Neither War, Nor Peace

By Amir Zia

March 2019

Monthly Newsline

In the latest crisis with India, the Pakistani leadership has displayed a great deal of sagacity, restraint and maturity to avoid a war. Now Prime Minister Imran Khan and his team have to stay the course and utilise the crisis to write a new set of rules in Pakistan’s favour

After all the menacing warmongering, dangerous posturing and tit-for-tat attacks, Pakistan and India have apparently pulled back from the brink of a full-blown war. 
If the credit for preventing an all-out conflict goes to the hectic overt and covert efforts by global and regional powers, Pakistan unarguably also helped in de-escalation through its measured military and diplomatic response to the Indian aggression and display of extreme restraint despite serious provocation. 

The uneasy lull notwithstanding, Pakistani and Indian troops remain locked in a heavy exchange of mortar and artillery fire along the Line of Control (LoC) in the divided Himalayan region of Kashmir and in other border areas. The disputed frontier – where the Indians have resorted to more than 3,000 ceasefire violations in 2018 alone – is likely to remain an intermittent conflict zone in the foreseeable future, as the prospects for peace are bleak given India’s intransigent stance on the issue. 

While Indian forces continue to target civilians along the LoC and the working boundary, the Pakistani military – as per its standard operating procedure –makes sure to fire with care to avoid villagers being hit in Occupied Kashmir. 
And so, against the backdrop of deafening artillery fire and a pounding of mortar shells in various areas of the disputed region, Kashmir is again calling for international attention as the most dangerous nuclear flashpoint in the world. Any sharp escalation of hostilities and even a small miscalculation by either of the nuclear-armed South Asian neighbours has the potential to spin out of control and result in a doomsday scenario for not just the region, but even the world.

Using the bogey of terrorism, India is setting the pace of the conflict against Pakistan, through both words and actions.  

Islamabad’s repeated peace overtures and offers for talks on assorted issues, including Kashmir and the challenge of terrorism in the region, have so far been haughtily rejected by New Delhi. And Prime Minister Imran Khan’s decision to free Abhinandan Varthaman, the pilot of the downed Indian fighter aircraft, is being portrayed by the jingoistic Indian media and leadership as an act induced by external pressure rather than a goodwill gesture.

And so while international diplomatic efforts have helped avert the danger of a full-blown war for now, chances of sustained and meaningful bilateral talks between the two countries before or after the Indian general elections – scheduled in April-May this year – appear slim. 

Even if talks resume – as they have done several times in the past – whether or not the two neighbours will be able to take even few baby steps towards resolving their disputes, including the core dispute of Kashmir, remains a key question.  And if the core issue remains unresolved, will Pakistan and India be able to carve out a roadmap for peace and confidence-building measures, or at least opt for a prolonged season of cold peace? In the current environment of hostilities, particularly from the Indian side, the possibility of even holding talks for the sake of talks appears remote. 

The records of the bilateral “composite dialogue,” which started in 1985 and dragged on till 2008, followed by a “comprehensive dialogue” that began in 2015, indicate that the two countries failed to address even those issues – such as the dispute over Sir Creek and Siachen Glacier – which were seen as ‘low hanging fruits’ that were easy to pluck. The responsibility for the failure of the bilateral talks overwhelmingly rests on the shoulders of New Delhi which did not implement the decisions considered a done deal after the talks, such as a pulling out of troops from the Siachen Glacier. 

So if the past is any guide, why the result of any such efforts in the future would be different is a point to ponder, as an economically buoyant India attempts to redefine red lines in its favour vis-a-via Pakistan on the back of New Delhi’s growing diplomatic clout in key world capitals. 

For Pakistan, the situation has never been as challenging and tricky in recent years as it now stands, with prospects for regional peace remaining precarious.

Pakistan – despite constraints – gave an effective military and political response following the crossing of the LoC and international frontiers by Indian fighter aircraft on February 26 to bomb a deserted area in the Khyber-Pakhtunkhawa province. Though India contends hitting an alleged “terrorist camp,” there is no evidence on the ground to back these claims. 

India justified the attack in the name of self-defence and in retaliation to the February 14 suicide bombing in Occupied Kashmir’s Pulwama area which killed more than 40 Indian soldiers. But according to Foreign Office sources at home, in the dossier presented to Pakistan after the escalation of hostilities, India failed to provide any definitive evidence of Pakistani involvement in the attack.

