The author is a Director at the World Bank. The views expressed in this article are those of the author and should not be attributed to the World Bank, its management and its Executive Directors.

     The current debate about economic recovery in Pakistan has surprisingly boiled down to a number of simplified set of observations. A group of commentators place the blame for the stagnating economy squarely at the doors of the IMF and the World Bank policy prescriptions and every succeeding government’s sense of docility, submissiveness and helplessness against this powerful instrument of Western ( read: American)policy and multinational domination. Another group of ever dissatisfied and perpetually critical writers find fault with each government’s ineptness, malafide motives and lack of decisiveness in taking bold measures such as taxing agricultural income,cutting down defence expenditure etc. A third group of well- intentioned and economically literate observers provide partial solutions which make perfect sense if each is taken in isolation but can break the back of the camel if they are lumped together.

     The argument of this paper is that the choices for economic recovery in Pakistan are quite complex and extremely difficult. There are no easy solutions out and the decisions made in choosing any one of the possible options will involve trade offs and tensions which in turn will create a different set of winners and losers. The function of the technocrats is to lay down the consequence of each one of these options and the function of the political leadership is to make informed judgments based on this type of analysis. Let us take three or four different issues and trace the consequences for each set of decision options to resolve these issues.

     First, there is a tension between containing fiscal deficit and stimulating the economy through a package of public development expenditures. Assume that the government expands the public expenditure by 1% of GDP  on infrastructure projects as a stimulus package. In absence of  corresponding increase in the tax revenues ( there are difficulties in collecting existing revenues) ,the larger fiscal deficit  can only be met through monetary expansion, internal or external borrowing or reduction in consumption expenditures elsewhere. Monetary expansion to accommodate the larger fiscal deficit will generate inflationary pressures which will hurt the fixed income groups and the poor segments of the population. Domestic borrowing will not only crowd out credit for the private sector which will be unable to expand their operations and create employment in the economy but also raise the interest rates stifling new investment and raising budgetary outlays on servicing the stock of domestic debt. External borrowing in wake of stagnant exports and declining aid flows will create severe imbalances on current account, put pressures on the foreign reserves and eventually lead to devaluation.

    If the Government wishes to avoid any of the above fall outs then it can contain the fiscal deficit by downsizing the public sector and saving expenditures on current wage and salary bill. This will put at least 200,000 officials of all ranks out of job in the public service, These officials  should be provided severance packages and golden handshakes to ease hardships on them and their families. They have lost their professional skills by working in the government  for too long and in a tight labor market the employers will naturally prefer those young people who not only possess marketable skills but can also be trained and molded in the culture of their companies. The retrenched public servants would have, with few exceptions, very little aptitude for indulging in business or entrepreneurial ventures.

     The tough choice for the political leadership therefore is whether they should invest in new infrastructure projects ( whose benefits will accrue after a lapse of 3-4 years)  and stimulate the economy  thereby incurring costs up front in terms of inflation, higher interest rates, possible devaluation or  allow 200,000 families to suffer through downsizing. The losers under the former will be the poor and the fixed income groups in general but the losers under the latter will be specific and identifiable families of 200,000 retrenched employees of the public sector. The price for macroeconomic  instability will also be loss of credibility and withdrawl of financial support from the international financial institutions. Whom should the Government hurt?

     The second trade off is between the increase in the electricity and gas tariffs and the financial viability of organizations such as WAPDA and KESC. Without attributing any blame for what happened in the past the reality is that both these organizations as well as the Gas companies are in dire financial stress. These organizations owe about $ 1 billion of debts to the banks and financial institutions and accounts payable to suppliers of goods and services. The current tariff structure and the future payment obligations to private producers of power require a further increase in electricity rates. This increase should enable the WAPDA to meet its debt servicing obligations, pay back the outstanding dues  to its  suppliers and maintain the existing power supplies. The losers in this game will be the users of electricity particularly the industries and exporter whose cost of production will rise eroding their competitiveness in the international markets. The higher rates will also lead to further collusion between the employees of WAPDA and the unscrupulous consumers who will evade the increased tariffs by bribing the employees of WAPDA and depriving the WAPDA of its legitimate revenues.

     On the other hand, if the government does not permit an increase in tariffs it will have to pay $ 1 billion  out of the budget which will contribute to higher fiscal deficit and punish the entire population through the  consequences of this particular scenario traced above.  Should the status quo be allowed to persist, the non-performing assets of the banks will rise and the liquidity of other creditors ( bond holders and suppliers )of WAPDA will be shrunk giving rise to higher demand for money balances from the State Bank and /or a reduced level of economic activity. The effects of monetary expansion have already been spelled out earlier.
 
   What choices  should the government make under these circumstances? Increase the tariffs and punish the industry and exporters. Provide the subsidy , pay off the debt of $ 1 billion out of its finances and widen the budgetary deficit or keep  large number of creditors-- financial institutions and private and public sector companies who supply goods and services to WAPDA --- under enormous risk of default or bankruptcy.

