The economics of President Zardari


Asif Ali Zardari’s victory in the presidential election on 6 September and his oath taking ceremony on the 9 September have finally laid to rest all speculations about his political ambitions.

There is some residual speculation about whether President Zardari will get rid of the seventeenth amendment now that it strengthens the office he holds, yet there is no need to focus on that for an obvious reason: whether Zardari directly holds the power to dismiss the assemblies or indirectly through his rather mild mannered and compliant Prime Minister, Yousuf Raza Gilani, is not germane to his actual power base: absolute support from the PPP rank and file.

There is also general agreement as to the considerable challenges that the democratically elected President will have to face now in the economic arena: to reduce the budget deficit from 7.2 to 4.7 percent this year that, given the lack of clarity in the revenue targets, is unlikely to be met (a condition that is being viewed with great trepidation by the multilaterals) to arrest further weakening of the foreign exchange reserves position, a declining rupee and a growth rate that is expected to further decline due to the continuing energy shortfall. So what exactly is President Zardari’s economic agenda? How is he going to deal with these serious issues?

His response to these issues, during his post-oath taking press conference, was simple: we have to take some harsh measures and the government will not shy away from them, however the country would not be put on the International Monetary Fund (IMF) programme as is generally being touted as a fait accompli by many economists. The question is: can President Zardari succeed?

At a press conference, held on 4th September 2008, the IMF stated: “The (Pakistan) authorities have not requested a Fund programme, and what we have said is that in terms of the next year the authorities have announced that, in principle, Saudi Arabia has agreed to provide an oil facility which would defer the payment of part of the oil import bill for Pakistan, and they’ve also announced a series of policy measures to correct the situation. We have said if these are implemented and the external financing to fill the financing gap is secured, then this would go a long way towards addressing the country’s macroeconomic vulnerabilities.”

This statement more clearly lays down the economic policies and focus of the government of President Zardari in the current year than any statements coming from President Zardari himself or his Cabinet ministers and numerous well paid advisors. And this in essence is precisely what Zardari indicated during his maiden press conference after he took oath as the President as noted above.

But is this doable? The oil facility, despite statements from senior government officials that the Saudi Arabians have agreed in principle to extend it to Pakistan, is still not inked. Conspiracy theorists are arguing that this may be linked to the granting of an amnesty to former President Musharraf, which would require indemnifying all his unconstitutional actions, even those he admitted on television that he had committed.

Nawaz Sharif is openly opposed to granting any indemnity to the former President but is, reportedly, proceeding to Saudi Arabia, the first time in over a year, reflecting the real possibility that his party too is under pressure from the Saudis who are recalling all their markers to ensure that Musharraf receives amnesty. Many allege that several PML (N) stalwarts have already begun stating that they would not be opposed to this move by the government.

It is also possible that other Gulf Co-operation Countries (GCC) may also put pressure on the government, with or without US mediation, to link any assistance – grant or loan – with agreement on amnesty. When one weighs sorely needed dollars on the one hand and a man who is now toothless on the other, few would opt for taking on our foreign friends by insisting on bringing Musharraf to trial which he, no doubt, deserves.

The injections that Pakistan requires are quite significant. Estimates place the total amount needed at 8 to 10 billion dollars. This figure maybe based on two factors. Last year the total tax revenue collected was 1,005,569 million rupees against the budgetary target of 1,030,547 million rupees. This amount was raised at a time when the economy was growing at a fast pace, 5.8 percent.

In the current fiscal year the growth rate is forecast to be poor, a little more than half of last year, mainly because of the negative impact on productivity of massive load-shedding which will not only affect tax collections, but also revenue target, due to lack of clarity about the matter. It is generally thought that the budgetary target of 1,251,462 million rupees is grossly over estimated. If things remain as they are, the shortfall in revenue may be reflected by the difference between the 2008-09 budgetary targets and the revised estimates of last year. The difference between the two is about 245 billion rupees or about 3 billion dollars.

Second, the foreign exchange reserves have also come tumbling down – from a total of 17 billion dollars last year to a mere 9.1 billion dollars. Support is required therefore amounting to about 5 to 6 billion dollars for improving the balance of payments.

The question, therefore, is: can the government generate this much foreign exchange currency, and from where? The amount of 8 to 10 billion dollars, on average, represents about three years worth of foreign assistance if past precedence is anything to go by.

Even in the post 9/11 scenario, when the floodgates of foreign assistance to Pakistan were fully open, the amount for one year was under 4 billion dollars. Besides, Pakistan’s absorption rate for assistance is rather low and this is reflected in the difference between commitments and disbursements.

The question then is: Can the government generate enough resources from domestic sources? A way has been found, drawing a leaf from Shaukat Aziz’s book, and which can be summed up in one word: securitization. It has been recently revealed that the Saudi American Bank and Al Raji Group have offered to the government of Pakistan 500 million dollars against securitisation of remittances.

There is no risk involved as far as the two banking groups are concerned, for the simple reason that on average around one billion dollars of remittance income has found its way into Pakistan for the last two years from Saudi Arabia – an amount likely to be matched this year as well. Thus giving half of that amount to the government is no risk from their perspective. However the terms and conditions of the deal have not been revealed and the interest payments in dollars may well be exorbitant. Be that as it may, this method alone is unlikely to generate the amount required.

Privatisation proceeds which were earmarked at 25 billion rupees in the budget, reflecting the low priority placed by the PPP led government on this source of finance, has suddenly assumed importance as a means of generating revenue. However the climate for privatisation remains poor and unless the government can usher in a business-friendly environment privatisation will proceed at a snail’s pace.

It is expected that the government of Pakistan would in all probability generate up to a maximum of 4 billion dollars from bilateral and multilateral sources and another one billion or so from issuing bonds in the domestic market as well as securitization. This too is an over-optimistic figure. But there is little doubt that the total amount will still not be adequate to meet the needs of the economy. Options other than an IMF programme may well close in time unless the government takes drastic measures by slashing expenditure mercilessly and raising revenue by plugging the loopholes.


Source: Business Recorder, 15/9/2008

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