How do we stand today?

May 31 - Apr 06, 1999

The recent hostility by India in disputed territory of Kashmir leading to downing of two Indian jet fighters which intruded into Pakistan has added a new dimension to Youm-e-Takbir celebrations. There was an overall jubilation for celebrating first anniversary of successful nuclear tests by Pakistan on May 28, 1998. The recent situation, even if not posing an immediate threat to sovereignty of the country, demands the nation to remember that achieving the nuclear capability alone is not the destination. It is first step towards an endeavour to attain a respectable place for Pakistan in the international community. The best way to consolidate the position is to strengthen the defence of the country. The objective cannot be achieved without persistent and sustainable economic growth. This includes minimizing dependence on external resources.

The nuclear programme of Pakistan can be termed a miracle of this century. It is the result of untiring efforts by dedicated Pakistanis and contributions by friendly countries. The programme, till tests were conducted, was spared over more than 20 years. After the first series of nuclear tests in 1974, India had become a threat to sovereignty of Pakistan. Many people were of the view that supremacy of India in the region should be accepted. When India conducted second series of tests on May 11, last year there was pressure on Pakistan from G-8 countries not to conduct similar tests. But the government made it very clear that for security reasons it was unavoidable for Pakistan to respond in an appropriate manner. In a few days the country responded in a very successful manner.

Pakistan was also warned by the developed countries that if it went ahead, economic sanctions would be imposed. This included suspension of fund flow from the World Bank and other multilateral and bilateral agreements. Despite these warnings, the decision to conduct test was made. The biggest challenge before the economic managers was to minimize the impact of sanctions and maintain the economic growth rate in the country. While efforts were, at the peak, to get the sanctions withdrawn, the immediate measures taken included freezing of foreign currency accounts, implementing foreign exchange management policy, 30 per cent margin for establishing letters of credit and, of course, imposing emergency in the country. All these measures were unpleasant but unavoidable.

The first point to ponder is, what did the country gained or lost after the tests? There could not be two opinions. Pakistan has consolidated its position against India. Some political analysts said that the chances of war between India and Pakistan were far less but during last 15 days the clouds of war have once again engulfed the disputed territory of Kashmir. If the vengeance and counter retaliation by both the countries continues the fear of yet another war cannot be ruled out.

External debts

Many analysts say that the economy registered economic slump as per expectations. However, the real impact was not there due to existence of undocumented economy which is estimated around three times the size of documented economy. While there was no real shortage of consumer goods, it was feared that Pakistan may default in discharging its external debt obligations.

Though, Pakistan technically defaulted in discharging its external debt servicing obligations, the lenders were convinced that in the absence of their agreed assistance programme, there was a need to withhold remittances. They were confident that once fund flow from the IMF, the World Bank and the Asian Development Bank resumed, Pakistan would be able to clear the overdue obligations.

However, the situation forced all the lenders to review Pakistan's total external debt obligations and annual debt servicing as a percentage of GDP. For quite some time it was realized that unless Pakistan's external debts were restructured, the country may face ultimate default in the long run. The imposition of economic sanctions further highlighted the need for restructuring of debt. Since Pakistan was always current on debt servicing, the lenders had a relatively sympathetic attitude.

Though, the external debts were ultimately restructured, a fact should be kept in mind that it is only a breathing space for Pakistan. Extra efforts have to be made to: enhance exports and unilateral remittances, increase revenue collection, reduce budget deficit and increase developmental expenditure to provide extra impetus to economic development and achieve improved GDP growth rate.

It is very unfortunate that politicians in Pakistan try to portray that the World Bank and the IMF are responsible for most of the miseries faced by the country. Their impression is often based on the stringent and additional conditionalities being imposed with the passage of time. However, they ignore two important factors: the recent policies of these lenders is now aimed at promoting private sector and also the result of broken promises of the government. During last several years Pakistan has not been meeting the agreed targets for one reason or other reason. Missing the targets is not unusual in the financial world but lack of will and hardly any effort to achieve the agreed targets is unpardonable.

