Of IMF’s Gloss & Govt’s Promises

By Amir Zia
The News
Sunday, March 13, 2011

Pakistan has to show more seriousness and commitment toward the stalled economic reform process

Eleven days of talks between an International Monetary Fund (IMF) mission and Pakistan’s top economic managers leave more questions than answers about the direction of the country’s ailing economy. The biggest one remains the government’s willingness and commitment to introduce reforms on which it has been dragging its feet for months and months now.

The statement issued by IMF’s mission leader Adnan Mazarei at the end of talks on Friday, indeed, provides the much-needed gloss over Pakistan’s shaky relations with the global lending agency, but the carefully chosen polite words such as “constructive discussions” do not conceal the fact that all depends ‘if’ the government manages to “promptly and consistently” implement measures needed to reduce the yawning budget deficit and put a cap on bank borrowing during the remaining months of the current fiscal year and the next 2011/12 (July-June) period. All the other key economic performance benchmarks, including reviving growth and curbing inflation, remain linked to whether the government is able to address the fundamental structural flaws of the economy or not. For this, expanding the tax base and abolishing untargeted subsidies, ranging from fuel and electricity to the loss-making state-run institutions, are seen as the most vital.

But going by the Pakistan Peoples’ Party (PPP) government’s performance, this ‘if’ syndrome has so far proved its main disaster. Yes, if the ruling party had an economic vision, an economic team of its own, if it managed to provide clean and honest governance, if it was able to increase revenue collection, widen the tax-net and implement reforms, and if... the wish list can go on and on. Certainly, Pakistan would not have been in the present mess, if the government had taken timely and tough decisions.

But that was not in Pakistan’s destiny under President Asif Ali Zardari-led PPP government, which wavered, compromised, and remained paralysed on key economic issues, from the imposition of the value-added tax (now the reformed general sales tax) to taxing the urban rich and rural landlords.

The government’s inability and incapacity to fulfill promises made to global lending agencies led to the technical suspension of the IMF’s $11.3 billion standby arrangement in May 2010 after the disbursement of $7.6 billion. Despite these 11 days of talks with the IMF, tidings from Islamabad are that the situation is unlikely to change as the PPP bosses, bogged down by a wide range of political challenges emanating from the judiciary, extremists, political opposition and from within the ruling coalition, do not want to shake the present economic status-quo and go for hard choices.

If looked at from the PPP leadership’s narrow self-serving prism, the government’s inaction makes sense. The PPP has started the fourth year of its term and going for difficult and path-breaking decisions does not make sense now. Such decisions are made at the start of the term, which the ruling party did not go for. Now going by President Zardari’s agenda, the target is to complete the term or at least hang on to the power as long as possible.

The current level of foreign exchange reserves, hovering at above $17 billion on the back of high remittances from expatriate Pakistanis and a surge in exports, means that the government can safely pull itself through for another few months, or even a year or so without needing the IMF’s held up tranches of $3.7 billion. By that time, the country would have gone into the election mode and it would be the new government’s job to face the harsh economic realities.

Therefore, one now does not see the urgency and the will even within the government’s economic team to fight their case within the ruling party or with political opponents and plead their case in the media. Finance Minister Dr Abdul Hafeez Sheikh and his coterie of economists appear content just holding important portfolios and passing time. No wonder, apart from occasional lip-service provided to the cause of reforms, Sheikh and his team appear in no mood to stick their necks out and become the public face of this government. The aloofness of this team from the stakeholders and the media is also taking its toll on the economy.

Remaining engaged with the IMF without producing results, however, remains a necessity for this economic team not just to give a flimsy mirage to the world that the reform process is still on, but also helping individuals to cultivate contacts and provide an opportunity to remain within the circle of global donors and lending agencies. After all, for some, these institutions could offer the next lucrative job.

But for ordinary Pakistanis, the sobering thought is that for the first time in recent years the United States and its key western allies have not asked the IMF to show Pakistan any leniency. The world powers, through the IMF, want Pakistan to develop a consensus on reforms and their implementation and to contribute its bit before seeking aid, loans and dollars from the taxpayers of other nations.

