INSIGHT AND FORESIGHT

June 28, 2013

MY EYE YOUR EYE: PAKISTAN’S FISCAL SLIDE

Filed under: Uncategorized — sharafs @ 4:59 pm

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Since 1972, Pakistan’s currency has devalued by a walloping 892%. Of all evils that plague Pakistan’s economy, a depreciating rupee appears the mother of all. Energy prices and shortfalls have more to do with devaluation than the dollar prices of IPP energy. 900 fold depreciation means that something is not right. For far too long, Pakistan’s central bank experts, economic managers and surveys have misinformed that a weak rupee is imperative to boost exports and build foreign exchange.

Devaluation and bad economics aggravate Pakistan’s downward spiral. It has led to accumulation of foreign debt, high cost of imports, low exports, substitution of cheaper imports (consumerism), the rising cost of IPP energy, energy shortfalls, flight of capital and its reverse flow in dollars, hyperinflation, rising consumer price indices, and creation of elites making windfalls through exchange rate instability, stocks, properties and corruption. While pockets of vertical richness have climbed steeply, the poverty has spread horizontally. This has led to very low human development indices, rising populations, unplanned urbanisation, poverty and crime.

Pakistan’s economic managers trained at Harvard and Westminster lack the psychology and urgency of a Pakistani.  You cannot be a hare and run with the hounds. Year after year, they play the leach sucking blood from stones. They ceaselessly contend the mantra of a weaker currency to boosts exports. They ignore the fact that countries like EU, Japan and China through their own downward monetary adjustments force the cost of economic adjustment onto emerging countries via appreciation of rival currencies. Rather than hedge this incidental appreciation through politically crafted defensive mechanisms the Central Bank allows the rupee to float and depreciate. The cycle goes on.

But there is a silver lining with a counter narrative. Despite such massive economic mishandling, Pakistan’s unregulated economy has managed to sustain itself and acted to offset disadvantages of state controlled management. This undocumented sector evades tax collection but donates generously to social causes. The ‘Not for Profit’ organisations catering to the deprived segments of the society far outweigh the direct taxes collected by the FBR. Pakistan’s social capital is there to be exploited.

Pakistan’s monetary policies are divided into two categories. The first phase began in 1955 and ended in 1972. During this period the Rupee Dollar parity began from 3.30 and ended at 4.77, meaning a devaluation of 44.5%. The influx of US Aid through MAP led to rapid industrialisation and an export led economy as a result of which the growth surged and sustained itself between 5-6% of the GDP.  The Central Bank allowed the rupee to float while retaining its value due to exports of Jute, tea, cotton, textiles and instruments. Pakistan was a role model developing country and a pride for IBRD, Word Bank, and IMF. However, inequitable distribution of wealth, permit mafias and failure to address compulsions of domestic political economy led to a civil war and disintegration.

Separation of East Pakistan weakened the rupee that dropped to 11 and had to be readjusted through demonetisation. Till 1981 the Rupee appreciated and stabilised below 10. Despite nationalisation and Bhutto’s populism, the GDP remained stable around 4.5, a good performance in the aftermath of a great national tragedy. During the Soviet occupation of Afghanistan, Pakistan became the hub of the internationally supported Afghan resistance. Dollars and Narco-money flowed. The GDP hovered around 6-7 % while the rupee unnaturally plunged to 18.26 reflecting the failure of the government to use unexpected inward remittances as boon to domestic industry.  Oversizing of the unregulated and black economies resulted in inflation and proliferation of cartels. By 1989, when democracy returned, Pakistan was under international nuclear sanctions. Intervention of international financial institutions with financial oversight became endemic.

In the period 1989-1998 the GDP declined from 7 to just below 4%. In these ten years, the Rupee declined from 21.4 to 46.11 by 116%. This decline was mostly attributable to international sanctions and decline in power generation capacity. As per one estimate, during this period Pakistan’s unregulated economy dwarfed the official economy and held the country together with controlled inflation and domestic production-consumption cycle. Economic sanctions failed.

