INSIGHT AND FORESIGHT

June 6, 2010

PAKISTAN’S ECONOMIC HITMEN: PART III How the Economy was manipulated

Filed under: Uncategorized — sharafs @ 6:04 am

Brigadier Samson Simon Sharaf

The first two parts of my columns explained how Pakistan’s economy was set to meltdown. Come 2007 and as of today, the meltdown continues with complete contempt to National Security. Even the national Security managers choose to look the other way. The principal dynamics that acted both as precursors and trigger points are summarised and listed below.

  • The water managers within the Government of Pakistan despite being the biggest recipients of foreign loans till 2000 did not exercise vigilance on Indian water development projects mainly because they were guilty of corruption, negligence and technical insufficiency.
  • The seizure of FCAs in 1997 however negative proved that a weak rupee was not a pre requisite to boost exports.
  • Under the pricing mechanism of 1994, IPPs with tax exemptions had recovered investments and begun remitting profits and outsourcing costs abroad. They were the new energy manipulators to earn windfalls.
  • The imposition of GST as a VAT was abandoned by CBR in 2000-1 converting it into an easy to collect levy. The incomplete GST regime did not help in documentation of the economy, and rather served to jump start inflation and discourage small sector domestic production.
  • After 9/11, despite 13 Billion Dollars in the system and an appreciating rupee, the Central Bank ignored the lesson of WEAK RUPEE VERSUS EXPORTS and devalued the national currency.
  • The government also ignored the basic theory that any country in atrade deficit must regard unexpected and non-fundamental appreciation of domestic currency as a boon to be used for cheaper imports and resetting of import priorities.
  • Also to restore Rupee Dollar Parity, the government left Rs. 1 Trillion at the mercy of the Banking Sector, an equivalent of Pakistan’s entire National Savings from 1965 to 2001.
  • Agriculture growth and pricing mechanism was deliberately discouraged and loop holes created for proliferation of Cartels.
  • The circular Debt issue in the energy sector was the mechanism that set off all the triggers for meltdown.

Within the corridors of the government, many alternatives were also discussed but set aside by the Finance and Prime Minister Shaukat Aziz. Steadily, all critics of such policies were either sidelined or made OSDs. Pervaiz Musharraf and his team were convinced that Shaukat Aziz offered the best solutions to revive the economy on lines of Asian Tigers and become an economic challenge to India and Dubai. Critics who pointed out that the high growth rates were attributable more to the circulation of loose money in the economy rather than tangible sustainable growth were dismissed as cynics and disruptive. But the fact remains that Musharraf era economic policies have backfired and all critics including myself stand vindicated.

So what the Government could have done?

GST/VAT

The FBR and PRAL should have developed cash machines for receipts of Sales Tax. The cost of this system could have been met through the GST revenue. Cell phone companies with their expertise to provide value added services could have provided another method of documenting the GST paid by each individual. All consumers at the fag end of the GST cycle should have been encouraged to claim refunds for items like households, fuel, electricity, gas and telephone bills. As envisaged earlier, the Income Tax Department could have picked up all this data and worked out the profit margins of the entire manufacturing and trading sector and then challenged the Tax Returns of the business community. As per the simulations carried out in 2000, the direct taxes would have grown exponentially.  This mechanism was discouraged and a short cut adopted. But better late than never, this method can still be implemented rather than an incomplete and impractical mantra of imposing a new regressive VAT on a sinking economy.

Rupee Dollar Parity

If the domestic private sector could not absorb the surplus money, the State could. With the increase of FCA remittances the Rs 1 Trillion windfall should have been easily absorbed in the State Sector through issue of Government securities at market rates to the holders. This would have appreciated the rupee, discouraged consumerism sponsored by banks and hedged national savings. Inevitably, the imports and therefore the value added exports would have become cheaper.

Privatisation

The justification that “It is not the State’s job to run commercial business” is a lie. The foreign enterprise which bought PTCL is a State Enterprise itself. Instead of privatizing the infrastructural assets, Pakistan could have built more State Enterprises instead of getting rid of the existing ones at throwaway prices. If management expertise was an issue, it could have been easily imported. Instead of giving the State Sector away to foreign businessmen who would slash employment for profitability alone and to remit dividends in dollars, the State could have instead imported the management expertise with a task to expand and justify the manpower employed. Unfortunately, Pakistan’s large scale consumer sectors like communications and energy are now foreign controlled. Unfortunately, even the reversal of Pakistan Steel Mills by the Supreme Court was not taken in this spirit and conditions created to run it dry.