Yes, Pakistanis have to show more seriousness and commitment towards the stalled reform process than their international partners.

Sadly, it appears that the IMF remains more serious about putting the country’s battered economy back on track rather than our government and its economic team.

Subsidising Oil — Poor Govt’s Poor Choice

By Amir Zia
The News
Sunday, March 6, 2011

Untargeted subsidies remain a bane for the economy as in the case of petroleum products. Instead, the government should plan targeted subsidies for low-income groups.

The Pakistan Peoples’ Party (PPP) government has again been forced to beat a hasty retreat on the thorny issue of adjusting domestic fuel prices in line with the international oil rates. However, unlike early January, when the government was compelled to withdraw the entire nine percent hike, this time around it is not an all-out surrender, but a partial one. The revised decision to slash by 50 percent a 9.9 percent increase in fuel prices within three days of its March 1 announcement has been made to appease a key coalition partner, the Muttahida Qaumi Movement (MQM), and to deflect the political pressure.

This concession definitely has made the life of the embattled PPP government slightly easy for a month or so, but the issue remains far from over and its repercussions are all set to bite the economy hard in the coming days in terms of a widening budget deficit and mounting inflationary pressure.

The tidings are indeed ominous.

There has been an almost 26 percent raise in the world oil prices since November 1 to date, a period during which Pakistan kept its domestic fuel rates capped. The international oil market remains highly volatile and nervous because of the Libyan crisis, which has squeezed supplies from this North African nation. As the crisis drags on, the crude prices appear set to remain on the higher side despite assurances by some key oil producing countries to increase their output. For countries such as Pakistan, this means bleaker and more uncertain times.

A fleeting glance at the damage done due to the game of politicking on this crucial economic issue explains it all. The government had already taken a hit of around 14 to 15 billion rupees from November 1 to end-February for keeping the oil prices unchanged. This loss is likely to mount to 20 billion rupees now because the government is being forced to sell fuel at a discount of more than 20 percent.

Whether we call it subsidy or slashing the government levy on the petroleum products, the end result is the ballooning of the budget deficit, which is all set to cross eight percent against the original target of 4.7 percent for the current fiscal 2010/11 (July-June) as all efforts to expand the tax base through the imposition of reformed general sales tax (RGST) and meaningfully cut expenses appear to be making no headway.

The government, which had set a target to collect 110 billion rupees through the petroleum levy during the current fiscal year, faces an accumulative shortfall of at least 20 billion rupees in achieving this target by the end of March because of selling oil cheaper than international prices. If the government continues to subsidise oil, this shortfall is all set to increase. According to a senior Finance Ministry official, the government has no arrangement to recoup this amount.

There are serious repercussions if the government continues to waiver on such key policy issues, starting not just from a galloping budget deficit — termed the mother of all troubles for an economy -ñ but further undermining Pakistan’s credibility in the eyes of the global donor agencies, including the International Monetary Fund (IMF) and the international community. The cash-strapped government, which had already increased the country’s public debt to a record 10 trillion rupees from 4.8 trillion rupees in 2006/07, will have to depend on ever-increased bank borrowing and print more and more new notes, triggering an unprecedented inflationary pressure, which is already hovering at more than 16 percent.

A further increase in inflation because of the fundamental policy flaws will hit the poorest of the poor and prove more damaging for the economy than the price hike triggered by an increase in petroleum prices, which may appear bitter, but at least remains a step in the right direction.

However, the way the government has been yielding to the pressure of allies, opposition and interest groups, mainly led by public transporters who staged a two-day strike in Karachi against petroleum price increase earlier this week, underlines the fact that it has no vision or any commitment to tough economic reforms, which remain vital for the country.

The government’s economic team despite identifying the ills gripping the economy and prescribing solutions, has proved powerless to implement them. Our soft spoken Finance Minister Dr Abdul Hafeez Sheikh has been unable to make his voice heard or put reason in the minds of his political bosses. He and his economic team have also been unable to effectively fight the government’s economic case and point-of-view on crucial issues effectively in the media. The result is that the government seems to be rudderless when it comes to economic management. The politics of appeasement and surrender are only deepening the crisis rather than offering a way forward.

