July 1, 2012


Filed under: Uncategorized — sharafs @ 2:37 pm
(Interplay of Economics and Politics: Part I)

Through the present budget the incumbent federal and provincial governments have ensured that by the year’s end, Pakistan’s economy will be on a ventilator. Rather than take bold decisions, they have chosen the Electoral Waltz ignoring that the streets could be full of chaos. They are performing the last rights over a patient who refuses to die.

The plummeting of Pakistan’s ecconomy is manipulated. The trigger to offset sustainability was set as early as 2000. Lest our memories fail, I am summarising some crucial decisions that have bled Pakistan to an economic catastrophe with explosive social implications and are pursued even today.

The water and power management coterie despite being the largest recipients of foreign loans till 2000 neither exercised vigilance nor showed efficiency. They wasted over 60% of allocations on fruitless feasibility studies and turned a blind eye to Indian developments and energy needs of the country. Slowly and steadily the stakes of IPP’s in the energy sector were allowed to eclipse the hydel and thermal potential.

By 2002, IPPs with tax exemptions had recovered investments and begun remitting profits, outsourcing costs and assuming the role of manipulators. Rather than cheap indigenous energy, Pakistan is now hostage to an expensive import based cartel that sells electricity in foreign exchange while consuming a sizable portion of Pakistan’s natural gas. The present government rather than make amends has aggravated the crises.

The downstream but most crucial industrial sectors have neither power nor gas. With the inability of the domestic industry to produce for local consumption and exports, cheap sub standard imports have replaced the local small scale industries creating unrest, poverty and layoffs. Having thoughtlessly lured 60 % of the country’s automobiles on gas, curbs have been imposed on supplies bringing a closure to the windfall of CNG stations. The new buzz is LPG.

The imposition of a classic VAT on the EU model was abandoned by CBR in 2000-1 in favour of an easy to collect indirect Sales Tax levy on the US Consumer Model. Rather than document the economy and harness irregular cash flows, this volte face jump started inflation and systematically forced the closure of irregular productive sectors. Now Pakistan is forced to live with this till a major turnaround in the economy cannot be made ans the scourge continues.

In 2000, Pakistan’s pioneering efforts in the canola edible oil and research were brought to an abrupt end by the ministry of industries to benefit the soya poultry lobby. Factories specialising in this field were locked up till extinction. The same ministry also eased restrictions on deletion programs of auto makers by allowing import of second hand cars. This crippled the local car industry that had successfully begun manufacturing international standard utility vehicles like Adam Revo and Korakoram. These factories are now junkyards.

The seizure of FCAs in 1997 had proved that a weak rupee was not a pre requisite to boost exports. Within three years the economy was on road to recovery. The government ignored the basic theory that a country in 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. Despite 13 Billion Dollars in the system and an appreciating rupee, the Central Bank ignored the lesson and took the fatal decision to devalue the national currency. Imports were now more expensive and exports did not grow appreciably. But it did not end here. Rupee is fast reaching its century against the US Dollar.

By 2003, with increased remittances, the State Bank soon ran out of the mopping up and sterilization capacity.  Every Rupee the Central bank dished into the market carried a return at that time of over 17% for the commercial banks while the dollars it got in return were earning less than 2%. This meant that budgetary resources were to be strained to meet the difference. Rather than address this issue, a windfall of Rs. 1 Trillion was left in the banking system to restore the parity of rupee to dollar at 2%, an equivalent of Pakistan’s entire National Savings from 1965 to 2001. The State Sector through issue of Government securities at market rates could have absorbed it, appreciated the rupee, discouraged import based consumerism sponsored by banks and hedged national savings. Lamentably, by 2003, Pakistan’s currency printers were in over drive and still are.  As of now, these windfalls are replaced by heavy government domestic borrowing bringing Pakistan on an economic precipice.

The rationale for privatisations was faulty and manipulative. A foreign state enterprise bought PTCL and still owes about 800 million dollars. Pakistan at one point had the resources to build more state enterprises rather than ridding itself of existing ones at throwaway prices. Good management could have been imported. Unfortunately, Pakistan’s large scale consumer sectors like communications and energy are now foreign controlled. The reversal of Pakistan Steel Mills was not taken in this spirit and conditions created to destroy it.

The government ignored that the agriculture sector through value addition was the major component of the GNP. In contrast high growth rates based on consumerism were propagated as a success story. The marketing strategy through limited intervention of imports of agricultural products had always stabilised domestic pricing and kept the pricing cartels in check.  Once these checks were removed in 2007, cartels proliferated. Repeatedly, agriculture imperialism made forays into the sector using dubious multi nationals but remains at bay due to market forces.

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 triggered the circular debt issue. The cartels took their money and fled. A fortune was deliberately surrendered under the nose of an India centric security establishment and Pakistan plummeted into the biggest crisis of its history.

There are two explanations for this to have happened.

Pakistan’s elites and dirty rich have their money stacked in overseas accounts and solid Gold. Their currency of convenience is a dollar or euro.  Their only stakes in the system are political intrusions to ensure the status quo of neo colonialism.

Governments in Pakistan choose this path deliberately. The emphasis is on CONSUMPTION: not SELF-RELIANCE because this is where the ready cash exists and serves the neo imperialist masters.

To be continued……..

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

Brigadier Samson Simon Sharaf is a retired officer of Pakistan Army and a Political Economist. E Mail:


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