After the nuclear explosions in 1998, the government decided to seize foreign currency accounts in exchange for rupees. This amount of over 11 billion dollars with the private banks was seized to hedge Pakistan against additional nuclear sanctions and economic starvation. The rupee fell from 46.11 to 51.1 according to official rates but 57 as per market rates. This devaluation of 24% was to set negative trends for Pakistan’s future.

Post 1999, the Central Bank controlled the rupee dollar parity, built foreign exchange and began restoring remittance confidence. Other monetary policies were counterproductive. Post 9/11, Pakistan once again became the hub of international attention. Inward remittances surged and GDP jumped to sustain itself above 6 and peaked below 7 in 2004-5. Thereafter the decline began resulting in an all-time low below 3 in 2008, 2011 and 2012. Shaukat Aziz’ economy was a bubble he blew away when leaving.  The reason why?

After 9/11, despite $13 billion in the system and an appreciating rupee, the Central Bank devalued the national currency, making imports more expensive and multiplying foreign debt. The government ignored that in a trade deficit it must regard unexpected and non-fundamental appreciation of domestic currency as a boon for cheaper imports and resetting of import priorities. To add insult to injury, the government devalued the rupee and left 1 trillion at the mercy of the banking sector; an equivalent of Pakistan’s entire national savings from 1965 to 2002. The argument was that the central bank had run out of sterilisation capacity.

But this was a wrong decision. If the domestic private sector could not absorb the surplus money, the state could. With the increase of FCA remittances the 1 trillion windfalls should have been absorbed through government securities at market rates. Shaukat Aziz then went on to create a holier than holy state monopoly in the name of PSO no one can investigate for the trillions it has embezzled.

Pakistan hopelessly lacks a War Front on its political economy. Had it been so, the economic statisticians would have concentrated on fiscal policies rich in political thought. Pakistan needs a paradigm shift in its economic policies built around a re definition of Pakistan’s currency. The Paisa and Anna must regain its value.

So how will we look IMF in eye to eye and dictate terms? “My eye and your eye- beautiful sensational eyes” is an ironic twist. This sums up Pakistan’s predicament.

Brigadier (Retired) Samson Simon Sharaf is a political economist and a television anchorperson. Email: samson.sharaf@gmail.com

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/columns/29-Jun-2013/my-eye-your-eye

June 27, 2013

US RETROGRADE FROM AFGHANISTAN

Filed under: Uncategorized — sharafs @ 12:56 pm

Note: The article was published in April before the elections. My worst fears have come true

US occupation of Afghanistan was never a consequence of Strategic logic. As described in these columns, it was a war that stemmed out of revenge and hate post 9/11. The impulse to pulverize the already primordial and fiercely self independent tribesmen to Stone Age far outweighed any strategic hypothesis. The urge was to demonstrate and employ leading edge technologies to obliterate the defined enemy that was pronounced as Al Qaeda but as events proved, beyond that. Drone war was a lie.

In the final analysis, Pakistan will continue to pay a heavy price for joining a conflict with unstinted support, no homework and an engagement situation that warranted a paradigm shift outdone by compulsions of the homegrown social dimensions. Pakistan wasted this time holding one gun to its head and another to a floating threat, while an NRO sponsored regime set to its task of dismantling the state edifice. In case the worst comes to pass, no one in Pakistan’s establishment including military and politicians will be able to absolve themselves of the role they played in such attrition.

In his book, The Nature of War, Julian Lider describes war as an activity of choice and opportunity on a perspective of relative equilibrium from cooperation to coercion. Violence is exercised in rare and extreme cases. The transition to war is logical with an ends-means relationship to the ultimate objective of restoring equilibrium; usually peace on terms. The rationale for war is never built on emotive factors but rather on cool and calculated political logic. However, the point at which the conflict must end is always difficult to ascertain. This is due to the uncertainty, fog of conflict and intrusion of strong emotive factors that result in prolonging a conflict, making it more illogical. In long drawn conflicts, emotive factors cast a shadow and defeat strategic and military logic.