Good governance

If the IMF asks Pakistan to accelerate GDP growth rate, improve revenue collection, reduce budget deficit and expand exports, their demands are justified. Can the government deny that the investment is taxed in this country? Is it not a fact that Pakistan's revenue are hardly enough to meet defence and debt servicing? Is it not correct that the income from agriculture is still tax exempt? Can any one deny that the largest percentage of non-performing loans pertain to nationalized commercial banks? It is also a fact that only lack of good governance is responsible for failure in achieving the agreed targets.

Apart from good governance, lack of commitment is also responsible for economic mismanagement. The IPP controversy has been lingering on for more than two years. Despite reduction of crude oil and POL products prices in the international markets, the government has not reduced POL prices. The prices were increased after imposition of sanctions to increase revenue collection. It was expected that once fund flow from the donors resumed, the increase would be withdrawn. However, due to massive shortfall in collection of revenue the government did not reduce the POL prices. After the introduction of unified exchange rate the government has once again increased POL prices. At present POL prices in country are approximately 35 per cent higher as compared to their international prices.

The analysts say that since revenue collection has been much below the revised target, the government is forced to depend on development surcharge on POL products. While some economists have objections on this practice, others believe that it is yet another type of indirect tax. It may be true, but sale of furnace oil at higher price to power plants, both state-owned and IPPs, has been affecting the profit margin of WAPDA and KESC. The increase in electricity tariff has also affected the industrial sector and eroded its competitiveness.

Inputs cost

The economists also say that the higher inputs cost has virtually rendered the local manufacturing sector incompetitive in the global markets. On top of this, inability of the government to control smuggling has pushed many industries to the verge of closure. They also say that recent reduction in import duties will also have an adverse impact on the local manufacturer. The revised duty structure has not been cascaded in an appropriate manner and can only make the import of finished goods cheaper.

It is also said that the government has not been able to curtail influx of unnecessary products into the country. Many of these products are consumed by less than half a per cent of the total population. Even when Pakistan faced the worst balance of payment situation, after imposition of sanctions, no restriction was placed on the import of these goods. It was said that being a signatory to World Trade Organization (WTO), Pakistan could not impose such restrictions. However, the experts say that at that time and even today, this option is available to Pakistan. The country continues to suffer from a similar situation, though to a lesser extent.

Mismanagement, wastage and inefficiency is not only a characteristic of public sector but also made in roads into the private sector. The inefficiency in the private sector has emerged mainly due to area and industry specific incentives. On the one hand an uneven playing field was created between the units located in tariff areas and the units enjoying exemptions. On the other hand the sponsors of the units enjoying exemptions, in general, never bothered to be cost efficient. Many of the textile units established in Chunian in early nineties and enjoying exemptions have accumulated huge losses over the years and also caused sickness to the units operating in the tariff area.

These are a few glimpses of prevailing economic situation. It forces one to drive a conclusion that most of the miseries faced today are the overall result of lack of good governance. During a difficult time these units, were not able to sustain extra pressure. On the Youm-e-Takbir, the nation has to prioritize its objectives and work hard to achieve them. The objectives are: a commitment to defend the territorial integrity of the country, to live united, to say good-by to external help, curtail extravaganzas and make the best use of all the available resources.

Setting priorities

It is necessary for both the countries to evaluate their past practice of heavy expenditures on defence. After more than fifty years of independence a large percentage of population in both the countries live below poverty line. However they continue to spend significant percentage of their annual budget on defence fearing assault from each other. The three wars fought by the two countries in the past have neither rendered any results nor reduced the hostility among them. India's expenditures to enhance military capabilities are based on the lust to become 'big brother' in the region. Whereas Pakistan is forced to incur similar expenditures to protect its territorial integrity.

After the nuclear tests it was expected that India would give more attention to consolidate its economy rather than to expand its defence capabilities. But, it seems that the extremist Indian ruling party is making desperate efforts to win the election. Operations in Kashmir may be termed as an efforts to drag Pakistan into a fruitless war. However, some analysts also say that BJP may fail in winning the election despite having nuclear tests on its credit.