Agriculture

The easy access to windfalls and mantra of privatisation obscured the importance of the agriculture sector. The government ignored that all along it was the agriculture sector that through value addition was the major component of the GNP. This effect is clearly visible in the Economic Survey of 2010 where the manufacturing growth has only picked up in the consumer sectors. Moreover, the marketing strategy of Dr. Zafar Altaf through limited intervention of imports of agricultural products had always stabilised domestic pricing and kept the pricing cartels in check.  Dr. Zafar’s exit was the biggest disaster for the performing agricultural sector.

Considering that the Government never and even now refuses to set a correction course, where does the future lead us?

Even if the indicators given in the Economic Survey are to be taken at face value, the economy and social conditions are set to plummet to the lowest levels before the societal dynamics set in for a revolution. The question that still intrigues my mind and was raised repeatedly in all my columns is, ‘why must we commit this suicide bombing on ourselves?’

There are two explanations.

First, Pakistan’s elites that include militarymen, politicians, bureaucrats, technocrats, big business houses and dirty rich all have their money stacked in over seas accounts. It is neither in their financial interests nor wherewithal to challenge the equilibrium and downslide to restore Pakistan towards a performance criterion.  Their only stakes in the system are political intrusions to ensure the status quo.

Secondly, the Government of Pakistan chose and continues to choose this path not because it is stupid but because it wants to do it deliberately. Consumption has to grow in all the exporting countries reliant on US as the major trading partner; otherwise the entire global monetary system will collapse along with the West and Breton Woods. The emphasis therefore has to be on CONSUMPTION, and not SELF-RELIANCE. As long as the world produces and West consumes, the system is not sustainable. Others need to consume as well.

This is why a country that survived sanctions for a very long time, despite massive influx of remittance continues to plummet to the dungeons of poverty.

Societal implosion in Pakistan is seen as a viable thesis to Cut Pakistan to Size.

A note of thanks to Dr. Ashfaq, Dr. Zafar Nasir and Mr. Zahid an investment banker for their intellectual deliberations with me.

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PAKISTAN’S ECONOMIC HITMEN: PART II An Opportunity Surrendered Deliberately

Filed under: Uncategorized — sharafs @ 6:01 am

Brigadier Samson Simon Sharaf

The 13 year nuclear sanctions on Pakistan served to stimulate home led growth, exports and import substitution. During this economic quarantine, the growth, inflation and poverty lines remained static while parallel economy grew. The parallel economy sustained the lower middle and poor class in terms of jobs and subsistence. This was also the time when Pakistan had to address its external balance of payments through the IMF interventions.

The nuclear sanctions failed.  International consumer manufacturers were aware that they were deprived a big share of dumping their products and could ultimately be overtaken by domestic led growth.

The seizure of foreign currency accounts in 1997 broke the dollar rupee parity and Rs 47 and drove the local currency into a nose dive. It also shattered the confidence of people. Logically, the weak rupee should have led to a surge in exports that never happened. This explanation was enough to break the myth that a weak rupee was imperative to increase exports.

In the 2000s, Pakistan made concerted effort to break out of the IMF interventionist programs. The Central Bank debt retirement section and money changers worked expediently to arrest the nosedive and stabilise currency markets. However there were inbuilt Trojans at work. The import substitution programmes of car manufactures were way behind schedule and becoming a liability on impossible debt servicing costs. The Central Bank was left with just three weeks of reserves. Yet the black currency markets were growing due to unchecked flight of capital. Ironically, under the pricing mechanism of 1994, IPPs with tax exemptions had recovered investments and begun remitting profits and outsourcing costs abroad. They were now poised to play a leading role in the economic potential of Pakistan. New energy manipulators had arrived to earn windfalls.