Although the Indian attack failed, it was an indisputable act of aggression that aimed to set a precedent in India’s favour for the future. Pakistan had no choice other than to respond. The very next day, pilots of the Pakistan Air Force downed two Indian fighter aircrafts and bombed six targets in Occupied Kashmir, clearly demonstrating the forces’ capacity, ability and will to retaliate when attacked. However, even the retaliation was restrained. Director General, Inter Services Public Relations, Maj. General Asif Ghafoor told reporters that as the Indian attack did not cause any loss of life, the PAF bombed close to Indian military positions rather than hitting them directly to avoid damage and casualties. (SEE BOX FOR DETAILS) 

Facts also exposed India’s propaganda. The Pulwama attacker was a local youngster, Aqeel Dar, who wanted to avenge Indian atrocities in the occupied region. Dar had joined militants because he was humiliated and tortured by Indian troops. Yet, even before the fires of the Pulwama attack had been doused, anti-Pakistan hysteria gripped the Indian media.  

And while Pakistan scored some tactical diplomatic and military success in this latest Indo-Pak impasse, its one-sided efforts to lower tensions do not raise many hopes for peace, as India remains adamant about pursuing new rules of engagement.

Firstly, the Indian leadership is confident that the time is now ripe to up the anté of tension with Pakistan in the push to establish India as an unchallenged dominant power in the region and beyond. This confidence emerges due to India’s growing economic clout and its strategic partnership with the United States. That partnership was seen at work recently as Washington endorsed the Indian position that it had carried out “counter-terrorism actions on February 26” and advised Pakistan to take “meaningful action against terrorist groups operating on its soil.” 

New Delhi has also been able to build relationships with other regional countries and neutralise some of Pakistan’s allies. The appearance of the Indian Foreign Minister Sushma Swaraj as guest of honour at the Organisation of Islamic Conference (OIC) remains one example of India’s successful diplomatic push.

Secondly, India wants to divert attention from its human rights violations and the state-terrorism it has unleashed against citizens in Occupied Kashmir. 

Thirdly, India aims to paint the burgeoning legitimate, and now entirely indigenous freedom struggle in Kashmir, as terrorism. And in the post-9/11 world, the Indian leadership has found a conducive environment to associate the Kashmiri freedom movement with terrorism.  

Last but not least, India and some of its backers want to keep Pakistan destabilised at a time when the new government at home is trying to revive the economy and introduce reforms and clean the Augean stables. An escalation of tension between the two countries and mobilisation of troops even without a war remains a drain on the economy and discourages foreign and local investment. 

To make the situation for Pakistan even more fraught, some international players appear to be working in tandem at various levels to keep the country under pressure. For example, Pakistan fulfilled almost all the requirements set by the Financial Action Task Force (FATF) aimed at stopping money-laundering and terror-financing to get the country’s name removed from the Grey List. But suddenly FATF had another prerequisite before this could happen: Pakistan would have to declare the source of financing of its nuclear and security programme, a precondition which wasn’t mentioned before. 

Therefore, continued tensions and the “no talks” posture with Pakistan fits in well with India’s Hindu extremist government’s game plan which, along with its international backers, want a pliant Pakistan.

Indians feel that they can get away with their genocidal policies in Occupied Jammu & Kashmir, put this core issue on the back-burner once for all, and engage Pakistan on their own terms as and when desired. 

Meanwhile, the Pakistani leadership – at least in public – appears to agree on one point. Not just many Pakistani analysts, but even government top-guns, including Prime Minister Imran Khan, have repeatedly said that Modi orchestrated tensions because of the looming elections in which the anti-Pakistan card sells in India’s cow-belt. 

Elections are certainly a factor prodding the Modi government to get tough on Pakistan, but they are not the only factor. The Indians have greater designs in the region, and the “no talks” mantra with Pakistan suits them and their backers.    

India as a hegemonic power is looking at ways to escalate tensions and create a new normal in the region where it can take unilateral military action against Pakistan in the name of self-defence against alleged terrorists. This is, of course, an unacceptable situation for Pakistan, which in round one fully demonstrated its capabilities and will, and denied India the chance to tilt the balance in its favour.

But going forward, Islamabad will have to perform a high-wire diplomatic act to avoid the escalation of tension with India, resist diplomatic pressure regarding its core national interests, including a stand on Kashmir and the nuclear programme, and ensure that its national security red line stays in place.

At the same time, the government has to ensure internal security at every cost. On this front, Pakistan has already achieved a lot as the country has, virtually single-handedly, turned the tide of terrorism and abolished the terrorists’ safe-havens. But the fight against extremism is still far from over. It needs to be taken to the next level in line with the 20-point National Action Plan, which was the result of a national consensus following the terrorist attack on the Army Public School Peshawar on December 16, 2014. The past government failed to empower and activate the National Counter Terrorism Authority, introduce reforms in the police and judiciary, effectively curb the extremist narrative, and defang some of the already banned organisations. 