After remaining a closed-door economy for nearly 50 years, India opened the country for foreign investment. The country, mainly on the basis of its market size, succeeded in attracting substantial foreign investment. This was despite the fact that India opened its market much later than Pakistan's initiative. However, the political analysts say that the recent hostility between the two countries may see an end to foreign investors' interest in both the countries.

While the recent confrontation has witnessed an immediate and severe impact on capital markets in India, Karachi Stock Exchange also witnessed some bearish trend. However, some analysts say that down drift has feeble correlation with the Indian hostility. In last two weeks KSE-100 index had gained over 200 points and technical corrections were expected.


The rescheduling of external debts has provided Pakistan an opportunity to restructure its economy. The key issues are: restoring the confidence of both local and foreign investors. Introduction of unified exchange rate and facility to encash frozen foreign currency accounts at interbank rate has brought some change in perception about the country. Interest of foreign investors was slightly visible from renewed interest of investors in capital markets. There is also a general feeling that government is reaching resolution with the IPPs.

Reduction of NASTRO and SLR limits coupled with reduction in discount rates by the State Bank of Pakistan have improved overall liquidity position in the country. The central bank has, so far, been able to minimize dollar volatility in the country through rather regular interventions. These measures are expected to discourage 'dollarization' trend in the country. To ensure long-term investment, it is necessary to keep the investors interest in the capital markets.

During last five months flotation of term finance certificates, Rs 11.5 billion by KESC, Rs 300 million by First International Investment Bank, Rs 300 million by Saudi Pak Leasing Company and Rs 700 million by Dewan Salman Fibre indicates major investment potential in the country. The trend must continue

Textile industry, having the largest share in the economy of the country and exports, needs fresh investment for BMR. To enable the textile exporters to attract foreign buyers it is necessary to improve quality standards, discourage export of raw cotton, coarse counts of yarn and grey fabrics. Pakistani textile manufacturers must remove the label 'exporters of low price low quality products'. Locally produced cotton is suitable for conversion into medium and fine counts of yarn. It is being misused by the spinners as they convert it into coarse counts of yarn. Unless quality of yarn is improved, the quality of textiles and clothing being exported from Pakistan cannot be improved.

Strong economy is the only strong defence nowadays. Even the strongest military capabilities cannot save a country. The disintegration of USSR into many smaller states was mainly due to its economy in shamble.

Nuclear explosions by India and Pakistan

Nuclear explosions detonated by India and Pakistan has changed the geostrategic environment in the region, which will have long lasting impact on both the countries.. Nuclear explosion by India and followed by Pakistan finally ended the ambiguity about the nuclear status of both the countries prevailing over a long period. The geostrategic situation changed immediately after Indian tests and compelled Pakistan to follow suit. In the backdrop of unresolved Kashmir dispute, India's conventional and nuclear edge over Pakistan after its 1974 nuclear explosion and its refusal to sign the nuclear non-proliferation treaty (NPT), Pakistan was expected to conduct similar tests to be at par with India. It was an effort to deter India from imposing a fourth war on Pakistan. There was also a manifestation of Pakistan's intention to resolve the bilateral conflicts peacefully through negotiations and not by resorting to nuclear arms race. internationally, the Indian decision to go nuclear was condemned. Pakistan's tests were termed the direct result of India's nuclear proliferation efforts. Earlier Pakistan was pressurized to exercise restraints and also threatened economic sanctions if it went ahead with tests. But when Pakistan went ahead, international reaction carried sympathetic tone. Nonetheless, sanctions applied to India were also imposed against Pakistan.

Confrontation at LoC

Pakistan had shot down two Indian fighters that crossed into its territory along disputed Kashmir. The downing of the jets is seen as a major escalation in tension between India and Pakistan. Pakistan's foreign minister has urged India to stop escalating the fighting and to honour the Lahore declaration. This document was signed in February this year between India and Pakistani ministers. The two uneasy neighbours and combatants in three wars in 52 years promised to try to settle their differences through negotiations.