Sales Tax started as a VAT and was abandoned by FBR in 2000-2001. It scared the small time entrepreneurs in the manufacturing sector in awe of the high handedness of FBR and military led tax surveys. This backbone of Pakistan’s very strong unregulated economy was poised to close production and change tracks as soon as time permitted. The tax became an inflationary levy benefitting the top tiers of businessmen and jump started an inflationary trend. Ultimately, the entire buck was passed on to the consumers who had no capacity to claim refunds.

As the inflation and consumer price index continued to rise, Pakistan was ripe for quick injection of funds that through consumerism could be manipulated for the benefit of overseas markets. This meant that any remittances into Pakistan had to be grabbed back through the rising import bills and short term bubbles of consumer prosperity. In the meantime the perception of Pakistan as a bankrupt and ungovernable nuclear state was reinforced. Pakistan though helpless and yearning for such cash, had no plan to absorb it into the local economies if it ever came.

Come 9/11 and the entire political economy changed. Sanctions were lifted and debt rescheduling came through. By 2002, overseas worker’s remittances and balances transferred from abroad in the banking system jumped from $ 900 million to $ 4 billion. USA pumped billions in logistical support payments for operations in Afghanistan and FATA.

In order to maintain the rupee parity the Central Bank quickly absorbed as much as it could but soon ran out of the mopping up and sterilization capacity. The rupee began to appreciate from 65 to 57. Despite over $ 13 Billion in the system reserves and ignoring the historic precedence that a weak rupee never boosted exports due to a high import input factor, the government decided to devalue the rupee.

The government also ignored the basic theory that any country in a trade deficit must regard unexpected and non-fundamental appreciation of domestic currency as a boon to be used for cheaper imports and resetting of import priorities. A strong rupee also meant lower imported energy costs but that wasn’t the priority. Rupee was prevented to strengthen to 50 versus the dollar, ostensibly not for the exporters to survive but to tie strings to the growing economy that could be manipulated later.

By 2003, Pakistan’s currency printers were in over drive.  The problem that it created was that every Rupee the Central bank dished out into the market carried a return at the time of over 17% for the commercial banks while the dollars it got in return were earning less than 2%. The difference of 15% meant that the budgetary resources were to be strained to cough out the difference. Rather than address this issue, it was decided to leave Rs. 1 Trillion in the banking system to restore the parity of rupee to dollar at 2%. The negative fallout of this floating 1 Trillion that equalled the entire long term savings of Pakistan from 1965 was never addressed. This money floated around like a monster. The banks’ profits in a single year jumped from Rs. 30 billion to Rs. 100 billion because they could now lend retail at 14% while paying the depositors 2% slumping deposits.

In order to harness this windfall, the government made the third fatal error of the trickle down effect and consumer led growth that had previously failed in the ASEAN. Unlike the tourism industry of Thailand, Pakistan’s domestic growth was already squeezed due to the levy of Sales Tax. Hence began the era of import oriented consumerism. Pakistan became a haven for investors seeking quick and easy profits in the absence of hedging policies. There was too much money chasing too few goods and logically consumer imports grew rapidly and with it the exponential inflation and high cost of living.

Sadly, even the main domestic growth sectors were discouraged. The bumper wheat crop was bought at very cheap prices and exported. Later, food deficits were made up through very expensive imports. In order to ease such a damaging policy, the man planning and ushering Pakistan’s agricultural revolution Dr. Zafar Altaf had earlier been shown the door. This manipulation of wheat, sugar, rice and cotton was to become a regular feature through unchecked cartels.

The circular debt in the energy sector was one of the two manipulative triggers to collapse the economy at will. As late as 2005, WAPDA was crying hoarse on the impending crises due to pressure from IPPs. There were corporate lawyers both from WAPDA and IPPS preparing litigation cases just in case the government defaulted. Ironically, the IPPs had already recovered investments and were pledged for expansion. So was the Telecom sector that underwent exponential growth. Little did we realise that every call we made or every bulb we switched was in fact accounted against our import and profits remitted in dollars.

With 2007 elections in mind, the government remained reluctant to adjust fuel prices commensurate to the international rates. This exerted a huge pressure on the national exchequer. Belatedly, when the decision to raise fuel prices was finally taken, it also triggered the circular debt issue.

These simultaneous crises signalled the cartels to take out their money and flee. A fortune was deliberately surrendered so easily under the very nose of an India centric security establishment.

To be continued………..

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