For the large part, this accumulated cost of errors of omission and commission has been the logical outcome of a secular worsening of governance under successive governments and of the pursuit of politically popular but economically disastrous, policies. However, much more important have been the structural reasons underlying this progressive deterioration. Although these factors have been discussed at length at different times in these columns, it would not be out of place to remind ourselves of the key issues before we examine potential measures to address them.
a) Partly owing to decades of lax fiscal management, but more because of myopic policies in the domain of external relations, the militaristic structure of the State and the narrow vision of a rapacious elite, the State, in 1998/99, is Rs.120 billion short of resources required to simply keep its machinery operational so that it can carry out the minimum functions that states are expected to perform in civilised societies. Just two items of expenditure, debt servicing and defence, are more than the net revenues of the Federal Government. In fact, even 1/3rd of the expenditure on defence has to be financed from borrowings, reducing the role of the government to that of a debt-securing agency.
b) The government prides itself on having achieved the IMF imposed budget deficit target. However, this has been achieved by:
? A drastic reduction in development expenditure from 7.5% of GDP in the early nineties to just over 3%, which translates to a cut back of Rs.125 billion in today’s prices. A compression of government expenditure of such magnitude, which buys private sector goods (say cement, steel products, pumps, cables, pipes, transformers, etc.) and services (of engineering consultants and contractors), goes a long way to explain why entities in large sub-sectors of the economy are at the point of either closing down or operating at highly reduced capacities. That these capacities had, in the past, been created in response to unsustainable levels of government expenditure, is another matter.
? Giving the provinces Rs.27 billion less under the NFC award announced by the caretaker government of Mr. Farooq Leghari, than what they would have received under the old award, thereby transferring a part of the deficit into their books.
In other words, the actions taken by the government to date have failed to resolve issue of the structural deficit.
c) Moreover, not only has development expenditure been sharply curtailed, the scarce resources set aside for infrastructural works have been diverted to less productive investments-like the motorway and the new Lahore airport. This massive pruning of the public sector’s developmental activities has also caused a major contraction in employment opportunities for the educated youth in smaller provinces. This is particularly serious in their case because the private sector is unlikely to locate in parts of the country devoid of adequate infrastructure, skills and markets, and especially under existing recessionary conditions.
Since, as argued above, it has been unable to either provide adequate physical and social infrastructure or create an environment for private sector investment, the government finds itself helpless in influencing the growth rate. It has not been able to maintain law and order, its policies lack transparency, and its credibility on policy consistency (in view of the frequent changes in the rules of the game) and of honouring its legislative and contractual commitments lies in tatters. Irreparable damage has been done to the credibility of government. It takes decades to build confidence, which has now been wiped out by the single stroke of a pen. The unsavoury treatment meted out to foreign currency account holders and the IPPs illustrates this point.
d) On an annual basis, there has historically been a huge gap of 5% to 6% of GDP between domestic national savings and investments. This gap, the equivalent of Rs.150 billion in current prices, has been financed from remittances of overseas Pakistanis and external borrowings- which explains the size of the debt, its unsustainable level and the extent of IMF, World bank interference in the formulation of domestic economic policies.
e) Massive corruption at all levels has meant that a large proportion of national wealth and government expenditure has been siphoned off into private coffers.
f) Successive governments have singularly failed to create a tax culture because the structure has not been equitable. It taxes income from different sources differently. For instance, although the large farmers are now getting international prices for their major cash crops, they are still unwilling to pay even the rather modest level of taxes levied on their agricultural incomes by the provincial governments.
Not only has enforcement been weak, habitual tax evaders get protection. The existing system also encourages tax evasion by issuing instruments whose holders are exempt from all kinds of taxes and from answering all awkward questions on the source of their wealth.
The political leadership itself does not pay its taxes diligently. Therefore, unless companies owned by sitting ministers install invoice-based systems for GST accounting, it will be difficult to impose GST at the retail level, even if the community of traders supports the current regime.
f) The external debt of around US$34 billion (including the military and short-term debt) is more than 50% of the GDP, and 4 times the annual foreign exchange earnings. We can neither service nor repay this massive debt. We have so far succeeded in postponing the inevitable, debt default, by piling up more debt on more painfully excruciating rates and terms. However, time has now run out on us.
g) After 50 years of independence our exports comprise less than 0.2% of world exports, and diversification has remained an elusive hope. Therefore, for the exports of, essentially, a single-crop economy to become the driving force to raise the level of economic activity would require an astronomical increase in exports, notwithstanding the lack of skills required to increase the volume of value-added exports.
