The economic reforms introduced by the present
economic managers some three years ago have certainly yielded a rich
crop of strong macro-economic fundamentals inducing a feeling of
economic independence to some extent. The reforms have also strengthened
the government's hands in dealing with matters like balance of payments,
reserve management, and debt servicing at external front.
At the home front, the economic managers are also
seem comfortably settled with an improved output of the exports,
manufacturing, exports sectors and of course up to the mark collection
of the revenues.
The outcome of the economic reforms during the last
three years must be giving a sense of achievement as well as
satisfaction to the economic managers of the country, however, it did
not provide any sort of relief to the common man, rather the campaign
launched for more and more collection of taxes has eroded the purchasing
power of an ordinary Pakistani during last three years. A sort of unrest
among the middle class is growing due to mounting price hike pressures.
The economics of the common man is steeply sinking taking them below the
poverty line which is also a negation of the much publicized policy of
poverty reduction campaign launched by the present government.
Admitting the above situation, Dr. Ishrat Hussain,
the Governor of State Bank of Pakistan has recently elaborated the
economic reforms. He was of the view that the present policy of
continuation of economic reforms should go on at least for next ten
years to harvest a rich crop.
Spelling out the situation, he recalled that during
1999-2002 Pakistan had to stabilize its economy, get out of the ever
impending payment crisis situation, turn the fundamentals around and lay
down the foundations for sustainable growth and poverty reduction. Those
who believe that we could have succeeded in reducing poverty or
accelerating growth in absence of first achieving stability, getting out
of debt trap and assuring good economic governance is sadly mistaken.
Prime-pumping by the government and opening the doors
of government departments and corporations to large scale employment or
providing subsidies on petroleum, electricity, food etc. would have been
a short-lived blip in the economy but was not simply sustainable.
This approach would have certainly accentuated
inflationary pressures in the economy, depreciated rupee to over 70 per
dollar, increased the debt burden and accelerated flight of the capital
from the country. Short-term gimmickry for gaining political gains has
been tried in the country before but was not successful either in
maintaining political support or improving the economy.
The reforms which were required during the phase
1999-2002 were no doubt harsh on general public but they were necessary.
Had the previous governments taken the right decisions on the right time
to set things on the course this severity could have been avoided. But
the Military Government had to take all the tough decisions which were
avoided in the past and the cumulative impact was necessarily quite
Second, the current phase (2003-2005) whereby the
real economy is beginning to pick up as revealed by the various
indicators does not require that the same set of reforms which were
pursued in the past three years have to be continued.
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 first phase.
As there is a great deal of ambiguity about the
nature and contents of the reforms, there is a need to elaborate as to
what kind of reforms need to be continued in this current phase and the
consequences they are discontinued.
WAPDA AND KESC
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 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
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 tax
payers and tax collectors. The reforms initiated in last one year for
restructuring of CBR are still in infancy and need to be nurtured. If
these reforms are aborted none of the aims of the desired tax
administration will be achieved. We will be stuck with an inefficient,
inequitable system with a narrow tax base and the usual complaints of
extortion, and harassment.
FINANCIAL SECTOR REFORMS
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 trend; 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 is at very low levels
and has to be stepped up. If these reforms are no longer pursued the
benefits will remain confined to a small class of corporate and trade
businesses and thus 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 haemorrhaging the country's finances. Three years ago their annual
losses funded out of budget were Rupees 100 billion as recently
mentioned by President Pervez Musharraf. These losses have come down but
still amount to one percent of GDP. These enterprises produce goods and
services and 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
Public Sector Entities (PSEs) is diverted towards education and health
the benefits to the poor of this country will be enormous. In case we
have cold feet and decide to abandon privatization it is quite certain
that the 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 us highly vulnerable was the rising gap between our income and
expenditure. We kept on borrowing internally and from international
financial institutions to bridge this gap until the burden became
unbearable and our economic sovereignty was compromised.
In the last few years strict fiscal discipline has
allowed us to reduce our external debt burden. If we once again begin to
indulge in bad practices of the past we will soon be faced with
financial crises and will have to run to international financial
institutions to bail us out. Fiscal discipline does not mean squeezing
of government expenditure but a reallocation towards development
expenditure and social sectors along with higher tax collection. The
higher tax collection is of course is an important factor for running
the government smoothly, yet the more important area is to create an
environment which enables the tax payer to afford the tax burden. The
trend of collecting tax through various utility services like
electricity, gas and telephone bills how ever gives a bad taste
especially for the lower strata of the society. The salaried class duly
pays the income tax, but it has to pay the taxes on the consumption of
the utilities which in no way justified or comes under good economic
governance. The subservience of our economic decision making to external
agencies is something every patriotic Pakistani should avoid. The only
viable way out is to maintain fiscal discipline.
Pakistan had earned the distinction of being ranked
as the second most corrupt country in the world. The waste, leakages,
favoritism and nepotism have cost the country a huge fortune. Some
semblance of good governance was established during the previous
governments. If merit, transparency and level playing field are given up
in the name of expediency the country will be faced with widespread
disaffection and social instability.
AGRICULTURE SECTOR REFORMS
Productivity in agriculture sector is still low and
the use of water resources and other inputs is inefficient. Farmers were
not paid international prices for their output and small farmers were
denied credit. Subsidies in agriculture were misused by the influential
and well-to-do farmers. The reforms introduced to boost incentives,
invest in rural infrastructure and expand 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.
REFORMS IN SOCIAL SECTOR
The devolution of powers to local governments is
aimed at empowering the people at the grass roots level to make choices
about essential services such as education, health, water supply, and
farm-to-market roads, land leveling, water course improvement. The
demand-driven projects responsive to the needs of the local people will
produce better outcomes 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.
The flaws and deficiencies in the existing system
should be rectified but no attempt should be made to bring about
CIVIL SERVICE, POLICE AND JUDICIAL REFORMS
Although some initiatives have been taken to reform
the main executive and judicial organs of the state not much progress
has been made. Merit based recruitment, performance linked promotions,
adequate compensation, continuous up-gradation of skills and knowledge
are some of the essential ingredients of these reforms. No doubt they
will be met with fierce resistance but involvement of all the
stakeholders in the design and implementation process will neutralize
this opposition. But if we go to abandon this path and do not bring
about the required changes our institutional capacity to deliver
justice, services and protection to the ordinary citizens of Pakistan
will be severely impaired. What is wrong with continuing the above set
of reforms for the next three years? They will relieve us of the burden
of excessive pricing of our utilities; ease the harassment and extortion
of tax collectors; make our banks more accessible to the middle class,
farmers and small businesses; get rid of unprofitable public sector
enterprises; minimize corruption and nepotism; improve the productivity
of agriculture; transfer powers of providing essential social services
to the local governments; increase our education and health availability
while improving their quality and make our civil service, police and
judiciary more efficient and responsive to the needs of the common man.
If any one will disagree with the thrust of these
reforms. They may differ on the modalities, instrumentalities and
sequencing, phasing and timing. But a three year period is too short for
such an ambitious and comprehensive set of reforms to take hold. At
least next 10 years should be devoted to get them implemented in the