AN OUTLINE OF PAKISTAN'S ECONOMIC POLICIES

Most the macro indicators hint towards better prospects

SHABBIR H. KAZMI
Aug 13 - 19, 2007

The existing assemblies are about to complete the term after dismissal of four elected governments and decades of political turmoil. It is time to examine the balance sheet of the present regime and to take into account achievements and failures. However, there should not be any doubt that the consistency of policies has been the hallmark of the regime of President General Pervez Musharraf and Prime Minister Shaukat Aziz and the benefits are also evident.

Policies are not the holy words and have to be constantly reviewed and amended to ensure conducive working environment. Ideally, policies define the objectives and also outline the measures to achieve defined objectives. The various policies of the present regime put together are aimed at making Pakistan economically stronger. The guiding principal is that economic strength helps in protecting sovereignty of the country and also becomes the best weapon against all types of aggression be it internal or external.

In the nineties Pakistan did not enjoy good relationship with donors mainly because of growing imbalance in appetite for the funds and repayment ability. The country was forced to borrow funds to meet debt servicing. The result was conditions becoming stringent with each fresh borrowing. At one time there were growing fears that Pakistan was fast approaching towards default. However, institutions like International Monetary Fund, World Bank, Asian Development Bank, International Finance Corporation, Islamic Development Bank continued their support, though with great reservations.

With the change of regime and Musharraf-Shuakat duo gradually succeeding in controlling the malaise the situation started improving. The blessing in disguise was 9/11 incident. Those who imposed economic sanctions on Pakistan for committing the crime of conducting nuclear test needed Pakistan to play the role of frontline fighter in war against terror in Afghanistan.

The key policies of the government needing specific mention are debt management and debt retirement. The objective has been to minimize budget deficit. The two tier policy is to improve revenue collection and ensure greater allocation for infrastructure development, education and health care. There has been a gradual increase in allocations under these heads and a visible change has been evident. It may be another thing that the various execution agencies have been falling short in playing the desired role, mainly because of lack of capacity to undertake such mega projects.

One of the problems faced by the country has been high inflation rate, which still remains the key issue. However, the inflation is fueled by imported commodities i.e. petroleum products, food items, fertilizer and sugar. Though, efforts have been made to enhance production of oil and gas the success has been limited.

One of the major achievements has been prudent Monetary Policy. The aim has been curbing inflation and ensuring competitiveness. The tight stance been followed has helped in containing inflation to some extent but the real issue has been excessive liquidity prevailing in the market. The gravity of the situation can be gauged from the fact that during last financial year money supply growth was more than 500 points higher than the target.

The recently issued Monetary Policy statement (for the first half of ongoing financial year) aims at containing inflation. This would be done by gradually shifting Export Refinance Scheme from 100% reimbursement by the central bank to 70% this year. The government has been also advised to retire its debt acquired from the central bank and opt for raising funds through Shariah compliant debt instruments, Sukuk.

The foreign exchange regime being followed from early days is aimed at minimizing pressure on exchange rate, neither letting it go beyond an upper nor a lower limit. The central bank has been successful in stabilizing the exchange rate through timely intervention. The bank undertook massive buying of foreign exchange through open market to contain the supply. There was a lot of criticism on the policy and it was said that it would push the inflation rate beyond control.

However, the strategy helped in achieving the twin objectives, mopping up excessive supply of foreign exchange and building foreign reserves. The net result is that despite huge trade deficit country's foreign exchange reserves are on the rise.

With the increase in oil import bill the central bank also decided to provide foreign exchange rather than asking the banks to obtain the dollars from interbank market. The net impact is that rupee, which used to depreciate against dollar very quickly in the past, started appreciating. This was not any appreciation in real terms but stability and now trade and industry is demanding devaluation. However, the government as well as the central bank has not bowed down. This has been a very prudent decision because there would have been no material gain from the devaluation. This may have yielded one time gain but initiated a vicious circle where the devaluation has to be followed by another one.

Deregulation and liberalization policy has attracted huge investment in the telecommunication sector that includes privatization of Pakistan Telecommunication Company (PTCL), entry of new mobile and payphones. The latest news is that Pakistan Telecommunication Authority (PTA) has renewed licence of Mobilink for another 15 years. The company has paid US$ 291 million for the renewal.

Another point worth noting is that according to Shahzada Alam Malik, Chairman of PTA the number of cellular phone subscribers is expected to touch 100 million.

The WiMax Service, a high-speed wireless telephone and Internet facility, would be launched nation wide next month for first time in the country. The infrastructure has been developed for Wimax Service in Pakistan as Wireless Local Loop (WLL) license holders in 3.5 GHz frequency have now established their own networks using WiMax technology after issuance of commencement certificates by the authority.