Moreover, no amount of revenue generation or retirement of the stock of existing debt from the proceeds of privatisation can meaningfully address the issue of debt servicing. Given the state of the world economy, the treatment accorded to HUBCO and KAPCO and the regime of exchange controls being currently operated by the State Bank, pinning ones hopes on the turnaround in the international environment for investment in privatised assets would be quixotic.
h) Our ability to export has been seriously affected by sluggish world trade, while inflation and the rising cost of inputs, in the face of an overvalued rupee, are rendering our exports uncompetitive. Although so far this year our exports have declined by less than the fall in imports, the much touted decline in imports is for fortuitous reasons. They are on account of a better wheat crop resulting in the reduction of wheat imports (under 1 million tons compared with 4 million tons last year) and lower international prices of wheat and petroleum (although the latter are now firming up after the OPEC decision to cut production).
i) For us to get through the remainder of fiscal 1998/99 additional funding of US$4.5 billion is required. Until now the annual gap of US$6 to 7 billion was partly met from remittances, foreign currency deposits (which financed 30% of the foreign trade deficit in recent years) and short-term borrowings. Remittances have declined to modest levels, in view of the huge differential between the official and hundi rates of exchange. The option of flows from foreign currency deposits is gone for ever, while accessing funds from international markets is almost impossible after our refusal to repay the liabilities of the swap funds and after yet another downgrading of our international credit rating. Therefore, maintaining even the present levels of imports and growth rates (low as they are), as well as meet external debt liabilities will, at best, be a distant dream.
j) Fiscal haemorrhaging is being caused by public sector enterprises making huge operational losses because of opportunistic government policies, over-manning, corruption, and protection accorded to defaulters of utility companies. The combined operational deficits of just 6 corporations in the public sector is now touching Rs.100 billion, of which the contribution of WAPDA and KESC is Rs.91 billion. Furthermore, the total borrowings of 18 public sector enterprises are now in excess of Rs.250 billion.
k) High interest rates on government savings schemes-ranging from 15% to 19%- are increasing the burden of debt servicing as well as discouraging investment in legitimate productive activities- which in the current domestic and international environment cannot earn such rates of return. Nor, for that matter, can the government generate such rates of returns on its assets to first service these debts and then have enough left over to finance development activities.
l) The overwhelming part of industry faces negative or nominal growth, with low value added industry having surplus capacity of as much as 60%. The limited growth in some sub-sectors of industry is in those in which we do not have a comparative advantage. These factors combined with lack of availability of credit, except at high interest rates, have subdued economic sentiment and aggravated the sense of despair and helplessness among entrepreneurs. Although the inflation rate is below double digits, domestic interest rates of 15% to 20% on loans to industry are far too high even to keep the real economy afloat, let alone raise it to a sustainable growth path.
m) A large part of the banking sector today is technically insolvent. The portfolio of non-performing loans of financial institutions, which is growing at Rs.2 billion a month, is now more than Rs.300 billion, in excess of 50% of the total advances made by the financial system. Moreover, at high interest rates typically highly leveraged companies are at serious risk of bankruptcy. Therefore, there is every reason to fear that the large portfolio of non-performing assets is growing faster than banks can write them down, making the possibility of a systemic collapse a serious one. Any correction thereafter will be costly for the taxpayers, since public funds will have to be injected into the banking system.
n) For the private sector, for whom prospects for the future are influenced by the recession-like conditions experienced in the past (as well as the present), it is difficult to take a long-term view if the government is continuously engaged in fire-fighting activities and cannot display a long-term vision through policy consistency. The lack of confidence in the management capability of the state machinery to implement its policy pronouncements is reinforced by the poor law and order condition in the country. All this is encouraging investment and energies into speculative activities.
The disparities between the rich and the poor have grown. The share of the poorest 20% households in total household income has decreased from 8% in the late eighties to a bare 7%, compared with the share of the richest 20% households that has swollen from 43.7% to around 45% over the same period. With increasing polarisation, the fabric of civil society is disintegrating. There is anger that whereas the incidence of increased taxation has been the heaviest for the least affluent, public expenditure on services used largely by them is being diluted rapidly in real terms. Social tensions are mounting with the growth in the absolute number of poor, illiterate and jobless, as employment opportunities and wages decline because of stagnating economy. Such conditions can hardly be conducive for political and social stability, without which substantial growth will remain a distant dream. Daylight dacoities only portend of what is still to come. A callous and uncaring society should not expect any better.