This Pakistan has to do in its own national interest and in line with the policy that only the state, not non-state actors, has the authority to formulate the rules of engagement vis-à-vis terrorism and related activity. There is already a consensus on this issue within all the state institutions. But it is time to double these efforts to deny anti-Pakistan forces the propaganda space they enjoy because of various loopholes. 

In the latest crisis with India, the Pakistani leadership has displayed a great deal of sagacity, restraint and maturity to avoid a war. Now Prime Minister Imran Khan and his team have to stay the course and utilise the crisis to write a new set of rules in Pakistan’s favour.

ENDs 

Plane Talk

By Amir Zia

Newsline 

March 2019

The Pakistan Air Force’s successful shooting-down of two Indian Air Force planes graphically illustrated the former’s superiority in air power.

There are more than 40,000 madrassas (seminaries) in almost every nook and corner of Pakistan. For the Modi government, hitting any one of them in an airstrike and declaring it a terrorist centre would have served as a good propaganda tool: a seminary destroyed and the bodies of dead militants ie. success by the standards of current western and Indian conventional wisdom.  That’s what Prime Minister Narendra Modi hoped to achieve to intensify pressure on Pakistan, get western public opinion and capitals behind him, and satisfy the war thirst of his own constituency of hardline extremist Hindus.

On February 26, any one of the several madrassas in Balakot, where Afghan and Kashmiri militants once used to operate a centre, was their target. In fact, that centre had been closed a long time ago, after former President Pervez Musharraf announced a ban on more than 20 militant groups, including Jaish-e-Mohammed in 2002. The screws were further tightened during subsequent crackdowns in 2005 and onwards.

The Indians, meanwhile, had, without producing any evidence to corroborate this, been shouting themselves hoarse that Jaish-e-Mohammed was behind the February 14 Pulwama suicide attack that had killed more than 40 of its soldiers.  

In the wake of the Indian propaganda, and its web of what is increasingly being proved to be lies, Prime Minister Imran Khan offered Prime Minister Modi talks and expressed a willingness to help in investigating the Pulwama incident. Instead, the Indians started mobilising troops in line with their “Cold Start” strategy. Pakistan reacted with parallel manoeuvres and mobilisation as per its doctrine, which has been in place since the days of General Ashfaq Pervez Kayani, which has made India’s Cold Start strategy ineffectual by stealing the element of surprise from it.

In a state of high alert due to Indian warmongering, Pakistani radars first detected the enemy aircraft heading toward the country from the Lahore-Sialkot sector in the wee hours of February 26. Pakistan’s Combat Air Patrol (CAP), which was already in the air, headed straight out to face them.

Minutes later, a second Indian aircraft formation was detected in the Okara-Bahawalpur sector and Pakistan’s second CAP was scrambled into the air. Later, a third and a heavier formation of Indian aircraft was spotted by the radar, heading towards the Line of Control. Within moments, a third CAP, from a peace-time base, took to the air.

Out of the 14 aircraft despatched, four Indian aircraft crossed the LoC four to five nautical miles into Pakistan at around 2:55 am and remained in the Pakistani airspace for around four minutes, turning back when they detected Pakistani aircraft approaching. They left, firing four missiles as they headed out, which landed in a deserted area in Balakot. Pakistani aircraft did not have a knee-jerk reaction and go in hot pursuit. But the Pakistani armed forces, which were already on alert, prepared to react.

“There is no blind spot on our eastern frontier, where our radars remain focused 24/7,” said a senior military official. “Especially, during times like these, we have to be extra vigilant and alert.”

Pakistanis wanted to respond to the Indian aggression immediately. But, according to a senior Pakistan Army officer, “we wanted to gauge the extent of damage first.” Within 30 to 40 minutes after the missiles had been dropped, the exact location where they landed was identified. And it was learnt that barring knocking  out a few trees, no damage was done, he said. Later, when local and foreign media personnel visited the site, their account corroborated Pakistan’s official claim.  

Pakistan reacted the next day in broad daylight as its JF-17 Thunder aircraft, without crossing into Indian-occupied territory, locked the Indian military positions, but fired close to them to avoid major damage and prevent casualties. One of the targets which was locked was an Indian Brigade’s Headquarters, where senior Indian military officials were also present at the time of the attack. They heard the pounding and knew that Pakistan had responded.

Keeping up with the Pakistani tradition of being one-up, the Pakistani Air Force fired six missiles compared to India’s four. The intent was to make it clear to the Indians that any aggression would be matched by similar, but greater retaliation, says the army officer.

In response to the Pakistani strike, the Indians then again sent their aircraft across the LoC, but found the Pakistani Air Force ready for them. Two Indian aircraft were shot. One Indian Mig 21 crashed in Azad Kashmir, its pilot ejected and was later arrested. The pilot of the other plane, a Russian SU – 30, tried to make it back across the border, managed to cross the LoC, but crashed before he could eject, and was killed.