The role of key government allies and the opposition also remains negative and destructive. They appear to be more focused on playing to the gallery by design or default and have become a key obstruction in the process of reforms. Most of their suggestions remain either devoid of reality or offer long-term solutions — from eradicating corruption in government ministries and departments, including the Federal Board of Revenue to the restructuring of loss-making state-run institutions, which need around 300 billion rupees annual subsidies.

Yes, progress need to be made on these fronts, as well, but it is a harsh reality that these forces not only remain unable to come up with doable suggestions for increasing the country’s revenue base, but block reforms despite all their lip-service paid to this cause. A case to point is the way the political parties contributed in obstructing reforms in the privately-run Karachi Electric Supply Company and the state-run Pakistan International Airlines. There is a need for a national consensus on key economic issues, including increasing the revenue base, curtailing expenses, fighting corruption and re-launching the country’s stalled privatisation programme. Along with this, those issues, which had been settled long ago, such as linking domestic oil rates with the international market ñ should not be reopened.

Untargeted subsidies remain a bane for the economy as in the case of petroleum products. Instead, the government and the main political players should plan targeted subsidies for low-income groups. The politics around oil prices is one thing, which Pakistan’s economy cannot afford now.

Pakistan’s Economic Management -Tragedy Of Delay

By Amir Zia
The News
Sunday, February 6, 2011

A large budget deficit is considered the mother of economic problems. It multiplies public debt, increases interest rates and reduces fiscal space.

We are being told that Pakistan’s economy remains in the throes of a crisis. The fiscal deficit is all set to balloon to 7.5 to 8.0 percent against the targeted 4.7 percent in the current fiscal year if the government fails to mobilise resources and cut expenditures. Inflation, which the government planned to keep pegged at 9.5 percent, is now expected to hover between 15 to 16 percent in fiscal 2010/11 (July-June). The public debt has crossed the red mark of more than 60 percent of the Gross Domestic Product (GDP) or 10 trillion rupees. It was around 4.8 trillion rupees in 2006/07 - when former military ruler Pervez Musharraf started losing his grip on power. This means that in the three years of this democratic rule, total public debt has more than doubled.

What do these economic numbers mean for an ordinary Pakistani? The answer is not difficult to guess — hard times and a grim future! A large budget deficit is considered the mother of economic problems. It multiplies public debt, increases interest rates and reduces fiscal space. That’s what has been happening in Pakistan where social sector and development spending have taken a deep cut.

The government’s desperate borrowing from commercial banks, as is being done in today’s Pakistan, crowds out the private sector from the credit chain, further slowing down the economy and resulting in large-scale layoffs. High government borrowing from the central bank, also being done with impunity these days, compounds inflationary pressure. It directly hits the poor and fixed income group, creating a snowball effect.

The scenario of doom and gloom is being articulated by leading national and international institutions, government officials and experts. The State Bank of Pakistan (SBP), in its first-quarterly report on the country’s economy, warned that any “further delay in implementing the critical structural adjustments” poses great risks. The global lending agencies, including the International Monetary Fund (IMF), mince no words in asking the government to implement the reformed general sales tax (RGST) and reforms in the energy sector.

Finance Minister Dr Abdul Hafeez Sheikh has been pointing out the structural challenges faced by the country in parliament, at various government forums and to the opposition. He has been telling his political bosses, President Asif Ali Zardari and Prime Minister Yousuf Raza Gilani, about the gravity of the situation. But he is unable to make an impact. Political considerations and vested interest continue to dictate economic policies.

Even the opposition and the Pakistan Peoples’ Party’s (PPP) coalition partners acknowledge the seriousness of the issue. But despite all these alarm bells, what is being done to address the situation? Agreed, that there is a lot of noise and commotion, but practically nothing.

It appears a drama of inaction.

The opposition Pakistan Muslim League-Nawaz (PML-N) announced a 10-point agenda in January and gave the government 45 days to implement it. The government welcomed the gesture and started negotiations, but is this 10-point agenda a prescription for the country’s economic ills?

