SHAMSUL GHANI (shams_ghani@hotmil.com)
Dec 01 - 07, 2008

With the formal acceptance of IMF assistance under the Stand-by Arrangement and the first drawdown of $3.1 billion, the preconditions debate has finally come to an end. The achievement of monetary, fiscal, and external targets is what the economic managers now need to focus on.

It is not Pakistan alone but the global financial crisis has driven a number of economies to the doorstep of IMF which is now being seen as a genuine recourse option rather than a draconian money lending force. The State Bank governor, in one of her recent lectures, laid great stress on economic stabilization.

While appreciating the positive change the withdrawal of subsidies on certain items has brought, she expressed hope that the ongoing privatization would also help in stabilizing the economy. The critics, besides lamenting the lack of national consensus, put forward economic arguments against the proposed privatization of Qadirpur Gas Field and other state owned assets.

They maintain that while major economies are striving to buy stakes in the toxic assets as a stabilization measure, a number of third world economies like Indonesia, Thailand and South Korea have decided to put their privatization programs on back burner. It is also feared that the privatization of Qadirpur Gas Field may trigger gas price hike. While the government in power advocates privatization on the grounds that it is the private sector that has the time, will and expertise to run commercial organizations critics target the hasted timing and dubious transparency of privatization deals.

Certain quarters still insist that the privatization of Habib Bank, United Bank and PTCL should have fetched far higher prices than they actually did.

The State Bank governor also appreciated the innate strength of Pakistan's banking sector, which after experiencing a few moments of anxiety got back on an even keel. She informed that with the latest one per cent cut in the capital adequacy ratio, an overall liquidity of $320 billion was injected into the banking system to keep it buoyant. She added that efforts were underway to make changes in the exchange policy framework.

While her claims to timely action in the case of banking sector appear quite justified, her policy actions on the exchange side have left much to be desired. Any worthwhile measures to check the dollars' flight were never in sight with the result that the country suffered massively on this account. The belated government action to nab the currency dealers has given rise to a number of questions majority of which has to be answered by the State Bank. The Hawala business has now become an economic issue encircling the entire banking system. The stories of parallel banking circumventing the State Bank regulations have started finding place in the print media.

The illegal whitening of money with the banking sector's connivance is to be explained both by the banks and their overseer. It is also argued that the Hawala system brings immense concessions from the banking sector to those involved in this business. Tight credit control and higher lending rates are meant only for those relying on legal business practices.


In order for us to achieve the fiscal deficit target of 4.3 per cent, it is imperative that non productive government expenditures be slashed to the bare minimum. The zero government borrowing (from SBP) seems to be a doubtful starter especially when the present government has already outstripped its predecessors in the field of borrowing from SBP.

Downplaying the fear of losing job, the successive SBP governors are said to have mentioned flaws in SBP laws as reason to capitulate to government demands. Recently, one of the ex-deputy governors of State Bank has disclosed that the subsequent addition of section 9A to the State Bank Act provides sufficient legal ground to stop governments from excessive borrowing. While the last two successive SBP governors may feel obliged to give their viewpoints about the effectiveness of section 9A, people would like to know what the said ex-deputy governor did to stop the government from over-borrowing while he was at the helm.

Besides effective control over non productive spending, the resource mobilization side also needs an objective review. The target of 15 per cent tax to GDP ratio demands multi faceted changes in the existing FBR regime. While the news that FBR has scaled up its FY09 revenue collection target by Rs.100 billion is a welcome sign, the conflicting reports about the efficacy of taxation systems in vogue at FBR remain a source of concern. It is said that despite huge spending of $400 million, the taxation mechanism is still far from purposeful reformation demanded by IMF and the World Bank.

FBR's recent switching from Circle Base System (CBS) over to Function Base System (FBS) has drawn severe criticism from the tax payers. The use of FBS to secure manipulated broadening of tax-payer base has also been reported by one of the leading newspapers.

While we need to tap all sectors of economy to boost tax revenue collection, the recent statement of Advisor to PM Shaukat Tareen giving immunity to the agriculture sector for at least next 23 months has come as a shock to those who have in their memory line the resolve of the said Advisor to tax all sectors including agriculture and real estate. Tareen has simply shown his ability to quickly adapt to the ground realities. It is not that easy to take the feudal bull by horns. Besides the undocumented sector, agriculture sector remains the most privileged escaper of state infirmities since long.

Stock market is another area that has tested the ambitious Advisor who had made no bones about the unwarranted freezing of KSE indices. The market still remains non operative even after the passage of 90 days with no future plans on the anvil. IMF's condition not to use public funds for the revival of stock market appears to have come as a bolt from the blue. The situation seems to have gone out of the hands of regulators. History's longest peacetime closure of equity market is a destabilizing blow to economy's stabilization efforts.

On the external front too, the picture is far from rosy. A negative current account balance of $5.943 billion during July-October 2008 vis--vis a negative balance of $2.993 billion in the corresponding period of the last fiscal year is totally inexplicable especially in the scenario of falling oil prices. On the monetary side too, the policy rate hike - with a further provision of 150 basis points - has cramped the business and industrial sectors which find it hard to resist a shutter-down. To sum up, the task of economic stabilization has become horrendous. The economic managers will have to roll up their sleeves in real sense instead of relying on a few tricks that may have up their sleeve.