With mounting economic challenges Pakistan’s elected government’s response profile needs to be outstanding. The economic crunch that is hitting out all across the country has applied a terrible squeeze on income levels. It has hit the investor, the spender and the survivor alike. The survivors who languish on the fine line between surviving and suffering will soon slip into the suffering zones. With their fast depleting purchasing power they may find it difficult to manage two daily meals. At least 10 million households in Pakistan live below the poverty line. An increase in prices by 10 per cent means an increase in people below the poverty line from three to four per cent.
A majority of the investors talk of departure, with business and baggage, to Dubai mostly. Many have already partially shifted their fortunes to Dubai. The value of the rupee has gone down by 18 per cent since January. Millions of dollars have been sent out already, according to one estimate about 29 billion dollars.
In Pakistan’s living memory for the first time ever, all three markets, the capital market, the real estate and the currency market have all gone on a downward slide together. The stock market reflects people’s perception if not the health of the economy. The stock market index has gone down from 15,000 to as low as 9,500 post-elections.
True the international environment and the inheritance problem are the key triggers but now the question is of the handling of this government. The responses of this government have ranged from good policy articulation in some cases but in many cases mostly trickling, tardy and sporadic. The strikes galore, whether textiles industry, teachers, transporters or transporters, continues adding stress to a public already being buried under the burden of inflation. The government’s interventions like making credit expensive, addressing of fundamental problems like unemployment and working on alternatives, the processes it adopts to increase prices, the consultation mode with stakeholders, ‘walking the talk’ itself of a tight budgetary situation, all raise multiple questions regarding the government’s management comprehension and capabilities.
The most questionable intervention was made on the monetary front. The impact of making credit expensive has adversely affected the secondary market, the market that uses the money, i.e., the capital market. Instead of achieving its target of bringing down consumer borrowing it seems to have been a factor in bringing down the down stock markets by 35 per cent, the market, a barometer of public confidence in the economy, has gone down from 15000 to 10,000. This move also seems to have negatively affected growth.
The State Bank governor must have believed that this would make lending expensive but the net result was that the cost of production /electricity, gas, minimum wages and credit all have gone up. The troubled investors now want to close down their operations and leave the country. So on the short term you have sown the seeds of the long-term problem. Interventions should encourage growth, for example tighter monetary policies, but instead the country’s economy is contracting. For investors the interventions, including interest rate changes and foreign-exchange regulations, have had negative effects. The consequence of this is the impact on the secondary market has made raising capital for productive activities so expensive that people are looking at other markets.
The consultative process has been faulty. From fixing prices and regulatory interventions, because of an absence of consultative process the government first goes for intervention, then the reaction comes, then the consultative process begins and then a corrective intervention by the government. This encourages the industry to react where it doesn’t have to. It tends to turn to blackmailing. In most efficiently functioning states financial regulation, taxation measures and where the state determines prices there is always consultative process. They first have reports by independent consultants, then get input from stakeholders, then make changes and publicize them. The seminar which we turn to approach to consultation is inadequate and inconsequential.
On ‘walking the talk’, people have yet to see the elected ones get into smaller cars, travel on foreign trips in smaller numbers and adopt a more modest life style. Control inflation by government’s unproductive spending, the extra fat, the extra luxury, downsize too? Should the project of shifting GHQ to Islamabad not be shelved?
On fundamental problem: work needs to be done on a war-footing. Inflation, low production and lack of interest of the investor in the Pakistani market will further raise unemployment or adversely affect creation of new jobs. Has the government engaged the investor to generate employment? Should the state now ally with the corporate sector in achieving the urgent objective of increase in employment. There has to be a transparent policy of allying with the investor for public good and within parameters that serve the nation. Side arrangements with ‘favourite’ investors should be out.
For example alternative energy sources should be developed. With loadshedding galloping from one hour in 2007 to eight to 12 hours in July 2008, some urgent measures are required. Transmission losses are up to 40 per cent. Have we thought of alternative energy, wind power? India today produces 8,000 megawatts of electricity from wind power. In the 70s after the oil shock India established a ministry for alternative energy. Today it exports wind turbines to India. How fast are we moving to harness the alternative sources of energy? Can our agriculture policy be successfully implemented with gaps in energy demand and supply, with the energy shortage having a tremendous impact on agriculture when tube wells can’t irrigate the land?
The government is likely to get a fiscal breather on foreign currency. The Asian Development Bank and the World Bank are planning to provide support and emergency funds while Saudi Arabia has agreed to provide oil on credit. To what extent Pakistan’s economy can pull it out of trouble will depend on how Pakistan’s political and economic managers prioritize the response to the mounting challenges.
The issue extends beyond economics alone. It has to do with articulation, the process and participation. Hence it is about management and about politics too. Admittedly, budget deficits need to be narrowed down, rising international oil prices mean price rises at home. But good politics and efficient management means going beyond simple mathematics and addressing the other core relevant questions; assessing economic and social consequences of price increase on the citizens that a state is mandated to protect and provide for; impact on the investor who is the state’s partner in providing for the citizens by generating employment and products. The failed writ of the state is obvious with the state’s inability to enforce price controls.
Unless the political direction is set, no crisis can be controlled. Will the coalition stay? Will the judges issue ever be resolved? What is the Musharraf factor? Is the nation together on internal security, on fighting terrorism? The political wavering and an absence of a set, consensus-based institutionalized direction must end if the national economy has to be pulled out of its dire straits.
The writer is an Islamabad-based security analyst
Source: The News, 23/7/2008