PRESENT GOVERNMENT PERFORMING THE LAST RIGHTS How the Economy was manipulated

PRESENT GOVERNMENT PERFORMING THE LAST RIGHTS How the Economy was manipulated

By Brigadier Samson Simon Sharaf (Retired)

The budget has come and will go. The government has ensured that by election time, Pakistan’s economy will be on a ventilator and streets full of chaos. While we tend to blame the present government for all our economic woes, we forget that the trigger of deflating the economy was set in 2007, ie when a military cum civilian government was in power. In this series I picked a time line somewhere in 2002. . I am summarising some of my articles written in the past ten years for the awareness of the readers, lest our memories fail us. I wish readers to make their own judgements as regards the black sheep.

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 and manipulate Pakistan.
• The imposition of GST as a VAT was abandoned by CBR in 2000-1 converting it into an easy to collect sales levy. The incomplete GST regime did not help in documentation of the economy, rather served to jump start inflation and discourage small sector domestic production.
• The violations in deletion programs by local car assemblers were ignored and substituted by import of second hand cars. This crippeled the local car industry that has just begun manufacturing international standard utility vehicles.
• 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. Soon it will be over Rs. 100 to a Dollar.
• After 9/11 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.
• To restore Rupee Dollar Parity due to uneven interest rates, 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. This ultimately led to a massive flight of capital through real estate, stocks and consumerism.
• From 2002-2006, 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.
• Agriculture growth and pricing mechanism was deliberately discouraged and loop holes created for proliferation of Cartels.
• 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.
• The circular Debt issue in the energy sector was the mechanism that set off all the triggers for meltdown.
• 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.
• The policies of the past five years have denied honest businessmen the space to invest.
• In the banking sector, windfalls have been replaced by heavy governmental borrowing leaving nothing for the private sector. This is resulting in rush on the banks.  

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 regressive VAT on a sinking economy adopted.

Rupee Dollar Parity

Following increase in remittances, the Central Bank quickly absorbed as much as it could but soon ran out of the mopping up and sterilization capacity.  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%. Between 2002-7  if the domestic private sector could not absorb the surplus money, the State could.  Rs 1 Trillion windfall should have been 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. By 2003, Pakistan's currency printers were in over drive and still are.  

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 destroy it.  

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 2010-12 where the manufacturing growth has only picked up in the consumer sectors. 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 and opened gateways for cartels.   

If the indicators given in the Economic Survey are to be taken at face value, the economy and social conditions have already plummeted to the lowest and societal dynamics set for anarchy.  

There are two explanations for this suicide bombing.

First, Pakistan’s elites that include militarymen, politicians, bureaucrats, technocrats, big business houses and dirty rich have their money stacked in overseas accounts and solid Gold. Their currency of convenience is either a dollar or a euro.  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. 

Brigadier Samson Simon Sharaf is a retired officer of Pakistan Army and a Political Economist, a member CEC PTI, Spokesperson Defence Production and member Media Pakistan Ex Servicemen Association.