Compared to Indian pilots, who have not seen any real action, Pakistani pilots are battle-hardened and better trained because of the ongoing war against terrorism in which they have to dive to physically spot their targets to hit them. That the Indian Air Force pilots are less experienced can be gauged by the two operating the aircraft which breached the LoC. They fired missiles randomly and at too high an altitude, and the results speak for themselves. 

Later in the day, after the shooting down of the two Indian aircraft, the National Command Authority went into a huddle. 

 “Now it is up to the Indians whether they want to climb the escalation ladder further or go for an exit,” said the senior Pakistan Army official. “Pakistan is ready for both scenarios – escalation as well as de-escalation.”

Ends

Interview: Asad Umar

By Amir Zia

February 2019

Monthly Newsline

“Markets are not interested in whether you are going to the IMF or not” –Asad Umar

n  Your ministry’s performance is seen as a ‘make or break’ for the PTI government. Are you satisfied with what you have achieved so far? 

Asad Umar: Yes, definitely. To know why, you have to look at the situation when we took oath on August 20, 2018. At that time, our current account deficit had averaged $2 billion for the three consecutive months of May, June and July. At that rate, it would have soared to $24 billion on an annual basis. Pakistan had never seen anything even close to this in its history, given the country’s [forex] reserves and net reserves position at the time.

Compare this situation with 2013, when the PML-N came to power. Even at that time there was a balance of payment crisis. I will share two simple numbers; in the fiscal year 2012-13, the current account deficit was $2.5 billion and our reserves were $6.0 billion. That means the reserves were twice the number of the annual current account deficit. 

When we came to power, Pakistan had a current account deficit of $19 billion (overall), which was well on its way to hitting $24 billion. The reserves at that time were $8 billion, which weren’t even sufficient for a year. The situation was five times more stretched compared to when the PML-N came to power. And if we analyse it just by net reserves, the situation was even worse.

Managing the economy for more than five months without any IMF programme was unimaginable at the time, but here we are.  

It is the first time an elected government has, on its own, taken strict measures outside an IMF programme. These measures were required to handle the dangerous situation. And now we have started to see results. Our trade deficit – responsible for the mess – has started decelerating. In December, there was more than a $500 million reduction in the trade deficit. According to preliminary data, the numbers of January are even better.  

How have we managed this? Of course, Prime Minister Imran Khan has played the central role. We gave our bilateral partners and friendly countries the confidence that we are trustworthy and are serious about reforms. And we got their unprecedented support.

The situation demanded harsh steps, which [inevitably] result in higher inflation. But under the PTI’s watch, the increase in inflation is slower compared to the initial six months of the PML-N and the PPP governments.

No doubt the prices of commodities are up and people are facing problems, but the impact of inflation has been managed. We protected the most vulnerable while making all our decisions, even while raising gas and electricity tariffs.

  

n  Why have many economists – even in the Economic Advisory Council – been complaining about the lack of direction? 

Asad Umar: You can accuse us of taking the wrong direction, but not that we lack one. Our actions are consistent. From day one, we have been saying the same thing and doing the same thing. 

n  The ambivalence regarding whether Pakistan will go for the IMF programme or not is seen as a key dampener. According to critics, that reflects a decided lack of direction.

Asad Umar: There is no lack of direction.  Financial markets are cold-blooded. They don’t have a heart. Tell me how the Pakistani stock market has increased by 10.8 per cent in January alone – higher than what it lost over the period of one year. Why are foreigners, who were net sellers for the last 11 months, now buyers? Why have our swap and bond rates improved in Asian markets? Uncertainty is a great item for discussion on a dinner table, but markets are not interested whether you are going to the IMF or not. They are interested in whether you have a strategy or not. 

The easiest way to calm nerves would have been to go to the IMF. If I had announced this, it would have immediately calmed the markets. But we have to assess at what price we want to end uncertainty. 

In my pre-election interviews, I said that some kind of a bailout would be needed, whether from the IMF or other sources. After the elections, I maintained the same position. Where is the lack of clarity or absence of strategy? You may disagree with us and say that we should have signed an agreement with the IMF on day one, but it is absurd to say that there is a lack of direction. 

The question is, why am I not going to the IMF if it is so beneficial for the markets? It is because the cost of uncertainty is temporary and small. The price of availing an IMF programme – which is not good for the economy and the people – was higher. I weighed both options – the short-term cost of uncertainty versus the long-term cost, which was heavy. 

There are many IMF programmes in the world which have failed. Not every IMF programme is designed alike, and not every programme is successful. 

