Nov 15 - 21, 1999
The 15th annual meeting of the Pakistan Institute of Development
Economics provided a most useful forum for detailed discussion on the economic crises
facing Pakistan, its history, causes and remedies by top economic experts both
based in the country and outside which will help our new economic managers to evolve a
better strategy for the future. The 4 day conference which was attended by a cross section
of economic experts ended in Islamabad on Monday.
Top ranking economists, bankers and financial experts read papers on
different aspects of Pakistan economy such as rising budget deficits, declining exports
and rising trade deficits, rising burden of domestic and foreign debts, privatization,
neglect of agriculture sector, inconsistency in economic policies and good governance.
Reading of every paper was followed by a lively question answer session which sifted out
the main substance of the subject.
Dr. Pervez Hassan, former Chief economist of the World Bank, presented
a comprehensive case study on "Pakistan's Debt Problem: It's changing nature and
growing gravity." Pakistan is now a severely indebted country. Its public debt
exceeds 95 per cent of GDP and 600 per cent of annual revenues, pointed out Dr. Hassan,
detailing that external debt $ 35 billion stood at 350 per cent of annual foreign exchange
earnings of the country.
All borrowing decisions were ad hoc in the past. The institutional
capacity to monitor debt levels, analyse debt management issues and give advice on annual
borrowing plans has been almost non-existent. "The new economic team should rectify
this and set up a high-level "Debt Bureau" either in the Ministry of Finance or
the State Bank to undertake the debt management functions, " he suggested.
Despite substantial debt relief and some debt reduction from the Paris
and London Clubs totalling nearly US $ 8 billion the foreign exchange situation remains
very difficult. He said that exceptional financing from the International Monetary Fund
(IMF) the World Bank and other sources would continue to be needed at least in the next
The debt burden was made much worse by the inability or unwillingness
of elected leaders to reduce the fiscal deficit significantly. Real revenue growth during
the period from 1996-99 has remained zero per cent per annum. Fiscal deficit as a
percentage of GDP remained at 6.1 per cent on an average in the same period. These and
other developments resulted in the rapid increase of implied real interest rate on debt
from 3.5 per cent of 1988-96 to 6.5 per cent in 1996-99, on an average.
Stagnation or fall in exports and revenues, coupled with a quantum jump
in external debt in the total public debt composition, had created a vicious debt-trap.
Pakistan's total public debt as a percentage of revenues was 423 per cent in 1976-77 that
had gone up to 604 per cent in 1998-99. As a result, cost of interest payments had also
jumped up from 32.9 per cent in 1992-93 to 42.6 per cent in 1998-99. The debt is now
driven largely by interest rate costs, observed Dr. Pervez Hassan. He stated that it was
no t surprising that the debt indicators, which relate to debt or debt service to
revenues, have shown much greater deterioration in the 1990s than in the 1980s. Thus real
debt has continued to grow even though the primary fiscal balance is now in surplus.
"Pakistan's foreign debt problem has become even more serious than its domestic debt
problem that was reflected in the near default and subsequent rescheduling of external
debt. Pakistan's debt crisis was essentially triggered by the unsustainability of the
level of the current account balance of payments deficits and the pattern of their
financing. ; During the eight years 1991-98, Pakistan ran current account balance of
payments deficit of over US $ 28 billion, or on an average of 5.5 per cent of GDP.
This level of growth is not sustainable for a decade, even with a rapid
expansion of exports. The growth of exports and remittances has in fact slowed down
markedly in the first half of the 1990s and then stagnated.
The alarm bells on the external debt, however, did not ring in this
period partly because balance of payments financing needs were being taken care of by the
short-term foreign currency deposits, volatile portfolio investment and fixed cost direct
foreign investment in the power sector.
Dr. Hassan said that debt problem cannot be separated from broader
issues of economic strategy and management, notably trend in savings, exports and
government revenues and quality of public resource use. In the near terms, say over the
next two to three years, he said, Pakistan will have to live with the macro-economic
consequences of the heavy debt.
Professor Paul P Streeten of Boston University USA, speaking on the
philosophy and rationale of Privatization said, the Privatization without the right
regulatory framework is bound to fail. Certain conditions have to be met to make
privatisation a success. In addition to the need for a capital market there must be a
competitive environment, so that public inefficiency is not just replaced by private
inefficiency; or if a monopoly is inevitable, it should be regulated.