The answer is a big ‘NO’.

Most of the agenda points are political, ranging from the implementation of judicial orders on the National Reconciliation Ordinance and other issues such as an overhaul of the Election Commission. Corruption, action against politically-connected loan defaulters and formation of an independent accountability commission remain some of its key points, but sadly these points have little to do with the economic crisis. The agenda also includes a demand for the reversal of the fuel price hike, which already has been accepted. But the decision costs around 4.5 to 5.0 billion rupees a month to the national exchequer against the backdrop of a steep rise in international oil prices, which hover above $100 a barrel now. It will contribute in widening of the budget deficit.

The demand for slashing 30 percent expenditure makes sense and Prime Minister Gilani remains all set to reduce the size of his cabinet, but the gesture is symbolic as the government lacks political will and commitment to restructure ministries, departments, and the state-run institutions where overstaffing remains rampant. In fact, the government itself contributed in making the situation worse by saddling thousands of more people in some of the already loss-making institutions. The forced reinstatement of employees in the privately-run Karachi Electric Supply Company underlines that the PPP government and its allies remain unable to walk their talk.

No wonder, in the four rounds of talks between PML-N and the government nothing substantial came out. According to an official, who attended these meetings, the crucial issue of resource mobilisation, including the RGST, has not even been discussed. This exposes the moral and intellectual hollowness of today’s ruling elite, which remains hesitant to do what is required of them. It does not want to pitch in their share through taxes nor is it able to provide honest leadership. It demands sacrifices from the people, but is found wanting itself.

The Muttahida Qaumi Movement’s (MQM) recent nine-point agenda includes a demand for the imposition of tax on agriculture income. But the influential lobby of landlords, which dominates parliament, remains bitterly opposed to this idea. The government appears in no mood to face the political fallout of any such decision.

As the country sinks deeper into trouble, it appears there is a stalemate on the economic front. It is a perfect tragedy of delay, where reforms remain on the hold in the name of consensus and nothing is being done to ward off the crisis. Maybe the IMF, the United States and its allies and our Arab friends, despite their weariness in supporting the country for so long, will again push us back from the brink and keep the economy of this lone Muslim nuclear power afloat. If this is the real plan ‘B’ — then we really are a nation with great faith.

Perspective: KESC Labour Row - A Test Case

By Amir Zia
The News
Sunday, January 23, 2011

The government seems to listen and bargain only with those who shout the loudest, resort to lawlessness and violence

The Karachi Electric Supply Company (KESC) management appears on its own to face the violent backlash and political pressure following the retrenchment of more than 4,000of its “non-core” employees.

When the sacked employees went on rampage on January 20 at the KESC head office, smashing furniture and damaging vehicles, police and paramilitary rangers’ personnel simply stood by, many with smiles on their faces. They made no effort to stop the lawlessness, exposing the vulnerability of businesses and law-abiding citizens in the countryís commercial hub. The ruling coalition partners — the Muttahida Qaumi Movement (MQM) and the Pakistan Peoples’ Party (PPP) - were quick to offer support to protesters. Governor Sindh Ishratul Ebad asked the loss-making Company to defer its retrenchment decision until a government committee gives verdict regarding the issue.

Welcome to the unique business and investment-friendly environment of Pakistan, which offers little protection to the life and property of foreign and local investors or ensures rules of the game - at least under this democratic dispensation.

The government seems to listen and bargain only with those who shout the loudest, resort to lawlessness and violence. In such a scenario, even local investors remain reluctant to invest, but we hope to attract foreign investment to help revive our battered economy. No wonder, Pakistan’s privatization programme stands stalled since 2008 and the foreign investment dipped to a mere $2.08 billion at the end of fiscal 2009/10 from the highs of $8.42 in fiscal 2006/07.

Those investors, who have already taken the plunge here, are getting a taste of Pakistanís choppy political and business environment in which corruption, inconsistent policies, lawlessness and insecurity reign supreme. The KESC, privatized in 2005, emerges as a glaring example that why investors should stay away from Pakistan. The baggage is too big and political interference too much.