Look at Pakistan. We had 12 IMF programmes in 30 years and look where we stand today. People say ‘take the bitter pill,’ but we have taken it 12 times and it hasn’t worked. 

To sum up, I still want to go for the IMF programme, but only that which is in the best interest of the Pakistan economy and its people.

n  Sentiment improves first and then the fundamentals… markets and investors seem to be wary.

Asad Umar: You are absolutely right, but this happens under normal circumstances. Again, I will draw your attention towards the situation when we took office. The analogy I always use is that if you wish to win a medal in Olympics, you go to the gym and playgrounds, but when you have a heart attack, you go to the ICU. 

Our first order of business was to manage the unprecedented balance of payment challenge, and stemming the out-of-record current account deficit. In this situation, you don’t build positive sentiment first. You have to sharply compress the demand, and when you do this, it invariably has a negative impact on the economy. But that’s what was needed: chemotherapy. As soon as the situation stabilised, it was the right time to go for the supply-side expansion. Our problem is the gap between domestic demand and supply and it is reflected in the current account and trade deficits. Demand compression was needed for immediate relief, but in the long run, domestic supply-side expansion is required. After the January 23 package, there has been a positive response in business circles across the board. 

I agree that initially there was uncertainty and a fear of default, but now sentiment is becoming more positive. Earlier, banks were reluctant to invest in the long-term government paper in PIB auctions, but in the auction held on January 23, Rs 350 billion worth bids were received, out of which Rs 137 billion bids were for the 10-year paper. 

On the international level, during the first 11 months, there was net selling by foreign investors in the stock market. On an average, $60 to $70 million were being taken out of the country. In the last 10 days of January, $27 million net buying was witnessed by foreigners. All this reflects a growing positive sentiment. 

n  There is also criticism that you are banking mostly on the PML-N’s selected team.

Asad Umar: Look at this one by one. The term of two Monetary Policy Committee members expired in January and they have been replaced by Dr. Hafeez Pasha and Dr. Naveed Hamid.

Our economic policies’ driving force is coming from the Economic Advisory Council, which is operating in five sub-committees, headed by veterans like Saleem Raza, Naveed Hameed, Faisal Bari and Ejaz Nabi.  

Not one of these persons is responsible for the PML-N’s economic policies.

Dr. Hamid Mukhtar, an ex-World Bank official and an expert on fiscal policies, is on board in my Finance Ministry team. Saim Ali has also joined, and we have advertised for the position of advisor to the finance minister. 

The Asian Development Bank (ADB) has provided us technical assistance and a grant to hire experts, and they are working full-time with us.

We have to go to the ADB because government recruitment and salaries are an issue. Under ADB’s technical grant, we are picking up people. The Finance Ministry’s team needs to be beefed up further. As far as bureaucrats are concerned, that can’t be changed. We don’t want to act like the PML-N.  

n  Your plans of reviving sick state-run units is being questioned under the planned Sarmaya Pakistan initiative. Why is there no focus on privatisation?  

Asad Umar: The PML-N calls itself a champion of privatisation – what was done by it during its term?  

We say that privatisation is not the only solution to the problem of state-run enterprises. I can give example after example where state-owned enterprises across the world remain profitable and play a critical role. 

The most profitable companies in Saudi Arabia are state-owned, as are others in the UAE and Qatar. 

n  But they are not democracies like ours…

Asad Umar: I know this theoretical debate… we have the examples of Malaysia and Singapore. In China and in India – the two fastest-growing economies – state-owned companies play a vital role. 

I don’t agree with the argument that we should not have state-owned companies. However, this doesn’t mean that we don’t see the private sector as a primary engine of growth.  

Now come to those we want to privatise. Our electricity sector is worth Rs 1400 trillion rupees. Do you think our financial market has the capacity to absorb even a trillion rupees worth of privatisation? The PML-N could not sell even a dime’s worth of assets in the electricity sector. So what do you do –just keep on debating?

In our first CCOP meeting, we determined what had to be privatised and what did not. There are institutions on the active privatisation list for the last 25 years. They are neither privatised nor managed. So we removed some from the active privatisation list and plan to fix them. Others remain on the privatisation list and we are pursuing them on a daily basis. 

Ours is a governance problem. These institutions were destroyed because they were given to politicians and bureaucrats to manage, who weren’t trained for this job – [not to mention] their motives and corruption.  

Why Sarmaya Pakistan? It is designed to solve the governance problem of these institutions. The governance authority has been taken away from politicians and bureaucrats and given in the hands of those who know this job.   

n  Experts say that the crisis in the energy sector could pull the entire economy down. What is the government doing about it?