The authority has also issued the certificates to Buraq Telecom, Wateen Telecom and MyTel to start operations across the country from next month. The rest of the WLL operators holding spectrum in the 3.5 GHz are also in the planning stage. DV Com also holds WLL license in all 14 telecom regions. The mobile operators such as Mobilink are also expected to join the WiMax market in the future.

China's ZTE Corp has built a pre-WiMax trial network comprising one six-sector Base Transceiver Station (BTS) and 17 CPEs (Customer Premises Equipment) for telecard. The infrastructure put in place by various companies is a milestone in the spread of WiMax, super fast wireless technology that has a range of up to 30 miles and can deliver broadband at a theoretical maximum speed of 75 megabits per second.

The WiMax Service, a high-speed wireless telephone and Internet facility, would be launched nation wide next month for first time in the country. The infrastructure has been developed for Wimax Service in Pakistan as Wireless Local Loop (WLL) license holders in 3.5 GHz frequency have now established their own networks using WiMax technology after issuance of commencement certificates by the authority.

The authority has issued certificates to Buraq Telecom, Wateen Telecom and MyTel for commencement of their operations across the country. The rest of the WLL operators holding spectrum in the 3.5 GHz are also in the planning stage. DV Com holds WLL license in all 14 telecom regions. The mobile operators such as Mobilink are also expected to join the WiMax market in the future.

China's ZTE Corp has built a pre-WiMax trial network comprising one six-sector Base Transceiver Station (BTS) and 17 CPEs (Customer Premises Equipment) for telecard. The infrastructure put in place by various companies is a milestone in the spread of WiMax, super fast wireless technology that has a range of up to 30 miles and can deliver broadband at a theoretical maximum speed of 75 megabits per second.

The construction work of dams and hydro electric projects has started after very long interruption. Construction of dams is aimed at ensuring better availability of water and enhancing electricity generation in the country. The mix of power generation has to be altered because electricity generation through thermal power plants (using furnace oil) has become too expensive.

Since early nineties all the successive government have been following Privatization Policy. However, the program was followed on the external pressure. Since the budget deficit was getting out of control, the international donors insisted on sale of public sector enterprises. The beauty of present program is that it has attracted substantial foreign interest. Sale of entities like Habib Bank, Karachi Electric Supply Corporation, United Bank and Pakistan Telecommunication Company has attracted not only quality foreign investors but also huge foreign exchange.

A few transactions, including the KESC faced snags but ultimately went through. There is criticism that the strategic buyers of the KESC are not managing the company efficiently. However, one must appreciate that the new management has commenced work on establishment of new thermal power generation and transmission and distribution network is being revamped.

The current regime also made a strategic decision that the government not in the business of managing business. Its prime responsibility is to facilitate the entrepreneurs. This includes development of supporting infrastructure, rationalizing duty and tax regime and creating supporting regulatory framework.

One of the key initiatives of the government has been Privatization for People. Under this program shares of a number of state owned enterprises like National Bank, Sui Southern Gas Company, PIA, Oil & Gas Development Company, United Bank and Habib Bank have been sold to general public. This strategy has helped in achieving two objectives 1) passing the benefits of privatization to the general public and 2) widening the investors base.

Almost all the shares are being traded much above the price at which those were sold, except PIA. Investors have been always informed about the risks involved with investing in the stock market and the same was done in case of PIA. It was not a bad entity but persistent hike in the fuel cost has adversely profitability of the national carrier. It is not the only airline which is incurring huge losses but most of the airlines around the globe are facing more or less similar situation.

Investment policy of the government yielded the best results. Telecommunication and Banking sectors have attracted the largest investment and continue to get the attention of foreign investors. In the banking sector sale of Union Bank to Standard Chartered Bank, Prime Bank to ABN Amro Bank, PICIC to Temasek and Crescent Commercial Band attracting an investment of Rs 6 billion from SAMBA Group of Saudi Arabia are worth calling milestones.

Textile is Pakistan's backbone and the sector faces tough competition. This requires improvement in trade relationship with key trading partners. However, the country has not been very successful in achieving access in the key markets, the USA and the European Union. In fact Pakistan has faced dumping proceedings and imposition of antidumping duties in these markets.

Pakistan has also been instrumental in regional integration and obtaining the best. However, SAARC has remained under Indian domination. The OIC continues to suffer from multiplicity of problems. Ideally this should have helped in the development of Islamic Common Market but it could not even reach preferential trade agreements among the member countries. The ECO, formerly Regional Cooperation Development, has been expanded to include few countries from the Central Asia. However, the association has remained dormant mostly. One of the common interests should have been development of energy corridor to facilitate linking of oil and gas rich Central Asian countries with energy deficient countries like Pakistan, India and China.

