AFTERMATH OF STRUCTURAL ADJUSTMENT PROGRAMS 

SOCIAL IMPACT OF GROWTH IMBALANCES

SHAMSUL GHANI (shams_ghani@hotmail.com)
Mar 24 - 30, 2008

The era of structural adjustment programs is over, at least for the time the newly elected people take over the helm of affairs. The results of the past economic policies are there to guide them, if they choose to benefit from them.

The year 2007 - although politically a turbulent year- saw the stock market creating new records of excellence. On December 26, the KSE 100 index peaked to the year's highest level of 14815. The year 2008 saw the index cross the formidable barrier of 15000. This is no mean achievement, at least from statistical point of view.

The table-1 below shows the KSE-100 index movement during the last 5 years.

TABLE-1

 

2003

2004

2005

2006

2007

2008-MAR

KSE-100 Index

4472

6218

9557

10040

14076

14994

Increase as compared to last year.

-

1746

3339

483

4036

918

% Increase as compared to last year

-

39%

54%

5%

40%

7%

% increase as compared to base year 2003

 

39%

114%

125%

231%

235%

The upward drive of stock index augurs well for an emergent economy provided that the growth is broad based in terms of a consistent increase in the number of new listings, an expanding investor and industrial base, an evenly distributed increase in equity values and a sustained and sizeable growth in capital formation.

Unfortunately, when the growth is tested on aforementioned criteria, a good number of loose ends start raising their heads. It will be unfair to assume that the growth is totally based on speculative engineering or dependent on footloose global capital, yet the imbalances created by the high-paced growth have given rise to some serious economic and social implications.

The equity ownership base has not been broadened in right proportions to the stock market development. The cross ownership phenomenon has given rise to a monopolistic control situation. The industrial and financial sectors have joined forces with the KSE big wigs to create conglomeratic alliances thereby blocking new entries and making the life of weak operators difficult. These conglomerates hold sway over the market and create bearish and bullish spells at will.

THE TWO DEMON SECTORS

The table-2 below shows the growth in the size of market capitalization during the last 5 years

TABLE -2 

Rs. in million

YEAR END DEC

2003

2004

2005

2006

2007

2008 (MARCH)

Market capitalization

951,446

1,723,454

2,746,568

2,771,114

4,546,899

4,510,754

Increase as compared to last year

-

772,008

1,023,114

24,546

1,775,785

(36,145)

% Increase as compared to last year

-

81%

59%

1%

64.%

(0.8)%

% increase as compared to base year 2003

-

81%

189%

191%

378%

374%

Commercial Banks account for 37 per cent of the total market capitalization whereas Oil and Gas Companies (both exploration and marketing) account for 23 per cent of the total market capitalization. The increase in the size of market capitalization has not resulted from a broad based increase in the value of equities. Rather, it has been the outcome of engineered narrow bull market operations. The combined market capitalization weight of banks and energy sectors, besides presenting a freak growth model, has also given rise to the economic woes of masses. These two sectors have committed economic larceny of the highest order by swallowing hundreds of billions of common man's money handing him in return such bounties as food inflation, energy crisis etc.

The banks, in the wake of weak SBP control, have more than doubled their equity of Rs.143 billion in June 2004 to Rs.350 billion in June 2007 besides siphoning off additional billions in the shape of cash dividends. The looted money was the property of depositors who were allowed a negative real return on their savings extorting, in the process, a historically high bank spread of 7.5 per cent.

The oil marketing and exploration companies, particularly the refineries, taking advantage of the notorious deemed duty and price anomalies played havoc with the lives of the citizens of this country. They still hold a claim of Rs.160 billion against the government on account of subsidy and are all out for a kill. On the contrary, our neighbor India has been holding its oil companies at bay by refusing them any price increase since last many years. The oil companies there are running losses in sharp contrast to our oil companies whose balance sheets are bursting at the seams under the pressure of ill-gotten profits. In our case, the oil price anomalies have resulted in windfalls for the oil companies who are estimated to have gobbled Rs.200 billion of the consumer money. The refineries in Singapore are allowed to earn between $2 & $3 per barrel, whereas in Pakistan the margin range is as high as $8 and $10 per barrel.

In the given situation, the only hope remains that the newly elected government will take a bold step and cut these two demon sectors to size to provide relief to the common man. Any further subsidy payments to the oil companies will be a suicidal act. Illegitimate profits earned by these sectors should be quantified and recovered in the shape of one-time public relief tax. Is that not too much to expect from the new setup, especially in the light of Henry Kissinger's words:

"The elections in Pakistan, far from calming the political crisis, have opened a new phase of it."

"In such an environment, the relations between Pakistan's three feudal-type organizations, the military and the major political parties, has more of the character of those among Italian city states during the Renaissance described by Machiavelli than of the party politics of traditional democracies. They have occasionally made temporary alliances - as they appear to be doing now - for tactical purposes, but these have always proved preludes to new confrontations with the military appearing as arbiters in the end."

The only way for the elected people to prove Kissinger wrong is to act in unison for the betterment of the dying common man. Only then the power of people will be on their back to see them through the long and tiresome journey of democracy.