In the US invasion of Afghanistan and now its exit plans, the United States of America supported by its most erstwhile ally United Kingdom is guilty of violating both. The most dangerous aspect of this development is that primacy of politics in conflict so endearing to Clausewitz, Michel Howard and Peter Paret has repeatedly been overtaken by Military Absolutism with an illogical end-means relationship. As a minion, Pakistan too pursued a relationship and cooperation least cognizant that in great power play, it had limited independent options.  The situation was complicated by mutual suspicions and lack of trust between USA and Pakistan that resulted in ambivalent strategies on part of both. Either way, the preposition to define a friend from a foe remained self defeating. In a post withdrawal scenario, when the violence reaches new levels, the armed forces of Pakistan could be sucked into another cycle of intense operations lacking civilian management capacity.

Every war imposes psychological limits on fatigue and how courage is spent. USA having spent ten years is finally calling retrograde. But for Pakistan Army the real test of its combat hardiness is about to begin; despite intense combat in hardy environments and very high casualties. In an ironic and contrasting dimension, it could facilitate civilian control over a tired military, the main theme of Memogate that lies in the dustbins of judiciary.

Historically, USA is once again guilty of repeating the Gulf of Tonkin tragedy that sucked and destabilized many countries in the Vietnam conflict. On the larger canvas, the springs in the Arab world have brought socio-economic disasters in Iraq, Libya, Egypt and now Syria. Countries that once prided themselves as bastion of religious and communal harmony have been plunged into violent anarchy and proliferation of religious extremism. In Iraq, both US and British Intelligence agencies through sexed up dossiers led the State Department and Pentagon into a mother of all battles. As 2014 closes in, the effects of this bad policy harbingered on similar intelligence will have to be endured by the people of Afghanistan and Pakistan. In a very scary hypothesis, the Durand Line could just melt away in spates of floating violence.

After 9/11, USA convinced itself to pulverize Afghanistan into the Stone Age. The conscientious decision was based on intelligence reports that were tailored to suit the declaration of war. US policy planners failed to factorise the primordial tribal culture, proliferation of private armies and propensity of Afghan economy to thrive in conflicts. Most, they ignored the lessons of history in which all occupation armies in Afghanistan failed to achieve their objectives in the region. The British with their experience of Afghan Wars and deployments against imperial Russia disregarded their own experiences to plan and execute an ill conceived military operation culminating in a dismal RETROGRADE meaning disengagement, scorched earth policy and withdrawal.

In contrast, the Afghan Taliban and resistance see this from a different perspective. For them it means the defeat of USA. Therefore they in typical tribal fashion will wait patiently for the time of their own choosing and move in for the kill. To assume that relative peace in Southern Afghanistan is a victory of US led ISAF operations leaves lot to doubts.

USA wasted over a decade, lost more than 1,679 combaters, 1,173 US civilians working for US contractors and over $641.7 billion dollars in a mission to eliminate a few hundred of Al Qaeda. However, the leaks on efficacy of drone strikes against Al Qaeda and other targets indicate the lack of focus on the declared mission. With huge collateral damage and creation of anti US sentiment, the disadvantages and hate thereof, far outweigh minor gains.

Once the operation control is completely handed over to Afghan National Security Forces (ANSF), and the US led forces thin out with stay behind parties and imbedded contractors, the futility of following the wrong policy will finally dawn. The entire exercise of using private contractors to train and arm tribal lashkars will backfire on the interests of both Afghanistan and Pakistan. That is when the fury of militants hidden in the densely forested and difficult regions of Kunar and Nuristan will debouch and unleash their wrath on ANSF high on desertions and professionalism, and low on morale. This will most likely be a new spate of militancy that may also flow into TTP led activities in Pakistan. For many decades to come, Pakistan may have to pay for the US folly of debouching on Herat and Kabul from the North and pushing the entire muck through the porous and pervious Durand Line into Pakistan, despite its support in a war few in Pakistan had courage to own.

As the dates of US withdrawal edges closer, Pakistan’s policy makers need to make a realistic appraisal of the situation and how best to deal with the most dangerous hypothesis described above.  The issues below need an incisive analysis and discussion.

