The second phase of reforms starting July 2003 to June 2005



June 16  - 22, 2003 




While addressing members of the parliament in Islamabad last week, the Governor State Bank of Pakistan (SBP) Dr. Ishrat Hussain disclosed that the second phase of reforms starting July 2003 to June 2005 will focus on reforms in WAPDA, KESC, restructuring of CBR, fiscal discipline, good governance, police and judicial reforms, agriculture and social sector and expediting privatization programme.

The SBP governor was speaking at a two day workshop for members of the parliament for processing and debating federal budget arranged by the Pakistan Institute of Legislative Development. Dr. Ishrat Hussain said that these reforms in the next three years would relieve the country of the burden of excessive pricing of the utilities, save taxpayers from harassment and extortion of tax collectors, and would make the bank more excessible to the middle class, farmers and small businesses. These reforms would further get rid of unprofitable public sector enterprises, minimise corruption and neptism, improve the productivity of agriculture, transfer power for providing essential social services to the local government, increase health and education availability and make the civil service, police and judiciary more efficient and responsive to the needs of the common man, he added.

In this current phase (2002-03) the real economy is beginning to pick up, as shown by the various indicators, and does not require the same set of reforms which were pursued in the past three years. This phase requires a completely different set of structural, sectoral and micro reforms rather than the price reforms, fiscal squeezing and monetary tightening observed during the first phase.

The SBP governor explained the following salient features of the second phase of reforms:


As both these entities are creating problems for fiscal discipline, burdening the consumers and affecting the competitiveness of industry, they need to be restructured, unbundled and made more cost-efficient. Thus, discontinuation of the ongoing reforms in these two organizations will pose a major macroeconomic risk and vitiate some of the gains made during the last three years. The purchasing power of the middle class will be eroded and the industrial cost of production will remain high.


The ultimate aim of a fair, efficient and equitable tax administration is to widen tax base, reduce tax rates, eliminate multiplicity of taxes and minimize physical interaction between taxpayers and tax collectors. The reforms initiated in the last one year for restructuring of CBR are still in infancy and need to mature. If these reforms are aborted none of the aims of the desired tax administration will be achieved. The government will be stuck with an inefficient, inequitable system with a narrow tax base and the usual complaints of exertion, harassment.




The banking system in the country has begun to show some signs of vitality and strength. Intermediation costs are on a downward path: portfolio of non-performing loans is shrinking; asset diversification has started to show some healthy trends; professionalism rather than connections is taking hold in management. But still the reforms have a long way to go. Mortgage and consumer financing to middle income classes, assistance to SMEs and agriculture are at very low levels and have to be stepped up. If these reforms are no longer pursued the benefits will remain confined to a small class of corporate and trade business and opportunities for expansion of economic activity, credit to middle class and new job creation will be missed.


A number of Public Sector Enterprises (PSEs) have been hemorrhaging the country's finances. Three years ago their mutual losses funded out of the budget were Rs.100 billion. These losses have come down but they still amount to per cent of GDP. These enterprises produce goods and services can be run efficiently only by those who know how to operate businesses and not by bureaucrats. If this budgetary allocation to meet the losses of PSEs is diverted towards education and health the benefits to the poor of this country will be enormous. In case the government has cold feet and decides to abandon privatization it is quite certain that budgetary subsidies to public enterprises will keep rising and leave little resources for social services and infrastructure.


One of the main problems faced by the economy, which made the government highly vulnerable, was the rising gap between the income and expenditure. The country kept on borrowing internally and from International Financial Institutions (IFIs) to bridge this gap until the burden became unbearable and the economic sovereignty was compromised. In the last few days strict fiscal discipline has allowed to reduce the external debt burden. If the country once again began to indulge in bad practices of the past it would soon face the financial crisis and would have to run IFIs to bail out. Fiscal discipline does not mean squeezing of government expenditure but a reallocation towards development expenditure and social sector along with higher and social sector along with higher tax collection. The subservience of the economic decision making to external agencies is something every patriotic Pakistani should avoid. The only viable way is to maintain fiscal discipline.


Pakistan had earned the distinction of being ranked as the second most corrupt country in the world. The waste, leakage, favorites, and nepotism have cost the country a huge fortune. Some semblance of good governance was established during the previous government. If merit, transparency and level playing field are given up in the name of expediency the country will be faced with wide-spread disaffection and social instability.




Productivity in agriculture sector is still low and the use of water resources and other inputs in inefficient. Farmers were not paid international prices for their outputs and small farmers were denied credit. Subsidy in agriculture were mis-utilized by the influential and well to do farmers. The reforms introduced to boost incentives, investment and rural infrastructure and expanded credit to agriculture need to be further strengthened. If for some reasons these reforms are not implemented there is a serious danger that the country may once again become a net importer of food.


The devolution of power to local government is aimed at empowering to people at the grass-roots level to make choices about essential services such as education, health, water supply, farm to market roads, land leveling, water course improvement. The demand-driven projects responses to the needs of the local people will produce better out comes as far as social sector development is concerned. Any move inspired by power grabbing considerations to dilute the devolution will have very negative repercussions for poverty reduction and provision of social services. Of course, the flaws and deficiencies in the existing system should be rectified, but no attempt should be made to bring about status quo.


Although some initiatives have been taken to reform the main executive and judicial organ of the state, not much progress has been made. Merit based recruitment, performance linked to promotion, adequate compensation, continuation in up-gradation of skills and knowledge are some of the essential ingredients of these reforms. No doubt, they will be met with serious resistance but involvement of all stakeholders in the design of implementation process will neutralize this opposition. But if the government decides to abandoned this path and does not bring about the required changes the institutional capacity to deliver justice, services and protection to the ordinary citizen of Pakistan will be severely impaired.