He said the privatization takes two forms. It can consist in
transferring previously state-owned enterprise into private ownership, control and
management; and encouraging the growth of new, normally initially small private
enterprises. The reason for privatization, he said, is the inefficiency of many public
enterprises, and the heavy drain on public revenues, their subsidies constitute.
An additional benefit can be the absorption of the liquidity overhang
in many ex-socialist countries, if shares in the enterprise are sold and the receipts are
not spent. In this way, Mr. Paul said, inflationary pressure can be reduced. But, he
underlined, the aim should not be to maximise receipts from the sale of assets, but rather
to encourage competition and to harness private initiative.
To corroborate his point on a right regulatory framework to make the
privatization a success, Streeten said the premature freeing of prices in Russia led to
vast price increase. This did not lead to more production because "protection rackets
kept out new entrants and skimmed off large profits".
For successful privatization there must be training facilities for the
new entrepreneurs and she workers, he further pointed out. There must be a legal framework
for property rights. He said it is desirable that there should be a political consensus on
privatization which in turn presupposes transparency of proceedings and credibility of
Speaking on "institution of restraint (missing element in
governance in Pakistan" Dr. Ishrat Hussain Director World Bank, said, the existing
institutions can effectively check and minimise corruption and misgovernance, provided
these are strengthened and given the autonomy they are invested with. The institutions,
apart from the judiciary, are Parliamentary Committees, and Public Accounts Committee,
Auditor General, Ombudsman, Public Service Commission, State Bank of Pakistan, Federal
Election Commission and Securities and Exchange Commission of Pakistan.
He said that judiciary basically provided protection of human rights,
security of life and property and contract enforcement. Parliamentary Committees and
Public Accounts Committee check misuse and abuse of discretionary powers of the executive;
Auditor General detects and report financial irregularities in public accounts. Ombudsman
redresses grievance of citizens against excesses of public servants; Public Service
Commission ensures transparency in appointments and promotion of civil services; State
Bank undertakes probity, supervision and regulation of the financial institutions; Federal
Election Commission screens candidates for elected office on the basis of integrity and
securities and Exchange Commission of Pakistan ensures high standards of the corporate
Dr. Ishrat Hussain observed "We have become one of the most
corrupt nations. Poor pay structure, nepotism, the phenomenon of speed money, and the
willingness of clients to bribe, are the principal causes of corruption." He quoted a
bank study of over 200 small, medium and large business firms, conducted in 1995. This
survey found 78 per cent firms had bribed public officials, mainly in the income tax,
labour, customs and excise sales tax departments. A similar survey of 6,020 rural
households carried out in 1996-97 revealed that 95 recipients of loans from banks out of
219 had paid bribes in exchange for loan approval. The average amount paid was 3.5 per
cent of the loan amount.
According to him independence and strengthening of these institutions
could revitalise the society with the cooperation of active civil society organisation and
Elaborating on these pillars of good governance, Dr.Ishrat Hussain said
that the Parliamentary Committees must acquire some teeth. The recent work of the PAC
shows that timely deliberations and follow up action are of essence if the committees
acquire some power. All procurement contracts above a certain financial limit, all fiscal
exemptions and concessions, modification to the SROs should be placed before it. The
proceedings of the committees should be open to the public and media. The temptation of
committee members is to harass or intimidate the officials or get involved in macro
management is a very strong tendency under the present political culture. If this
continues, the committee will be more of a nuisance than agent of good governance.
State Bank of Pakistan being independent and autonomous can provide
guarantees against excesses and irresponsible action of the politicians and bureaucrats in
economic management. The federal and provincial governments can be guarded in their
spending decisions if the bank refuses to honour the cheques beyond the given ways and
means limits. At the same time, the regulatory and supervision functions act as safeguard
against possible malpractices in the award of credit and recovery of loans.
Admiral (Retd) M Fazil Janjua, formerly minister for food, agriculture
and co-operatives, said that if an economy has to be improved the focus should be on the
strategy for future and role of public and private sector in the agriculture sector. The
farmers should be given incentives and as the price of the agriculture inputs had
increased there was a need to provide substantial support prices to the farmers.
Rashid Faruqee, Principal Economist, the World Bank Resident Mission in
Bangladesh, in his paper reviewed the past performance of the agriculture sector of
Pakistan and suggested the need for strategic reforms in agriculture sector. He said that
in the past there were many constraints which effected the agricultural growth, such as
human resources constraints, poor rural infrastructure and weakness of research and
While suggesting the future strategy for agriculture sector in
Pakistan, Faruqee said the role of both the private and public sectors should be
reorganized, irrigation crisis directly addressed and the distortion in line market