First, what were the factors that prevented Pakistan from capitalizing on the US presence in Afghanistan for ten years and why Pakistan failed to control militancy in its tribal regions and urban centers?

Secondly, is there a linkage between the sudden collapse of a growing and dynamic economy in 2007, its continued downslide and the WOT?

Thirdly, is the failure and collapse of state institutions linked to the economy with the ultimate objective of making Pakistan a failed and discredited state, or is this development being used to make Pakistan pliant?

Fourthly, will the Pakistani establishment, future governments and the judiciary, have the resolve and determination to affix blame on those responsible and punish them?

Fifthly, will the armed forces and law enforcement agencies of Pakistan get the necessary backing and support from future governments to become part of a National Counter Terrorism Policy to play the role assigned to them in bringing stability to the country while the US led coalition is still in Afghanistan?

The next twelve months are critical for Pakistan to decide the fate of non state actor conflicts in the region. Pakistan Army on its part has made a good beginning in Tirah Valley and must seal, contain and eliminate terrorists in the area with military precision.

Brigadier (Retired) Samson Simon Sharaf is a political economist and a television anchorperson. Email: samson.sharaf@gmail.com

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/columns/13-Apr-2013/us-retrograde-from-afghanistan

June 22, 2013

The Doha Initiative

Filed under: Uncategorized — sharafs @ 8:36 am

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The much publicised negotiations between Afghan Taliban and United States of America have suddenly run into a series of expected firewalls. Given the years it took to build such an initiative is not a comforting omen for many actors in the region. The apparent flurry of high diplomacy is but a miniscule tip of the iceberg that lies submerged with heavy baggage. The Afghan imbroglio loaded with competing and diverse interests, many years of confrontation, mistrust and memory leaves a much larger mass of discords and underlying motives submerged and invisible to the media. Speculations, time needed in determining policy shifts and disinformation would test the nerves of negotiators in a game of wits, leverage, concessions and invisible hands. It would be a disaster if these negotiations meet a dead end. But let us believe for once what Sir Winston Churchill said: “The Americans will always do the right thing…after they have exhausted all the alternatives.” The question is are all alternatives yet exhausted? It appears that this is the best amongst the unexhausted options for Afghanistan. What happens to Pakistan could be another story.

Apparently, the Afghan Taliban in assertion of their claim of legitimacy opened the Doha office with the name and flag. This was an embarrassment for Doha, regional NATO and US officials. This symbolism was aptly removed having made a bold statement that the present Karzai regime and foreign forces are illegitimate.

Secondly, the ever insecure and erratic Afghan President Hamid Karzai perceived the symbolism for what it reflected. Sooner or later, both sides of the conflict would be cajoled and some settlements could emerge giving way to more speculations and analysis. Within these negotiations will rest the future of Afghan Federation, Afghan National Army and the Karzai Regime completing its tenure in 2014. In likelihood, the negotiations will also involve the participation of Afghan Taliban in the elections, power sharing and role of Mullah Omar. This would leave little space for Hamid Karzai and throw up the advantage in favour of Northern Alliance and its leader Abdullah Abdullah.

Thirdly, John Kerry’s postponement of a visit to Pakistan leaves many question unanswered. Is Pakistan actually in the loop is the logical question. Though the White House has clarified the issue, to sceptics, it appears a diplomatic nicety.  They argue that a country lumped in AFPAK Coinage has been ignored in the run up to such an important event with a token of acknowledgement inasmuch as the Obama Statement after the Abbottabad raid. Yet, in view of the US retrograde from Afghanistan and the crucial stability USA needs before, during and after the exit, isolation of Pakistan would be regressive. It appears that policy planners in Washington need time to evaluate policy shifts and be convinced that Doha presents the best alternative.

If the reportage on the Afghan Taliban in Doha is to be believed, they appear as simple, straightforward and well-meaning people ready to accommodate the interests of all factions within Afghanistan. They look forward to an Afghanistan at peace within itself and all its neighbours. They wish a prisoners swap, conditionally agree to presence of US forces and reiterate their firmness in not allowing the use of its soil by any force against its neighbours meaning Iran and Pakistan.