Some very good work is being done to fix the power sector. We are clear that every decision should be well thought-out and deliberated, but even when we do this we are accused of being confused and lacking direction.

I approved the tariff structure after six ECC meetings because I don’t want to put the entire burden on consumers. So in the tariff structure, we protected the most vulnerable people.

On the administrative side, we fixed a Rs 140 billion performance target for the Power Ministry, which includes recovery of past bills and curtailing losses. It has been reporting to us on a monthly basis since November. Thousands of FIRs have been registered and action taken against hundreds of employees. And this is happening in all four provinces. 

We are also focusing on reducing the cost of power generation. This means less reliance on imported fuel and greater dependency on renewables. 

A revised policy on renewable energy will be finalised by March. The PML-N had stopped all work on the renewables, including hydel, wind and solar projects. Our thrust will be towards renewable energy. We want its equipment to be manufactured here. Therefore, we abolished all customs duties and taxes on this sector in the Jan 23 package. We also gave this sector a five-year income tax exemption.

Our transmission and distribution network suffers from massive under-investment. In future, there will be more funds allocated for this in the Public Sector Development Programme (PSDP).  

Along with this three-pronged strategy, we are also working to change the regulatory structure, which was basically geared around the 20th century energy market, when big capital-incentive projects were rolled out for economies of scale by a few producers and distributors.

Now we are going for a system, where every house can be a potential energy producer. For this, we need to completely change the regulatory structure.   

n  And are any measures underway to expand the tax base? We see the same set of people and sectors being squeezed. 

Asad Umar: It is absolutely necessary to widen the tax net. The old FBR system being used now won’t work. We need modern technology and 21st century methods. Within four weeks we had changed the laws, as the old ones barred data-sharing. Now data can be shared and the World Bank is working on a detailed report on this, which will be submitted soon. 

We have also separated FBR’s policy-making and the tax administration’s role. Right now we are focusing on structure and not revenue generation, which is reflected in the numbers. But we don’t want to go for a temporary increase at the cost of long-term goals. For better tax collection, provinces will also have to play their part by taxing and collecting property, agriculture, and service sectors. This will be discussed in the 9th NFC. 

n  Is the NFC a constraint on budget-making for the federal government?

Asad Umar: There is no doubt that the current NFC has eroded the fiscal sustainability of the federal government, but the constitution says that resources once given to provinces can’t be taken back. So we have to respect this and that will be the challenge for the 9th NFC.

The Great Economic Conundrum

By Amir Zia

February 2019

Monthly Newsline

Why is Asad Umar – earlier viewed by many as the ‘brightest star’ in the Great Khan’s firmament – beginning to look increasingly like an under-achiever, in the most important post in the country? This question baffles many PTI supporters, well-wishers and rivals alike 

Prime Minister Imran Khan’s dream team remains overwhelmingly dependent on the performance of one minister to determine the success or failure of the Pakistan Tehreek-e-Insaaf (PTI) government. The corporate-guru-turned-politician, Asad Umar, carries the huge burden of expectations on his shoulders as finance minister – a not so enviable position, given Pakistan’s precarious economic condition. And yet, within the PTI there are a couple of aspirants for this very slot, and others who are working behind the scenes to install their chosen man in it.

However, this kind of politicking is par for the course within any political party. For Umar, his bigger worries stem from the myriad economic challenges faced by Pakistan, which is currently struggling to keep itself afloat on the back of loans and favours bestowed upon it by friendly countries.

Unfortunately, help from friends is not a winning economic strategy. In fact, while it can be touted as a foreign relations feat of sorts, it is no strategy at all.

When it comes to a fiscal plan, the finance minister has, in his first five months in office, by-and-large failed to impress his backers in the PTI and the people in general, or to calm the nerves of those concerned in the financial and capital markets at home and abroad.

Why is Umar – earlier viewed by many as the ‘brightest star’ in the Great Khan’s firmament – beginning to look increasingly like an under-achiever, in the most important post in the country? This question baffles many PTI supporters, well-wishers and rivals alike. 

Some party insiders contend that while it is undeniable that the new government inherited an economy in shambles, the new finance minister’s lack of preparation contributes to the deepening of the crisis.

“Asad Umar was perhaps the only member of Imran Khan’s team who knew his cabinet portfolio even before the 2018 general elections,” said an honorary member of the Economic Advisory Council who requested anonymity. “Yet he walked into the office without having done proper spadework or preparation.” 

An aide at the Finance Ministry (who also asked not to be named) confirmed that not only was there no structured plan for an economic revival, but that Umar did not identify or shortlist in advance the core team members for the bureaucracy and other government assignments. This included posts such as deputy chief of the planning commission, director-general debt management and those at the helm of projects like Sarmaya Pakistan.