Pakistan has been able to sign Preferential Trade Agreements and Free Trade Agreements with a number of countries. These agreements are expected to boost Pakistan's export to these countries. The major impediment restricting export growth is the rising cost of production of Pakistani exporters. Till recently Pakistan enjoyed competitive advantage in a few products and sectors. However, it has lost the advantage due to high inflation, hike in interest rates and sky rocketing energy cost.

A major achievement of the government has been establishment of regulatory authorities and revamping of the regulatory framework. It goes without saying that an autonomous central bank has helped in strengthening the banking system as well as curbing growth of delinquent loans. Other regulatory authorities are NEPRA and OGRA.

Similarly, ongoing capital sector reforms have helped in restoring confidence of investors in equities markets. Though, there have been a few lapses, leading to crises the overall performance has been satisfactory. Some of the major achievements have been flotation of GDRs by OGDC, MCB Bank, United Bank. State owned utility WAPDA floated dollar denominated Sukuk and now planning for rupee denominated Islamic bonds. These transactions may not be termed big but have certainly earned credibility for the Pakistani entities.

Now it is time to prioritize sectors needing urgent and massive investment. Corporate entities have been successful in raising equity as well as debt, both locally and internationally. Now it is time to mobilize funds for the infrastructure projects i.e. motorways, bridges,

One sector are identified they need specific policies. Pakistan government has successfully constructed Gwadar deep sea port but not been able to attract any investment in the shipping sector. With the passage of time fleet of National Shipping Corporation has been shrinking. The country is now grossly dependent of the foreign shipping for imports and exports.

The Aviation Policy has been able to convince the foreign airlines to resume their flights to Pakistan. The Civil Aviation Authority has been able to redefine its tariff. The other major achievement has been establishment of another airline in the private sector.

Equities market has been the focus of present government and Prime Minister Shaukat Aziz has been paying due attention. Through, various issues of GDRs and holding Road Shows in the target markets the government has been able to promote Pakistan as a preferred investment destination.

Though, the government has issued various Energy Policies to attract investment in the exploration and production sector. However, it has not been to promote Pakistan's successive story. As compared to the global success rate of 1:10 Pakistan has an enviable success rate of 1:4 and in case of OGDC it is 1:2. It is on record that more than two dozen exploration and production companies are operating in the country but bulk of the production rests with less than half a dozen companies.

Pakistan continues to suffer from load shedding due to demand exceeding the supply. After HUBCO and KAPCO the country has not been able to achieve any major investment in power generation. Transmission and distribution sector needs even bigger investment because the real losses of power utilities are due the result of T&D losses, mostly comprising of theft.

Pakistan has also not been able to solicit major investment in the alternative energy resources i.e. wind and solar energy. It has also not been able to exploit its huge coal reserves, mostly concentrated in Thar. This was due to failure in constructing roads necessary for carrying the heavy mining equipment.

Boosting fertilizer production is the key to achieve higher production of major crops, the reason being that cultivable land is highly deficient in nutrients. Balanced use of fertilizer has to be promoted. Bulk of the urea requirement is met through indigenous production but country remains largely dependent on imported DAP. Fertilizer Policy 2001 has not helped in increasing installed capacity for urea production and urea import is constantly on the rise.

Sugar industry is the driving engine of the rural economy. However, it is now being controlled by the politicians and/or people having access to power corridors. It also suffers for poor capacity utilization due to limited availability of sugarcane. Capacity utilization cannot be improved without enhancing sugarcane production and allowing export of sugar.

Now foreign policy of any country has direct bearing on the economic policies, which helps in boosting flow of foreign direct investment and getting greater access in importing countries. Despite being a major partner in war against terror Pakistan has not been successful in getting access in the US as well as the European Union.

Fallout of ongoing war in Afghanistan has been development of the extremist elements in the country. This has proliferated suicide attacks and killings. Some of the foreign fighters also try to develop hideouts in Pakistan due to deep contacts with the locals.

There has been substantial investment from Middle East and China. Investment from the Middle East has been mostly in banking and telecommunication sectors. China has been a major investor in many sectors. The recent killing of Chinese has cast a dark shadow but Chinese have expressed repeatedly that their friendship is time test and it could not impaired by the ruthless killers.

Iran and Pakistan has also stood together in good and bad times. However, Iran-Pakistan-India gas pipeline project has been facing snags, mainly due to pressure from the US. India was offered an option to benefit from use of nuclear technology for civilian purpose. However, the deal has not been cleared by the Congress as yet.

The growing political uncertainty and forthcoming elections should not distract from continuity of economic policies. The country has not recovered from the lost decade of nineties. Whichever political party may come in power the journey towards better life style must continue.