As reported by Guardian, Matt Waldman, a former key UN official in Kabul involved in promoting dialogue and reconciliation said: “It would be a grave mistake to assume the Taliban would settle for nothing less than absolute power.” In the same report, Anatol Lieven, Theo Farrell and Rudra Chaudhuri painted a picture of a pragmatic Taliban leadership around Mullah Omar. It appears that the chatter about Good Taliban emanating from Britain and its think tanks takes a neutral view of the subject but to remain non-committal, there are ifs and buts.

Wahid Monawar, a former Afghan diplomat who has acted as an interlocutor told Guardian that though the Doha group was in some ways forward-thinking, they were also unworldly and simplistic “They need help, they need coaching by someone who can help them articulate their issues”. He remains sceptic if negotiations could succeed with serious hurdles of Haqqani Group, conciliation of Taliban foot soldiers and influence of Pakistan. In his road map to stability, Monawar opines that in case a settlement is reached, Afghan Taliban would not be averse to foreign presence in Afghanistan. Emergence of this ‘Good Boy’ image after two decades of brandishing them as blood thirsty mongers is a reflection of a mind-set.

This is exactly what Benazir Bhutto said in 1996 when no country was ready to listen. Taliban negotiators at Doha are reasserting the outlines of the draft on Afghan reconciliation they had conceded during negotiations led by the Late General Naseer Ullah Babar, Pakistan’s Foreign Secretary Najam ud Din Sheikh and Matt Waldman; then a junior UN negotiator. The Americans had walked away.

As negotiations mature, it will also be revealed that Afghan Taliban had no connection with Al Qaeeda and that Osama Bin Laden was shifted to Kabul from Sudan on the invitation of President Rabbani. Mullah Omar was ready to hand over Laden to a Muslim neutral country (Turkey) but the Americans refused. It was only after the raining fire of ‘gods from outer space’ with cruise missiles and daisy cutters that Afghan Taliban let go Laden in a battle of their own survival. If the clock was to ultimately come back to Benazir’s Plan of 1996, the question that arises is that had the world understood then, so much of mayhem and blood could have been avoided and so much money diverted to this impoverished region.

 

Doha definitely belongs to Afghanistan and its Taliban. What of Pakistan that has endured years of self-crafted and internationally imposed misery? To many, the most dangerous variant is reverse fronts of AFPAK like the switching North Pole. As winter approaches and conflict in Afghanistan hibernates in frigid weather, lawlessness in Balochistan and Karachi could peak to engage Pakistan’s law enforcement agencies on yet another internal front. Many feel that this along with Pakistan’s economic plight could restrict Pakistan’s options on the negotiating table. Perhaps this is why General Kayani is pressing to bring a swift end to TTP operations in Pakistan?

NOTE: 

Due to editorial policy I avoided naming countries. Doha and not Riyadh are the facilitators and the former feels irked and vulnerable sandwiched between Iraq, Syria and Iran, all Shiite. Strategically Doha also provides the bridge to Iran and regional NATO HQs. PMLN through some measures managed to keep Sunni Sectarian outfits in check, but this may change due to NRO II in place. If you note, sectarian mayhem in the other three provinces has suddenly surged. These Saudi inspired groups including TTP will hit back with ferocity. 

The mistake that most have been making is that they link TTP and others with Afghan Taliban (a lump of anti occupation resistance). Doha if successful will isolate and bifurcate the two. 

That done, Pakistan will need to segregate various groups under TTP including sectarian outfits. More than half of them in support of Afghan Taliban will automatically cease after Afghan Taliban join the power sharing in Afghanistan. That would leave Hakim Ullah Mehsud’s TTP, Swat Taliban, Laskar e Jhangvi, SSP, Jaish and an odd spoiler like Laskar e Islam to contend and these are the ones that will need, hammer, anvil and a carrot. This is the road map I perceive for ultimate negotiations with the worst

Brigadier (Retired) Samson Simon Sharaf is a political economist and a television anchorperson. Email and twitter: samson.sharaf@gmail.com

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/columns/22-Jun-2013/the-doha-initiative

 

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