     The third example of the similar nature concerns the privatization of the nationalized banks (NCBs) and development financial institutions( DFIs) . Under the current scenario, the profitability, the services to the consumers  and the health of the NCBs and the DFIs are all highly unsatisfactory. This has serious economic disadvantages. First, the savers do not get adequate return on their deposits and thus the deposit base does not grow proportionately . The volume of loan assets has to be curtailed to match the deposit base. Second, the intermediation  cost between the deposit rate and the lending rate has risen because of non-performing assets and larger than warranted  administrative costs.  Those who wish to borrow   to expand their businesses or invest in new ventures have difficulty in accessing credit at economically acceptable interest rates. Third, the quality of the portfolio of these institutions would remain dubious as the political pressures will  be brought to bear on the lending decisions and the key managerial appointments. What should the Government do? Either it can prepare the grounds for the sale of these banks and institutions to the private sector or retain them under its control.

     There is a lot of  concern that these financial institutions will either end up under foreign management control or acquired by leading business groups of the country ( as these nationalized banks account for 65% of the country’s deposit base). None of this option is liked by many commentators who feel that in the first case the national interests will be jeopardized and our economy will become further  vulnerable to the whims and caprices of foreigners who may not always act in our best interests. In the second case the strengthening of the leading private sector groups will give them immense powers to manipulate the levers of the political oversight to their own rather than social benefit.

     If the  political leadership exercises the option to sell to the private sector,  the banks  have  to shed off excess manpower at all levels, close the branches that do not make any business sense and take other cost-cutting measures to make these institutions attractive so that a prospective buyer can pay a decent price for them .The losers under this option will be the families of those who have been rendered surplus and the businesses and households in the remote areas who have relied upon the branches for banking services all along. The suppliers of goods and services to these banks will also be hurt as cost-cutting measures re introduced.

     Should the Government decide to keep these NCBs and DFIs under its control the cost of capital will remain high, the volume of credit available will be lower and the efficiency of resource allocation will leave much to be desired. The losers will be the businesses and self employed entrepreneurs who would like to enter or expand their operations, create new employment opportunities and contribute towards tax receipts. What choice should the Government make?

     The final example to illustrate the dilemmas of economic policy choices has to do with the devaluation or depreciation of currency -- a topic which has created more heat than light in the popular discussions. If a country is faced with acute and persistent balance of payments problem and has consistently higher domestic inflation rate relative to its trading partners or competitors ,economic theory and empirical evidence both suggest that depreciation of currency is the obvious option( provided some conditions of elasticities of demand and supply are met). The depreciation will increase the rupee earnings from each dollar of goods and services exported, from remittances, aid flows, private foreign capital flows and foreign currency deposits and thus raise the incentives  affecting the BOP situation positively. Exporters and potential exporters, Pakistani workers abroad, resident and non resident foreign currency holders are clearly the winners under this scenario.

     On the other side of the equation, if the import demand consists of essential commodities such as foodgrains, edible oils, petroleum products, raw materials and components for industries, capital equipment etc. then in absence of budgetary subsidies the domestic prices of these goods will  also rise and generate higher inflation rate( if this is not a one-off devaluation).Simultanesously, the external debt service obligations in rupee terms will also increase proportionately and widen the budget deficit ( in aabsence of other counteracting measures). Import duties on the revenue side should also rise but the higher prices of imported goods in rupee terms will put a brake on the demand for official imports and reinforce the tendency for procuring  smuggled goods,given the weak administartive and enforcement machinery in the country.

     The expectation that the value of rupee will continue to depreciate will induce asset substitution towards dollars and foreign currency. The increased demand for holding real money balances in dollars will exacerbate the situation and call for a larger depreciation than is warranted by trade imbalances alone. As Pakistan is committed to currency convertibility the foreign reserve position will have to be strengthened. In the immediate term, this can only be achieved through short term borrowing at relatively higher prices. This, in turn, will increase the debt servicing burden in the next period.

     The net positive gains from depreciation can be achieved only if the government pursues tight fiscal and monetary policies, builds sufficient confidence to attract foreign and domestic investment to expand the supply of exportables and the demand for imports is switched to domestic substitutes( wheat and edible oils are the two obvious examples).

      The above analysis  goes to show that there would always  be some tough choices which will have to be made and these will impose hardships and pains on  various  groups of people  differently. I am sure that under each of the examples cited above the readers can come up with other choices and options. The point that I wish to make is that the economic policy making is not that easy and straightforward as some commentators make us believe in their writings. The task before the political leadership is to weigh the costs and benefits of various options, build a consenus among their political allies and workers, involve the private businesses and the trade unions, explain the rationale to the general public  and then reach some hard decisions. There should be no illusion that this can be accomplished  without difficulty or they would be loved by everyone and the sundry.  There would be some winners who will not give credit to the political leadership  for their gains and good fortune but more important there will be losers who will blame those in power  for their adversity. A state of indecisiveness or flip flop will help nobody.  Actions against defaulters of loans, tax evaders, corrupt officials and those indulging in malpractices of all kind will add to the credibility of the Government and help them in implementing these tough decisions. The sooner the political leadership takes certain decisions they should stick to it knowing fully well that some people will be displeased. But the country will be better off in the long run if these decisions are made rather than postponed  or changed abruptly.