The recent spate of some good news on the economic front-- the agreement with the IMF, the upsurge in stock market,the resurgence of interest by foreign investors and introduction of sensible economic policy packages --is indeed most welcome. But there is a looming danger that this may give rise to a sense of complacency and a reversion of bad old habits which had caused  us so much grief in the recent past. This complacency may result in increased political and social pressures to do away with all the restrictions on public spending, to create new jobs, to start private sector mega projects of dubious validity and  large scale infrastructure projects and to set up specialized lines of credit.

 The argument of this paper is that these pressures should be strongly resisted because if they are allowed to materialize  the country  would once  again  plunge into a serious crisis sooner than we think. The battle to put the house in order has just begun not ended, and the road ahead is tough and tortuous. Hard work, austerity  and continued discipline are required if we are serious in turning the economy around. A complete abstinence from all kinds of indulgence is the need of the day.

 The fact of the matter is that the vulnerability of the economy hasn’t diminished in any fundamental manner. Short term external liabilities and high cost domestic debt continue to entrap us. Non-performing assets of the Banking sector are yet to be recovered. Public sector institutions are in a state of financial disarray.Turnaround in agricultural production or large scale manufacturing or exports has yet to take place. Imports of wheat are likely to be a record high and the prospects of cotton crop are unclear. Fiscal balances would remain in a precarious state throughout the year. Foreign exchange reserves are yet to recover to desirable level of comfort. The process of economic salvation has been put on the course by this government but we are not yet out of woods.

 The short term reprieve provided by the IMF is exactly that-- a breathing space to put the fundamentals right. The performance criteria agreed with the Fund have to be met to establish a track record. Any feeling that the restraints that have been voluntarily and rightly  imposed by the present government in the larger interest of economic revival can be relaxed would be most undesirable. The politicians will be understandably tempted to go for big ticket mega projects to leave a visible mark on the electorate in order to win their support . They may also be genuinely convinced that these large infrastructure projects are essential to lead the country in its march toward the 21st century.  The lessons from the last ten years’ experience of the governments presided over by both the parties strongly suggest that this route is not only economically enfeebling but politically disastrous. The Finance Minister is quite right in asserting that the benefits of the economic reform package introduced this year will begin to pay dividends only after a lapse of 2-3 years. But what happens during this transition period is critical to both the actual realization of these benefits and the time path. If this period is marred by decisions motivated by short term political expediency for gaining popularity or resources are overcommitted beyond our capacity then these envisaged benefits will in fact turn into enormous costs and will once gain plunge the country into another crisis.

 How would this crisis come about? There are at least four potentially destabilizing influences that will result from the relaxation of these restraints or pressures to carry out the  business as usual.First, the credibility and goodwill earned by the present government in initiating and implementing the right kind of economic policies will be eroded. Investor confidence will once again be shattered and new sources of private investment--both domestic and foreign--badly needed for sustained recovery will dry up. Second, the flow of official concesional finance such as available under the ESAF, IDA, OECF and ADF will be seriously jeopardized. Third, the almost certain downgrading of sovereign credit rating will induce international Fund managers to ask for higher spreads to compensate for the increased  country risk and raise our commercial borrowing costs including roll overs.Fourth, the lack of confidence in the economy will manifest itself in asset substitution and increased dollarisation of the economy making it difficult for the State Bank to effectively manage the monetary policy.

 What is the minimum set of actions that should be consistently taken to allow the restoration of economic fundamentals and  to avoid the recurrence of the above scenario? First, no new  large scale infrastructure project in the public sector or guaranteed by the public sector should  be initiated in the next two years and even after that they should be undertaken only if their economic feasibility is unambiguously established and credible cost recovery mechanisms are in place. It is a myth that the BOT projects in private sector have no consequences for the public exchequer. Poorly structured BOT projects have the same adverse economic effects as the poorly designed public sector projects.The current policy of a freeze on including any new projects in the Public Sector Development program for next two years is highly commended and should be faithfully respected.

 Second, the decisions to downsize public sector agencies,institutions and corporations at the Center as well as the provinces through attrition, voluntary retirement, golden hand shakes,complete ban on new recruitment and privatization should be allowed to take place without any interruptions or political interference.
It must be ensured that this is done in a humane way protecting the poor or those who are likely to be without any means of sustenance or support. Those who will be adversely affected  should be fully involved in the implemenatation of this process.

 Third,the efforts at financial sector restructuring including the recovery of non-performing assets at a discount, induction of professional management of high caliber and integrity, strengthening of supervision and inspection by the State Bank of Pakistan and sale to the private sector should continue unabated.

 Fourth, the measures to widen the tax base, increase documentation of financial transactions, extend  the general sales tax to the retail level,cross check the information provided by the tax payers for different purposes, improve incentives for tax collecting officials and  enforce strict penalties for tax evasion and non-compliance should be expeditiously implemented and monitored.

 It is naturally tough on the elected members of the Parliament and assemblies to be told that they would not be allowed to propose any new projects in their constituencies or recommend their supporters for government jobs because of the ban on recruitment or obtain loans for themselves or their friends from the DFIs and the NCBs. They should also be advised not to interfere in postings and transfers of government officials which should be made on merit.It is equally hard on a well-intentioned and visionary Prime Minister that his dreams of spreading large scale infrastructure projects throughout the nook and corners of the country have to be postponed until the economy is fully recovered and resources become available. No doubt, these measures appear to be politically suicidal. But extraordinary circumstances demand exceptional solutions. The sagacity and wisdom of the leadership will be measured by their efforts to pull the economy out of the mess, reverse the course and lay the foundations for a strong and sustainable path. This is a historical challenge and if the ruling party and its allies have to forego some of the immediate benefits and incur short term political costs in the process the nation will be extremely grateful and reward them adequately. The population at large realizes the gravity of the situation and would support the decision makers in their perseverance, patience and prudence in sticking to the course they have adopted for themselves . The  results from the 1990, 1993 and 1997 elections have clearly demontrsted that instantaneous gratification of a small coterie of ruling classes at the expense of the larger collective interest of the population do not fit in well with the preferences of the electorate.

The country needs to establish a solid track record of credibility,predictability and transparency  in economic management. Any deviation from this chosen track would not only do considerable damage to the economy but also incur the wrath of the public opinion--a trend that should not be dismissed lightly in politics.