Indeed, retrenchment of workers from any organisation remains a painful and unpopular process. But tough economic conditions demand difficult decisions. Institutions - both private and public - have to remodel, reinvent and adjust according to the changing times. The process can be agonizing, but necessary to make institutions lean, efficient and financially viable. This goes a long way in determining the fate of not just businesses, but the country’s economy.

It is the company, which has to determine the size and skill criteria of its work force and not the government. Any deviation from this principle proves lethal. We have seen Pakistan’s state-run institutions paying the price of over-staffing and mismanagement.

For the KESC, which booked losses of 14.64 billion rupees in financial year 2009/10 compared with 15.48 billion a year ago, reduction in operating cost is definitely a make-or-break decision. In 2010/11, the company hopes to cut losses further if it is allowed to restructure, recover money from defaulters and curb power theft. The signs of a slow recovery can be seen. In the first-quarter of the current financial year (July-September), KESC’s losses were around 1.78 billion rupees down from 5.61 billion rupees a year ago in the corresponding period.

But a sustainable turnaround in KESC’s fortunes will be hard to achieve without reducing the size of workforce, which hovers around 17,000 employees. According to senior KESC officials many of the appointments were made in the past on political basis in the category of non-core employees including drivers, office attendants, sanitary workers and security guards. Many of these employees were ghost workers and their functions already have been out-sourced in what the management claims “at a fraction” of the cost that the company incurs on internal resources.

For any business model, reduction in operating cost makes sense. Companies cannot provide jobs if they are in the red. They create employment only when they make profits. The successive Pakistani governments tried to be the biggest job provider, but the formula did not work. It transformed functioning, profit-making institutions into sinking ships, which proved a drain on the economy for decades now.

KESC says that retrenchment of workers came as a last resort. It initially launched a voluntary separation scheme (VSS) with what it called “generous payoutsî ranging from a minimum of 700,000 rupees to five million rupees. But only 400 employees accepted the scheme out of the targeted 4,500 as the Collective Bargaining Agent of the employees assured members that it would either be able to prevent retrenchment or get them better terms. In these pressing economic times, the dark specter of unemployment certainly remains a concern for employees, but that could have been addressed through peaceful and lawful means.

As the government, political parties and labour unions press the KESC management to change its decision, the company maintains that the step remain in compliance with local labour laws. “The company has the right to declare certain functions redundant and to retrench staff in these positions - this is all that has been doneÖ We intend to maintain our position and vigorously defend this decision through the courts,” a senior official of the company said. “The legal precedent remains on the side of the company since the higher courts have repeatedly upheld the right of companies to manage their staffing and to retrench redundant staff as necessary.”

How authorities resolve the management-labour dispute at KESC remains a test-case, particularly for the Finance Minister Abdul Hafeez Sheikh, who led the most successful privatisation programme of the country during Pervez Musharraf era as his Privatisation Minister. The tackling of the labour row at KESC by the government will determine not only the direction of the country’s privatization programme, but also the signal it wants to give to foreign investors. Will the government be able to make the right decision for the economy - remains today’s thorny question.

Efficient Team -- A Must To Steer Economy

By Amir Zia
The News
January 16, 2011

It remains an irony that the PPP has no person to offer from its ranks for the key slot of finance minister.

What are the foremost requirements to run an economy or to pull it out of a crisis? The answer, perhaps, is simple — a vision and a dedicated team. Sadly, the Pakistan Peoples’ Party (PPP) government lacks both.

Barely three years in the office and this government has already given us four finance ministers, five finance secretaries and three central bank governors. A continued state of flux in the key members of economic team means uncertainty and instability. For both foreign and local investors and businessmen, stability and consistency in policies remain a prerequisite for committing money in any country. Pakistan under the PPP has failed to meet this basic requirement, let alone tackling bigger issues that include providing clean governance, implementing the International Monetary Fund (IMF)-backed reforms and combating terrorism and crime.

It remains an irony that the PPP has no person to offer from its ranks for the key slot of finance minister. It banks on outsiders or stop gap measures to run the economy that speaks volumes about the lack of this government’s economic vision.