And a member of the federal cabinet disclosed that the prime minister has, in closed quarters, also expressed to various team members his frustration over the finance minister’s lack of preparation.

“Umar should know that one is only as good as his team… yet he had not done any head-hunting before-hand,” said the cabinet member. “For a project like Sarmaya Pakistan, you need at least 30 to 40 top-of-the-line professionals to run it. You have to put in place a board of governors and identify the human resource before you can go through the legal process of hiring.”

Umar, however, appears unfazed by all the criticism and attacks coming from  political allies, rivals and the media. In an interview with Newsline published in this edition, he brushes aside all allegations that he is a minister without a plan and explained that his strategy of first compressing the demand and then going for the supply-side expansion – as done in his January 23 package – was working. In a trademark display of ease and poise, the finance minister laughed off the criticism that the PTI government was either confused or lacked a proper strategy. In fact, he claimed, that this was the only elected government in Pakistan’s history that had taken office with a strategy and is pushing for structural reforms. 

After coming to power, while the PTI government made all the right noises on issues such as accountability and austerity measures – including auctioning vehicles and buffaloes at the Prime Minister’s House – there was no mention of any grand plan for economic stabilisation. The markets, industrialists, traders and businessmen, waited. And kept waiting. Because there were no viable solutions on offer when Umar announced his government’s first mini-budget in September 2018. Several economists, in fact, concurred that it was a non-starter.

No wonder then, that just a few months later, on January 23, Umar had to come out with a second mini-budget – this time giving some indication of the government policies as he focused on supply-side management. The second package clearly tried to revive investors’ confidence and remove irritants in doing business in Pakistan. But for critics, the package proved too little, too late.  

The finance minister’s under-whelming performance notwithstanding, one cannot underestimate the kind of mega economic problems the PML-N government had left behind. It went from a monthly current account deficit of roughly $2.0 billion (which was $2.5 billion a year when Nawaz Sharif came to power in 2013), to a record trade deficit of $37.7 billion in the fiscal year 2018 on the back of falling exports and rising imports, a record public debt of Rs.24 trillion and fast depleting foreign exchange reserves.  

Another leading economist, who is also a member of the Economic Advisory Council, said that perhaps Umar underestimated the scale of the challenge and “that is why he did not take action in the initial weeks.”

There can be no denying that the PTI government found itself boxed into a tight corner the moment it came to power, with no grace or honeymoon period at its disposal. The biggest job at hand was how to avert the balance-of-payment crisis, which was done by reaching out to friendly countries – Saudi Arabia, the United Arab Emirates and China. Imran Khan, who had campaigned against taking loans and aid prior to becoming prime minister, had to eat his words and humble pie, and embark on foreign trips to secure funds.

Even so, a mere outline of a viable strategy, aimed at ending the prevailing uncertainty in the markets and restoring investor confidence, might have helped. Especially in the face of an approximately 30 per cent devaluation in the Pakistani rupee and hike in interest rates – which, on January 31, were raised by another 0.25 basis points to 10.25 per cent.

Yet that was not forthcoming. The initial interactions of the finance minister with stakeholders failed to boost their confidence. “In the initial months, Umar remained aloof from the business community and did not take any input from it,” said a leading Karachi-based businessman. “Whatever few meetings some of our representatives had with him, failed to break the ice.”

The result was a big gulf between the government and the business community, which further dampened market sentiment.

In many countries, economic fundamentals have to be laid out before circumstances can take a turn for the better, but the positive sentiment of stakeholders needs to be engendered. This did not happen in the case of the PTI government.

“When Shaukat Aziz became finance minister on November 6, 1999, after General (R) Pervez Musharraf’s military coup, the economy was in worse shape than it is now,” recalled a veteran businessman. “But Shaukat Aziz gave a couple of interviews and announced a roadmap, and things started looking good.”

Umar has not been able to transmit any positive message to, or endear himself with, the business community, despite all his television interviews and press talks. His critics say despite being an excellent communicator, the fact remains that he has no concrete message.

Another key factor that contributed to the compounding of uncertainty was whether the government would go to the International Monetary Fund (IMF) for a bailout package or not. Lack of clarity on this front has kept markets jittery.

One group of economists maintain that taking loans from friendly countries is not enough. They contend that Pakistan should have gone to the IMF in September, or October, to initiate the stabilisation programme, because the IMF umbrella boosts investors’ confidence and makes it easy for the government to get loans from other multilateral lending agencies.

However, another set of economists remain completely opposed to the idea of going to the IMF, saying that the past programmes with this agency failed to correct the structural problems in Pakistan’s economy.

