the economy has been its inability to form an economic team of its own. It is ironic that one of the biggest, mass-based parties in the country remains unable to develop a core economic team within its ranks to run the economy. From day one, this government has been running the economy on 'borrowed' people. One should not be surprised if there is a wide gap in the thinking of the economic policy-makers and the ones who approve their policies.
This results in utter confusion at all the policy levels. For example, one finds privatization being promoted and opposed at the same time by the ruling party. Crucial issues such as overstaffing at the loss-making public sector enterprises cannot be addressed because PPP politicians stand opposed to it for political and ideological reasons, though their financial team wants to follow a different course.
So was the case with the International Monetary Fund (IMF)-backed reform programme, which the PPP government failed to implement despite repeated promises. The imposition of the reformed general sales tax (RGST) could never see the light of the day as the government missed one promised deadline after another due to opposition both from within the party and from allies in the ruling coalition as well as the opposition and various interest groups. No wonder, there was no serious push to broaden the tax base and raise the extremely low tax-to-GDP ratio of below 10 percent.
The fiscal management of the PPP government has also been one of its key weaknesses as it is expected to miss the budgetary deficit target for the third year in a row. According to IMF estimates, Pakistan’s fiscal deficit for 2011-12 (July-June) is likely to be at a gnawing 6.5 percent against the targeted 4.2 percent. The widening deficit, which was 5.9 percent in fiscal 2010-11, threatens the economic stability of the country.
There is hardly any possibility of a change in the situation in the coming months as the government has given up efforts to expand the tax base and also appears in no mood to eliminate the stifling subsidies given to the public sector because of political compulsions.
The government’s continued heavy borrowing from the central and commercial banks not just has an inflationary impact but has also crowded out the private sector from the credit chain. All this has compounded the country’s economic woes.
The government’s inability to handle the deepening energy crisis is yet another factor that has been hurting the real economy across the board. On this front, there has been an epic saga of delay, starting from the government’s delayed action in handling the circular debt problem and its failure to launch a comprehensive national energy conservation strategy. Instead of coming up with a strategy to utilize the existing power generation capacity to the optimum and starting new medium to long-term projects, the government came up with the 'miracle cure' of rental power projects which crashed without even taking off at the cost of billions of rupees to the national exchequer.
With small to large factories and industries now being forced to slash production due to the massive energy shortages, there remains hardly a possibility that the manufacturing sector will contribute in pushing the growth rate up. Instead, there will be a further slowdown in its activities, resulting in tens of thousands of job losses.
The government’s economic team has yet to come up with any plausible explanation for their criminal inaction. The story-line of blaming natural disasters, the war against terrorism and global recession for the economic troubles won’t sell now. They have certainly had an impact on the economy, but the bigger damage has been done by the government itself as it failed to carry out reforms and ensure good governance. Instead, its mismanagement and inaction served as a catalyst to worsen the economic situation.
In 2012, there is little hope that things will take a turn for the better. With the opposition demanding early elections and political instability gripping the country, the government will hardly have time to take measures which are required in these challenging times. There is no political will among the PPP central leaders to do so, while their financial managers seem content passing as much time as possible in their plush jobs where achieving results appears to be of no consequence.
The government’s decision prematurely pull out from the IMF programme in September 2011, has further eroded its credibility. The damage is two-folds. One, the country is without the prudent supervision of global lending agencies, which gives room for more slippages and mismanagement. Two, other multilateral and bilateral donors will shy away from Pakistan in the absence of an IMF umbrella.
In the coming months, Pakistan can face a serious balance of payment crisis on the back of soaring domestic and foreign debt, a widening fiscal deficit and the government’s inability to mobilize money from domestic or foreign resources. The scenario of debt trapped and cash-strapped Pakistan is now staring us in our face.
As early as in the second to early third quarter of 2012, the current reserve cover of over four months of imports is likely to drop below two months, exerting more pressure on the rupee, which has lost more than 40 percent of its value against the dollar since early 2008.
The estranged relations with the United States remain yet another factor that will increase our economic troubles. It is not just the absence of US money and aid that should worry Pakistan. Washington also holds the key to loans and aid at all the key multilateral and global forums.
In a nutshell, Pakistan’s battered economy remains on the course of a self-inflicted disaster in 2012 under the stewardship of the current economic team. The economic rot will not be stemmed as crucial reforms are nowhere on the agenda nor are there any efforts to put the economy back on the high growth trajectory. Yes, 2012 will be another gruelling year for Pakistan as the situation is all set to slide from bad to worse.