While PPP old guards stay committed to the jargon of Zulfikar Ali Bhutto-era, those who lead the ministry today are for privatisation, deregulation and economic liberalisation. No wonder this internal contradiction is hurting the policy-making and its implementation.

Let’s begin the story from the beginning. The first finance minister of this government, Ishaq Dar, was borrowed from the Pakistan Muslim League (Nawaz), who in his zeal to criticise Pervez Musharraf, declared that Pakistan’s economic numbers were fudged. This was the first self-inflicted blow to the economy, creating a crisis of confidence. Dar’s early exit from the scene, as a result of PML (N) differences with President Asif Ali Zardari, brought PPP stalwart Naveed Qamar as a stopgap-measure. Qamar kept finance minister’s chair warm as PPP hoped against all hopes that the PML (N) would return back to the federal cabinet. More than six crucial months were lost in indecision at a time when the country needed aggressive management to counter the impact of rising food and oil prices.

Shaukat Tareen, a veteran of banking sector, but not a PPP ranker, entered the scene as finance minister when the country was facing a gnawing balance of payments crisis. Tareen went to the IMF for $11.3 billion standby arrangement, which many analysts say was a far bigger programme than Pakistan’s actual requirement.

Dr. Ashfaque Hasan Khan, director general NUST Business School, Islamabad, and a former Finance Ministry adviser, said that the country needed not more than $2.5-3.0 billion IMF programme.

“A smaller IMF programme would have worked. It was enough to show to the world that the IMF remains engaged with Pakistan,” he said. “The big loan package from the IMF has pushed Pakistan deeper into debt.”

Tareen, however, left the cabinet on a sore note because of his inability to implement reforms, which he thought were crucial for the economy. From privatisation to cutting government expenses to that of expanding the country’s tax-base, the PPP veterans and old-guards remained firmly opposed to his proposed policies.

Tareen also overestimated the flow of funds coming from Friends of Democratic Pakistan and failed to foresee the impact of the National Finance Commission Award under which resources and powers have been transferred to the provinces. That resulted in the widening of budget deficit to 6.3 from the targeted 4.7 percent.

Abdul Hafeez Sheikh, the fourth finance minister, was part of the Musharraf government and remains a PPP outsider. He faces more or less the same challenges confronted by his predecessor -- the top one remains politics overriding the economy.

The way government has withdrawn the recent rise in fuel prices over the pressure of opposition and disgruntled allies and backed away from implementing the reformed general sales tax (RGST) underlines that Sheikh has been alienated in the cabinet.
But it is not just the opposition within the PPP ranks that is holding back the current economic team from delivering and implementing the process of reforms.

The current team has failed to come up with any mid- to long-term plans to arrest the present slippage on the economic front and convince the government not to go for an increase in its expenses that includes the recent hefty raise in the salaries of government employees.

A senior Finance Ministry official, who spoke requesting anonymity, said there appears a complete disconnect within the team. “Finance Secretary does not know what Finance Minister is doing. The State Bank of Pakistan governor instead of just focusing on its core responsibility is involving himself with the restructuring of state-run institutions, while the Planning Commission has yet to focus on planning.”

Many in the Finance Ministry complaint about what they call ‘lethargic’ and ‘laidback’ attitude of the finance minister. “He hardly interacts with the private sector or media. On crucial economic issues when the government was being attacked from the right, the left and the center, there was no one to present the government’s point-of-view,” the official said.

The long foreign trips of key officials -- sometimes stretching up to three weeks -- also hurt the effective management of the economy. Some key officials of this team, including Deputy Chief of the Planning Commission, Dr. Nadeemul Haq and Chief Economist Dr. Jaffer Qamar, have lived most of their professional careers abroad. This leaves them out of touch of Pakistan’s ground realities.

“Some members of this team do not have their families and homes in Pakistan. Till recently they have been living in clubs and hotels in Islamabad. They hardly have any stake in this country. They have to just pack their bags and go,” said the Finance Ministry official.

As the PPP government drifts from one crisis to another, economic management continues to remain low on its priority list. Its actions and words hardly boost the sagging confidence or offer any ray of hope for the beleaguered economy.