“When Ishaq Dar was finance minister, Pakistan’s adherence to the IMF diktats received a tick in every box, but resultantly, this is the economic mess we now find ourselves trapped in,” said one economist helping the Finance Ministry come up with revival plans for the economy. “The IMF stabilisation programme has not stabilised Pakistan,” he added.

For his part, Umar has maintained an ambiguous stance on the issue, saying he will go to the IMF only if it offers a ‘good programme’ – without explaining what he means by this. At the outset of his donning the mantle of finance minister, one of the problems he faced was that the Finance Ministry bureaucracy wanted to turn to the IMF immediately. The lack of consensus on this issue made negotiations with the agency a more complex game, sources say. 

“The IMF, as usual, wants to apply the demand-side management strategy, which could bring stability in six months, but the government, as announced in its January 23 mini-budget, is banking on giving supply-side management strategy a chance,” said an economic observer. 

The government has opted for some stabilisation measures on its own, including devaluation of currency, a hike in the interest rate, doing away with some subsidies and an increase in energy prices. This has not helped end uncertainty, because market players see more such measures on the anvil if the government strikes a deal with the IMF.

And while the January 23 mini-budget is said to be ‘business-friendly,’ many would like to wait and see what the government will have to offer in the 2019-20 budget, for which preparations and consultations will be underway in February and March, respectively.

Another problem for Umar is the finance team – or the lack of one. Barring a few, most of the top guns currently in the Finance Ministry as well as the State Bank of Pakistan (SBP), are individuals chosen by the previous PMN-L government.

“How can they not take responsibility for the economic mess we are in today?” asked a leading broker at the Pakistan Stock Exchange (PSE). “How can the monetary team, for example, absolve itself from taking responsibility for the current record account deficit and public debt?” To compound the situation is the steady erosion in the quality of institutions since 2007 – thanks to the corruption and nepotism of successive governments. There is a big dearth of quality human resources in the Finance Ministry, and it is left to the consultants of international financial institutions to research and prepare papers, which in itself remain a questionable practice. This situation too is not the current government’s doing, but the legacy it has inherited from its predecessors. 

So while Umar and his team struggle to improve markets and investor sentiment through fire-fighting measures, little is being done about the country’s deep-rooted structural financial problems.

For example, the same miniscule set of tax-payers are being squeezed further, while big landowners and others have not been incorporated in the country’s tax base. The January 23 package again provided some relief to non-filers by allowing them to buy vehicles above 1300 cc and tax on the services sector remains on hold. But the provinces are in no mood to seriously tax the agriculture, property and services sectors – for obvious political reasons, including the vote-bank the feudals control and other vested interests.

The NFC award has also rendered the budget-making exercise difficult for the federal government, since 57.6 per cent of the resources have to be transferred to the provinces. The provinces do not contribute to debt repayment, while any emergency situation faced by the country is also left for the federal government to tackle, despite it being devoid of resources.

As provinces are getting big transfers from federal resources, they have no incentive to broaden their own tax base or control their expenditure. The PTI government will find its hands tied if it tries to correct the flaw in the NFC Award structure, owing to its thin majority in parliament.

However, what the government can do is dispose of the loss-making public sector institutions, which eat up 4.0 per cent of the GDP. On this front, critics say Umar is following the ‘flawed policy’ of trying to revive these units.

“It has been proven that the government cannot run commercial institutions,” said a leading broker. “Umar is pushing a failed idea. He should push for the privatisation programme which Pakistan managed successfully in the past.” 

Another big crisis, which is building up fast, is on the energy front. The PTI government has, so far, failed to even mention reform in this sector, or explain the gravity of a problem that has the potential to bring Pakistan and its economy down.

“The energy sector is the biggest monster,” said an expert. “The circular debt has crossed the Rs. 1.4 trillion mark and is increasing every day. What does the government plan on doing? How will it manage this crisis? We are still in the dark after more than five months of the PTI government assuming power.”

Again, it is the PML-N government which created this monster, because of the poorly-planned and badly-executed installation of power generation plants, for which Pakistan will have to make capacity payments whether electricity is bought from these plants or not.

This is seen as the biggest and most challenging problem for the government and one that no one seems to be talking about – at least in public. So far, the only response to this from Umar and his team, has been to raise the price of natural gas and the electricity tariff. That again, is a poor strategy, as it will encourage more theft and non-payments and only squeeze those who bother paying the bills.

Overall, this means that things will get tougher for the government in the days to come, with GDP growth slowing down and inflation rising. This will hit the common man the hardest in many ways – from the loss of jobs to a reduction in purchasing power.

It will also hit Imran Khan’s dream of creating 10 million new jobs and building five million low-cost houses. And Umar is the man who will have to bear the brunt of his actions as well as those of his colleagues in the government.